Last year I wrote a post about WSGR's new term sheet generator and how that was part of an overall trend to "open source" the legal industry. Open source is the wrong term though; instead is probably better to say automate since LegalZoom and others are doing the same thing but commercially. I think this is great for end users both personal and professional, but I think it is going to seriously erode legal industry revenue in the long term. It's silly to pay by the hour to have the same documents generated over and over.
Another great example is a new tool I learned about today. It's a Terms of Service and Privacy Policy generator by Legal River. This is great for micro ISVs or small organizations that don't want or need to pay hundreds of dollars in legal fees to get a basic agreement in place. It's fast and easy to use and generates easy to use, copy-paste HTML. All you have to do is answer some basic questions and then voila, you have your nicely formatted agreement (which you can obviously edit if you like). It looks like a great service. It's free and I'm sure I'll use it in the future.
Because it's that season (bonus season, not holiday season) I've been getting questions about executive compensation from friends. But today I got an interesting question the answer I wanted to share here. The question was something along the lines of, "Well, I know the on-target bonus numbers I want to recommend, but how should I link pay to performance?"
Well, there are basically three ways you can link pay to performance (in startups):
Discretionary (i.e. it's up to the Board or CEO)
One or more financial metrics
Balanced scorecard
For very early stage startups (e.g. pre-revenue and maybe even pre-product), I recommend a discretionary plan, particularly when you're dealing with annual plans. It is just too hard to see out 12+ months with any certainty to be able to pick meaningful metrics. What's more, there is probably little money in the company so to promise cash payments based on metrics without knowing the ability to pay is a bad idea.
As a company matures, it makes sense to introduce some certainty into the pay for performance plan. By this point, your sales team and hopefully your head of sales are already on commission plans (or at least partially so). You probably have operating budgets for each department. If you're seeing somewhat predictable financial results (even if they're not moving in a way you'd like them to!) and you have the reporting in place (dashboards) to track them, then it makes sense to introduce one or more financial metrics to your pay plan. Make sure you don't introduce metrics too early; for example, before you have a robust financial reporting system/process in place.
And finally, once the business has achieved greater scale and size (50+ people, $10MM+ revenue, etc.) then you can start to think about a balanced scorecard approach to your pay plan. A lot of ink (and electrons) have been spilled defining a balanced score card, but the way I think about it is that it includes some financial metrics as well as other important non-financial metrics that can and must be tailored to your firm. If you have an important software release coming up, that could be included. Or perhaps you want to have internal performance reviews or customer satisfaction included. Whatever is important to you business and for which you have a way to track, you can include it.
Something to keep in mind, even in the case of a discretionary pay plan, you want to have your plan documented, approved and shared with the appropriate folks. It should be concise and important terms should be defined. For example, if you're going to tie some pay to revenue, then be very clear about what "revenue" means.
Also, set up quarterly reviews with each executive to talk about progress. Set the expectation up front that you'll do these reviews and you may mutually agree to change the metrics or other bits of the plan. You should build flexibility into the system, but rarely if ever use it.
Anyway, below is a template for MBOs that I've used in the past with some success. It's by no means perfect and I'm sure there are other templates out there (post in the comments here and I'll update with the best).
Note that the scorecards are only 1 or 2 pages per executive. You want to include both high level strategic goals as well as tactical / tangible milestones. And most importantly, you want to give specifics about relative priority and how you're connecting these performance metrics to pay. Remember that you almost certainly won't get this right the first time but that each year you will get close and closer to a predictable system.
Lastly, once you have this framework in place, make sure to benchmark your salary, bonus and equity for each position in your company using CompStudy data which allows you to narrowly focus on companies that meet your profile and the executive position in question.
This Thursday, December 3rd, the results of the 2009 executive compensation survey will be detailed and broken down in two 90-minute webinars (one each for Life Sciences and Technology). Over 700 companies in the US participated this year (the highest participation by a long shot in the 10-year history of the survey). Companies that participated in the survey have already received the results and this is the public unveiling to the rest of the world.
For technology companies (nearly 500 in total participated) about 50% described themselves as primarily in the "software" industry while 10% described themselves as in the "cleantech" industry. The latter is a dramatic jump from last year when just 5 or 6 percent identified themselves as cleantech firms.
As you would expect, there are a number of dramatic changes from previous years. For one, the base salaries and total compensation for non-founder executives, which had grown at a 5% CAGR for the past 9 years, screeched to a halt and had nearly zero growth (for Tech companies). Below is another interesting chart on founder equity for tech companies.
I've always found this chart amazing to me. Basically it says that "all founders are not created equal." If you're the CEO and a founder, then you median equity holding is 21%, whereas if you're CTO that number drops to 9%.
The 2009 CompStudy website has lots of little gems like this one. The new site is interactive and allows you filter and sort the results of the survey to get valuable cuts on the data (like show me founder CTO compensation in California for Series B, software companies with 40 employees and <$5 million in revenue.
Lastly, let me finish where I started. This Thursday there are two free webinars that detail the results of the survey which you can sign up for here. The webinar for technology companies is here and the one for life sciences companies is here.
Once again, here is a list of some of the more popular posts on this blog. The two most popular posts remain this one onterm sheet negotiationand this one onventure debt, although this one on convertible debt
is giving them a run for their money. I'd like to take this
opportunity to thank all of my readers, particularly those who have
voted, commented or contacted me about this blog...your interest is my
motivation!
This opportunity is with an unannounced healthcare IT startup lead by a MD/PhD with a successful track record of building and selling companies. The management team includes seasoned entrepreneurs with backgrounds in healthcare and IT. The company leverages proprietary technology developed commercially and through NIH grants over the past decade to bring a unique solution connecting hospitals to the drug and diagnostic discovery programs within life science companies. The position is based in Boston, MA. I can't say more about this publicly right now, but this is an awesome opportunity.
I've posted a couple of times on CompStudy, the annual survey of executive compensation in private / startup companies. If you haven't heard about the survey before I encourage you to check out my earlier posts (use either the previous link or click on "compensation study" in the popular searches above and to the right).
I won't rehash why CompStudy is so cool; instead, I'd like to share two things that are new.
First, as the post title suggests, the 2009 survey will close on July 15th for Canada and the US. There are close to 800 companies that have already completed the survey in North America which is by far the largest participation in the 10 year history of the survey. The survey also covers China, India, Israel and the UK and will remain open for a few more weeks for those countries.
Secondly, I wanted to point out that starting this year, the results will be published online at CompStudy. This means that you will be able to view and filter the data with a lot more precision. The graphic at right is a preview showing some of the controls...trust me they're pretty cool! Think Kayak for startup executive compenation. These aren't finalized yet, but you get the idea.
The other implication of publishing survey results online is that only participtants in the survey can get access to results. If you've seen the survey in the past, you know that the PDFs and hard copy reports were passed around quite a bit, but now those will not be available. The only way to get the report is to take the survey (or for VCs, to get your portfolio companies to take it and mention you).
It's free to participate in the survey so there really is no reason not to do it.
Informatics for Integrating Biology & the Bedside (otherwise known as i2b2) is an NIH-funded initiative managed by the Partners HealthCare System here in Boston. Over the past few months I've been spending time with a team of folks that is involved in various parts of this initiative helping them think about new commercial initiatives evolving from i2b2. It really is an amazing world...hanging out with MD / PhD types and wandering the halls of a medical research hospital is a far cry from a typical tech startup.
The background on i2b2 is that a few years ago the NIH invested something like $20 million into developing an open sourced platform that solves a major problem faced by hospitals (and medical researchers) which is that existing hospital information systems ("HIS") were not designed for search. A typical HIS is great for finding information about a particular patient. Type in medical record number 0123456 or a name and, boom, you have every bit of information from profile data, hospital visits, lab data, radiology, billing, etc. But if you were to instead try to search for patients that were male, aged 37, Asian ancestry, under 6 feet tall and have a particular condition, the system would be unable to answer (actually you're unable to ask). So that's what i2b2 was designed to solve and it's pretty good at it (you can play around with it here).
This is the real Google for medical records.
The technical challenge is daunting in and of itself, but that's just the tip of the iceberg. When dealing with medical records there are the legal issues of patients' right to privacy so having an ability to de-identify or anonymize data is key. And add on that a layer of bureaucracy almost unknown anywhere else and you've got yourself a hard problem to solve.
Apparently there are now 30-odd hospitals live in some fashion with i2b2 and later this fall (targeted for September) i2b2 v1.4 is slated for release and this version is dubbed the "enterprise ready" version. Program director Zak Kohane describes the next release as:
This release allows the entire set of patients from the enterprise to be exposed to the research community of the hospital while preserving patient privacy, providing the way for basic queries to funnel down to a set of patients interesting to the investigator. The chosen set of patients is matched to controls from the enterprise database and a project-specific mini-database is created. Major software enhancements of release 1.4 compared to release 1.3 include a hardening of the project management cell with a new, full featured client for managing enterprise users, a plug-in architecture for the data repository cell that allows complex server-side workflows, and streamlined project mini-database creation with processes to build sets of matched control patients for a given set of patients of interest.
Now there are many for profit companies also attempting to solve this problem including Microsoft, IBM and others but I think open source is a credible competitor in this sector as it has been in so many others.
So this coupled with a huge influx of public and private capital invested in "online medical records" is going to create some very interesting opportunities. Hopefully I'll be able to talk more about this particular project soon. In the meantime, if this is an area of interest or expertise for you, I'd love to hear from you.
Last week there was a meme flying around about "things VCs would never admit to." If you read TheFunded, a decent amount of the posts follow the same theme (although far less than many folks think). While I've always been slightly annoyed by these "traits" of VC, I've never paid it much mind and frankly don't care. First it's a sweeping generalization that is right as often as it's wrong and second I don't think it's unique to VC but rather is a symptom of a relationship between two parties with asymmetrical power/influence. Naturally the "weaker" party complains and the "stronger" party dismisses. I've always thought that entrepreneurs are equally guilty of exploiting asymmetrical relationships (which is one reason I don't sweat this as much as some entrepreneurs do). Well, today I saw a brilliant YouTube video that captures my point. If you're an entrepreneur and you cringe and see a little bit of yourself in this video, remember that the next time you get it back from a VC.
My view on this is to treat people like you would like to be treated and avoid doing business with those who do not. I've learned this rule the hard way but when I stick to it, I have no complaints.
You knew this was coming. Someone VC created the entrepreneur version of the VC non-admissions slide deck from last week.
I don't find it as funny...probably because it's hitting closer to home! ;-)
[update 11-9-2009] Twitter added a new feature for lists so I created this list here.
I've been wondering how the previous list of entrepreneur bloggers I posted maps to Twitter so I redid the list (order is now by Twitter followers which is the number in parentheses). 80% of the bloggers on the list are on Twitter. One thing that jumps out immediately is that several of the top bloggers are not (yet) on Twitter including: Seth Godin, Markus Frind, Linus Torvalds and Marc Andreessen among others. I suspect there's a "sunk cost" argument driving this. I think one of the reasons that Twitter is so popular is that it is a rare opportunity to redo the natural order of things (as evidenced by the changes indicated in the list below). It is also a lot easier to Twitter than to blog. If you want to bulk scribe to all of these folks, see the instructions at the bottom of the list:
If you want to bulk subscribe to all of these folks, one way is to use NinjaFollow. You can copy these screen names and paste them into NinjaFollow, press submit and voila!
Lastly, I'm sure there are many entrepreneurs on Twitter that didn't show up in this list (which was originally created as a list of entrepreneur bloggers). Post comments here with my omissions.
This post was inspired by Fidelity Ventures Partner Larry Cheng who recently compiled a list of VC blogs and ranked them in order of Google Reader subscribers. I have a few hundred feeds that I follow in Google Reader and the way that I find new ones is a random process of discovery so Larry's post was great in that he not only provided a rank-ordered list but also a convenient way to mass subscribe.
VC bloggers are fascinating to follow. But I also love to follow blogs by entrepreneurs. It's an unique viewpoint and one that I find that I learn a lot from. So with that in mind, I created a list of entrepreneur blogs. The criteria for inclusion on this list is rough but basically boils down to the primary author of the blog has to be a founder or C-level executive at an entrepreneurial organization and write relatively frequently about entrepreneurial stuff. In compiling the list I made several exceptions. For example, I included TheFunded which is not a single author blog but rather a feed from a members-only network of entrepreneurs and I included Marc Andreesson who has great stuff on his blog but he just hasn't written anything new in a while.
My list has many biases. For example, it's tilted toward authors in the US who write about "tech" companies but I would love to expand and grow the reach. So if you know of other blogs that should be included on this list, post a comment here and I'll update the list.
Lastly, here is a Google Bundle for the list. Full disclosure: I included this blog in the bundle which you can feel free to delete.
Joel Spolsky, Founder / CEO at Fog Creek Software (64,598)
Seth Godin, Founder of Yoyodyne; creator of "permission marketing" (41,957)
Jason Fried, 37signals co-founder Jason Fried (and other 37signals employees) (31,595)
Tim O'Reilly, Founder / CEO of O'Reilly Media (10,269)
Jason Calacanis, CEO of Mahalo (10,000) [note: this is an email list & not in Google bundle]
Boston Globe tech columnist Scott Kirsner is organizing an event here in Boston next month where the theme will be technology innovation in New England.
A few weeks ago when I was talking with Scott about the event he asked what I thought was "next in technology." I think one of the biggest new opportunities is going to be a new class of companies that are now viable investments because of improvements in capital efficiency over the past few years. Until relatively recently, the capital requirements of technology businesses were quite large. You would have to spend millions of dollars hiring software developers, renting real estate, buying hardware, etc. just to build a product which you could then start selling (and in reality test whether there was a market at all). Rarely did you get it right the first time so you would have to repeat the cycle until you had a complete solution the market wanted.
An entire entrepreneurial ecosystem was built up around this model including venture capitalists who would fund the big investments provided there was a big market, entrepreneurs who would start the companies and seasoned executives who would take over once the business outgrew the founders.
The "old" model is represented in the blue curve above: lots of money in and (hopefully) lots of money out. What's happened (#1 in the chart) is that improvements in capital efficiency have "bent the curve" so that less money is required to get to positive cash flow. In some cases dramatically less money is required. What this means for entrepreneurs and investors is that you can now pursue opportunities that have smaller potential outcomes (#2 in the chart) and get the same (or better) return on investment.
What has caused this improvement in capital efficiency?
Many folks, including me, have written about the trends that are driving down costs. Some of the big ones are open source, cloud computing and virtual office infrastructure. In some cases costs today are 1/10 that of even 5 years ago. AWS is a great example. The virtual office tools today are so impressive that you can source talent globally and simultaneously improve productivity while cutting costs--unthinkable 10 years ago.
It is important to remember that this doesn't mean the big market opportunities meriting large investments have gone away. I fully expect the market for big ideas to continue to grow. Rather, what it means is that there is a *new* opportunity to invest in companies pursuing smaller opportunities but the manner in which you pursue them (as an entrepreneur or investor) needs to change. On the investment side, it means putting in less money, being more on-par with management in terms of rights and preferences, having less control. The investment won't work if you spend $80K on legal fees preparing investment documents that include things like registration rights and all those other terms that will never get used. As an entrepreneur it means bootstrap, bootstrap, bootstrap. Spend nickels like they were manhole covers. In some ways it reminds me of that Michael Lewis book Money Ball and how the Oakland A's found ways to win with a small payroll.
Anyway, so that's my crack at "what's next in tech." What do you think Scott? And, oh, by the way, come to the event on June 25.
Fred Wilson started this thread with a couple of great posts on why the VC industry is having problems scaling. The real interesting part of Fred's post is the volume and quality of comments. I've never seen such a focused (in time or topic) discussion that creates value. The bottom line take away (for me) is that VC is capacity limited by the value of exits (M&A plus IPOs). I'm a visual person so here's how I see it:
Entrepreneurs start companies and the founders ("F" in my chart) invest capital which they grow with sweat equity and then limited partners ("LPs") invest capital via VCs which in turn grows the pie to the eventual "exit" (which comes in the form of M&A or IPOs). In order to increase "A" or "B" you necessarily have to increase "C."
According to Fred's posts, the "math problem" in VC is that LPs have been investing capital in VC funds at the clip of about $25 billion per year for the past decade (excluding 1999 and 2000 which were strange years). But based on a bunch of different estimates of the "exit" market, it would seem to be that only justifies an investment by VC of about $10-15 billion annually...thus the "math problem."
Over on TheFunded, there's a thread which attempts to make the argument that VCs are bad "stock pickers" and that, in fact, the market could be 2X its current capacity if they were funding more companies. I've taken some heat over there for being skeptical of that claim. I'll be the first to admit that I'm wrong....but show me the data!
[UPDATE] The 2009 CompStudy survey results are now published here.
I've mentioned this survey several times before, but this time I bring news of the 2009 survey opening to participants.
This year the survey covers five countries (China, India, Israel, UK
and US) in two industries (technology and life sciences). If you are
CEO or CFO of a startup company in any of these countries/industries
then I encourage you to participate
in the survey. It doesn't cost anything to participate (other than the
30-60 minutes it takes to complete the survey) and the benefit is that
you get the full results once they are published.
In years past,
the results were published in a PDF and a hardcopy book, but starting
in 2009 the results will be published online via a password protected,
members-only site (so participating is really the only way you can get
the results). I think the 2009 data will be very interesting as it
will reflect the effects of the overall economy as well as provide
global comparisons. Don't miss the opportunity to get the 2009 data...take the survey now!
If
you haven't seen the results of this survey before, I'm including both
of last year's unabridged reports results below. It's actually pretty
simple, yet since the data is otherwise so hard to find it's pretty
powerful. Basically the survey collects salary, cash bonus and equity
information for the top executives in private companies (mostly
venture- and preventure-backed companies). The survey also collects
information about the background of the executives and of the company
(like location, size, funding, industry, etc.). The report is then
able to give ranges of compensation based on these attributes.
First, there is the 2008 report for the technology industry focused on the following positions:
Technology
CEO
President / COO
CFO
CTO
Head of Engineering
Head of Sales
Head of Marketing
Head of Business Development
Head of HR
Head of Professional Services
Board of Directors
And here is the full 2008 report for the life sciences industry focused on the following positions:
Life Sciences
CEO
President / COO
CFO
Chief Scientific Officer / Head of R&D
Chief Business Officer / Head of Biz Dev
Head of Clinical Research
Head of Regulatory Affairs
Head of Manufacturing
Head of Sales (& Marketing)
Head of Marketing
CTO
Head of Engineering
Head of HR
Board of Directors
There
are some things that immediately jump out of the data. One is that
company founders have a significant discount in terms of cash
compensation (but obviously a premium in equity). Another point is
that the equivalent role in a technology company is compensated at a
lower level than in life sciences.
So if you are a startup CEO of CFO (whether you have venture backing or not) please take the time to go complete the survey and
you'll get the 2009 results for free. And also you can do a friend a
favor and forward this post to them so they can fill out the survey as
well.
No, this isn't a recessionary move to give away unbilled lawyer time nor is it some sort of shift to being a pro-bono only firm. Today, Wilson Sonsini announced the launch of a "term sheet generator." It's basically a web tool that creates draft preferred financing term sheets for startups. I got a preview of it a couple of weeks ago and my review is that it is really impressive!
The way the tool works is that you answer a bunch of questions (north of 100) and then when you are complete it gives you a perfectly formatted Word file term sheet. Most of the questions are structured as "select from" several options often with an optional to "write your own." The beauty of having the option to select from "standard" options is that WSGR has included some market data, e.g. what percent of term sheets in up rounds in 2008 included this term. Last year, I spent a lot of time attempting to reverse engineer this data based on a small personal sample size. Obviously, WSGR has a much larger sample size and the fact that they make it public (in aggregate) is impressive.
The Term Sheet Generator originated as an internal tool for WSGR attorneys to rapidly generate draft term sheets which they would polish up and then deliver to their clients. Not surprisingly, WSGR Partner Yokum Taku, who I've previously written about, is the key co-conspirator behind making this tool public. I exchanged email with Yokum about this tool and I wanted to excerpt a few take aways from that conversation:
Apparently this is the first of many online document generator tools that WSGR intends to make publicly available on the web. There are three categories (startup, equity financing and bridge loans) so we can expect more to come.
I would have thought that internally there would have been a debate about giving away for free what they used to charge for, but Yokum insists this did not come up.
The biggest challenge in building this tool is that each branch in the question tree is associated with unique verbiage. Building that must have been crazy.
So I think this is a brilliant step toward "open source law" which I've been advocating for a while. I am certain there will be hundreds (ne thousands) of lawyers who will use the WSGR Term Sheet Generator to create draft term sheets for use with their clients. In fact, I bet Google Analytics will quickly show Yokum and his colleagues at WSGR that his real userbase for this tool will be other attorneys both at firms and inhouse. What this tool really wants to evolve to is having an open, wiki-style back end where practitioners can change and comment on the myriad of options and verbiage which would keep the tool evergreen based on the best crowdsourced legal opinions.
In the meantime, I wouldn't be surprised to see some sort of watermarking of term sheets created by the tool that would allow WSGR to offer discounted legal fees if they created the draft term sheet using the tool. It would certainly reduce WSGR's time/costs as they would know the underlying terms
