Altgate

Political Social Networking

I just read this article in the New York Times about how the Obama campaign has dramatically advanced the use of social networking in politics.  It's an interesting read.  The article talks about how the Obama campaign hired Chris Hughes, one of the four founders of Facebook to run its online effort.  The article also talks about how the McCain campaign is playing catchup by launching McCainSpace (I wonder if the Facebook/MySpace angle was intentional?).  Anyway, the author didn't have kind things to say about the McCain campaign's foray into social networking so I took the bait and went onto JohnMcCain.com and clicked on the "Join McCainSpace" link.  So how surprised was I when I got the following "page load error"

Ouch!  Bad SSL certificate.  That's embarassing...

How (Not) To Pitch VCs

I haven't read this blog before, but Patrick Lor has a great post on how not to pitch VCs (and by inference, how to).  Having seen a couple hundred pitches in the past year, I have to totally agree...most pitches suck.  Great advice, Patrick...and it's not just that you use the same TypePad theme as I do!

Sales vs. Web Dude

A bit long, but one of the funniest videos I've seen this year.

How To Promote Your Web 2.0 Community

Remember in 3rd grade when, if you liked a girl, you would trip her in the playground and steal her milk carton?  Well, here's the Web 2.0 marketing version of that.  It's actually the funniest story I've read in a while.  The short version is that some online community site in the UK claimed to be pissed off at some of their users so they dropped the site and put up a splash page telling their users to go away (and dropping a few f-bombs in the process).  I'd like to hear what Seth Godin has to say about that marketing tactic...

Mac Vs. PC

Opinion Polls & Market Research

I just saw this post on the LinkedIN blog describing how they exclusively use Macs as their development environment.  I know Sermo also uses all Macs and speaking from personal experience I can't wait to get rid of the last PC I own (I'm down to just one).  I'm not a developer, but it's clear from LinkedIN and Sermo that it's possible to build great sites using just Macs.  And speaking from a business user's perspective, Macs are much more efficient and intuitive. So here's my question, is this the exception or the trend?  Take a second and vote in the poll to the left...do you use Macs or PCs in your company?

Regulation D

Here's an interesting blog post on Reg D and how it affects announcing (or not) news of investment in your company.  They give an example of how Twitter announced today their latest round of investment, but that anyone could have searched the SEC database and seen that the round closed on June 9th.  I guess the moral of the story is to pay attention to that stack of papers you sign at closing!

Technology & Politics

This weekend I have been following a "debate" on Twitter (read more about it here). It's between representatives of the Obama and McCain campaigns.  Bottom line it's terrible.  Instead of a standard debate which gets reduced to 10 second sound bites, this gets reduced even more to 140 character text strings.

This got me to thinking that it would be interesting to see the candidates actually debate technology policy issues where the moderators of the debate are leading technologists.  That would be interesting.

But then, if this interview of the candidates by Yahoo is true, I think this is unlikely to happen... 

More On Convertible Debt

My previous post on why convertible debt sucks shouldn't be construed as advising to never use it, but rather to explore your alternatives and avoid it if you can.  For example, Andrew commented that this might be his only option.  Others have pointed out another scenario in the case where there is a major milestone in the near future and you're confident a little cash can get you there.  Okay.  Just remember, it's "easy" to get into, but harder to get out of than straight equity and it creates some screwy incentives.

Also, here are some additional resources with more detail on the mechanics of convertible debt and opinion and analysis from other entrepreneurs, angel investors and VCs:

• Startup Company Lawyer: details on a lot of the legal terms.
• VentureHacks: gives some rules of thumb.
• Bill Payne: an interesting analysis from the angel investor's point of view.
• Redeye VC: from a VC's perspective.

5 Reasons Convertible Debt Sucks

There are two scenarios where convertible debt is typically used: bridge financing and angel financing.  I've raised convertible debt a few times and I have to say that in most angel funding scenarios it sucks as a way to finance a startup (I think it's okay for bridge funding, but I'd avoid that too if possible).  Why?

1. It's complicated.  Many founders think part of the attraction of doing convertible debt is that you get to "punt" on a lot of the key financing decisions until "professional" investors do the real work and put a "real" value on the company.  Unfortunately, doing convertible debt requires making a bunch of decisions that in total are about the same complexity as preferred equity.  For example, you have to write a loan agreement that includes things like default clauses, collateral, interest rates and more.  If the loan is secured (e.g. against the IP) then you have to create a separate lien.  Also, it's typical to include a discount for the lenders in the form of a warrant, however the warrant is on an equity instrument that does not yet exist (e.g. on the Series A Preferred) but you still need to decide the term of the warrant and the strike price.  Also, most founders don't raise all their convertible debt at the same time so they end up with lenders with different warrant coverage (big Excel spreadsheet).  Then, when it comes time to close your Series A, you can have a problem where the cap table changes on a daily basis because the interest that accrues on the principal converts as well and that changes daily.  [By the way, if you do use convertible debt, I recommend you agree to pay the interest in cash after closing Series A to avoid this last problem.]  All of these issues add up and it makes it more complicated to take convertible debt as opposed to equity.
2. It sets a bad precedent (or at least fails to set a good precedent).  Valuation is just one of the key terms of an investment.  I wrote previously on how to evaluate the various terms of an investment.  By punting on negotiating the full suite of terms in a round of preferred equity, you are basically leaving it to the Series A investors to negotiate these.  And some of them make a big difference (like dividends, preferences, etc.).  Most of the time, you're in a much better situation to negotiate favorable (or reasonable) terms with friendly angel investors than you will be with professional VCs  My recommendation is to use the opportunity to negotiate favorable terms with angel investors and these will likely become precedent for future rounds.
3. It doesn't make a big difference in the upside scenario.  If you run a few scenarios (I have), the potential gain for founders is 3-5% ownership after the Series A round and about half that at a successful exit. If you're lucky enough to get a successful exit of, say $75MM, after raising $15MM of VC and you have 2 founders, you're talking about +/- $500K potential gain each.  Now that's a ton of money, but the point here is that in the upside scenario you're looking at a six-figure benefit against which you have to measure and compare the risks.
4. It makes a big difference in the downside scenario.  In a wind-up scenario, the priority of various parties is, from highest to lowest, employees, A/R, secured lenders, preferred equity and common.  Yes, founders are at the back of the line, but the secured lenders are slightly ahead of preferred equity.
5. It creates a perverse incentive.  The biggest problem with convertible debt is that it aligns the interest of your angel investors with future VC investors and against you!  Because the debt converts into equity at a price equal to or slightly discounted from what the VCs pay, the lower the price the more the angel investors will own.  And often times, the angel investors will have the relationships and connections to VCs (and hence know them better than you do) so it is in your interest to get your angels on your side of the table. 

Bottom line: convertible debt when there is a high likelihood of an equity round happening very soon (i.e. you're bridging a few month gap), but if you are raising angel money and want to use convertible debt to avoid setting a valuation, don't.  Raise equity instead.

DROOM - Don't Run Out Of Money

John Nesheim has a great blog post on how to manage the process of running out of money.  Great post...and I totally agree.  As CEO, when you're company is burning cash, you should know the details.  Here's the bottom line:

Plan on running out of cash. Then execute your plan. Get going. Worrying is not going to make things better. Gather your core team. Build your recovery plan. Be wise about what you say to employees and investors. Get the entire company involved. More help is better than you alone. Do not try to do a miracle single handed and in secret.You need all the help you can get, even including spiritual assistance. When you can manage running out of cash, you will have added one of the most powerful skills to your tool chest. Use it to build your unfair competitive advantage.