Here is a set of simple forms appropriate for startups in the seed-round from Y-Combinator. (Termsheet, Share Purchase Agreement, Board Consent, etc.)
I also highly recommend the collection at Starup Forms Library created by the Orrick Law Firm. These include everything you need to set up a Delaware corporation, founders stock agreements, director & officer agreements, employment and consulting agreements and more. Orrick has even created a Termsheet wizard that walks you through the document based on your responses to a series of interactive questions.
For a set of typical A-round venture capital financing documents (Termsheet, Share Purchase Agreement, Investor Rights Agreement, Voting Rights Agreement, etc.) see US National Venture Capital Association site.
As always, you need to personalize these forms for your company’s situation and founders wishes – so copy/paste responsively, and when in doubt consult your attorney.
Since a lot of our clients have are asking – here is a great post by IP Watchdog, it gives a very honest and fair overview of what all the costs of a US patent filing add up to. Despite the “$99 Patent” banner ads you may even see on Watchdog’s own site – Gean Quinn’s post fairly breaks down the true turnkey cost of a patent. For consumer electronics product the total is about $12,800, mechanical tools $10,700, software/business methods related to internet $18,000. And lets not forget mentioning the average length of the process (2-3 years depending on the type of claim).
This is admittedly a very serious investment, but if you believe your intellectual property is worth protecting at all, it is worth protecting well. The skill of formulating defensible claims, together with the reputation your counsel will strongly effect the longer-term value of your company’s intellectual property.
While 30% of Rovio’s income today comes from licensing Angry Birds IP for merchandisers, submitting a check the box based patent claim will be as effective as brining a paperclip to a knife fight in case of IP litigation.
I am always on the lookout for new ideas on how to spark entrepreneurial spirit and create fertile conditions for growth of innovative start-ups. As such, as soon as I got my hands on Senor and Singer’s book ”Start-up Nation. The Story of Israel’s Economic Miracle” I tore into it looking for what could be transferred or copied by Estonia.
In theory, the two nations have much in common – tiny nations with small populations and unusual languages, menacing presence of oil rich neighbors (that have more than on one occasions invaded), no abundance of readily convertible natural resources or cash crops, and a recent past dominated by central planning and socialism. In reality, the likelihood of successfully localizing the Israeli model in Estonia is rather low.
In “Start-Up Nation” Senort and Singer describe how within just 20 years Israel created a world famous high-tech economy and one of the biggest venture capital markets in the world. Authors illustrate the uniquely Israeli landscape that created synergy from the close proximity of great universities, strong gorvernment investment into high-tech R&D, and a particularly strong and innovative national character forged by the government through the national service sytem.
When in the 1990s the government provided funding to encourage venture capital to invest in Israeli startups – the synergy was commercialized into an $18.1 billion technology export industry (2008) from near zero. As Erel Margalit put it “Venture capital was the match that sparked the fire.”
“Start-Up Nation” leaves the impression that Israel’s success can be generally divided into three broad influences: investment into education, investment into military R&D, and investment into culture of innovation.
Investment into Education
Israeli educational system is very effective at producing scientists and engineers, while successfully absorbing Russian, Ethiopian and other emigration in the millions. According to the OECD, 45% of Israelis are now university educated, and these universities are very good.
In 2008, Weizman Institute and the Hebrew University were chosen as the best two places to work in academia (outside of the US) by Science magazine. Israel now produces more scientific papers per capita than any other nation. Israel is a top 10 producer of patents in the field of nuclear science. Hebrew University is ranked #12 in in global biotech patent rankings (Telaviv University is #21). Israel has numerous nominations for Nobel Prizes and has recently won several prizes in economics and chemistry. Of course, all of this has required consistent government support for investment into raising the quality of the education to the world class level.
Investment into Military R&D
Constant threat of military conflict with hostile oil rich neighbors has forced Israel to invest billions of dollars every year into military R&D. Investment into projects such as the Merkava tank, Lavi jet are known by name, but in addition to these specifically military applications, there were many international projects with readily transferable technologies and innovations in the fields of satellites, missiles, optics, communications, cryptology and many others. The military R&D projects trained several generations of highly qualified and experienced engineers and technology professionals with unique cutting-edge know-how and expertise. Moreover, the Israeli government through its mandatory national military service targets for extra development the most promising leaders and scientists through specially designed military leadership programs.
Every year all high school students have an opportunity to try out for the elite military units topped by the Talpiot. Talpiot only considers the top 2% of the students, less talented students have to settle for less prestigious military units. If Talpiot candidates pass the 41 month training course they then commit to six years of further development in advanced military service. Today many of the Isreali NASDAQ listed tech companies are founded or run by Talpion alumni. As a result the authors claim that:
In Israel, one’s academic past is somehow less important than the military past. One of the questions asked in every job interview is , Where did you serve in the army
Thus Israel’s start-up engineers and future CEOs have by age 25 not only faced academic challenges, they have learned improvisation and innovation in leading combat operations against terrorists with millions of dollars in technology, learned responsibility in leading troops into battles and made rapid executive decisions literally under enemy fire. Israel has masterfully managed the technology transfer in leadership and technology skills learned through modern military service into profitable uses in the civilian technology markets.
Investment into a culture of innovation
Authors describe how Israelis are brought up in a culture of improvisation and innovation on the “edge of chaos.” A key to survival in the environment with few natural resources and hostile neighbors is thinking outside the box and challenging conventions in order to even up the odds.
The geopolitical reality of Israel is that it is surrounded by 250 million Arab neighbors (some more friendly than others) that are financed by the proceeds from the sale of 1/3 of the world’s oil reserves. In such difficult environment Israeli leaders have had to adapt to finding unexpected and unconventional solutions. Isrealis have learned that to tease out the best from a team a real leader should be ready to resist group-think and defending the status quo:
Maximize resistance—in the sense of encouraging disagreement and dissent. When an organization is in crisis, lack of resistance can itself be a big problem. It can mean that the change you are trying to create isn’t radical enough . . . or that the opposition has gone underground.
This is something that is specifically taught to everyone in the military through the after-action review process for analysis of all military missions. The ability to accurately and honestly admit and assess own and teams’ weaknesses and thus find ways for improvement is highly valued and rewarded. Israelis learn from early on that:
It’s ok to try and fail. Success is best, but failure is not a stigma; its an important experience for your resume”
An excellent demonstration of this culture has been the Yozma venture capital fund of $20 million combined with $100 million investment into creating 10 Venture Capital funds (each made up of local VC in training, foreign VC, and Israeli investment bank/company). Today these funds manage approximately $3 billion of capital and support hundreds of Israeli high-tech companies. There are now over 45 venture capital funds actively operating in Israel, and Israel has over the same period doubled its share of the global VC investment with respect to Europe (15% to 31%). The key for gaining support from the VCs was that from the beginning the government wrote in a cheap buy out clause (equity plus reasonable interest if the fund was successful). The idea of the program was: “while government shared the risk, it offered investors all of the reward.”
Relevance for Estonia
Unique synergies of the Israeli ecosystem is instructive, but not readily transferable to Estonia. Despite strong efforts none of the Estonian Universities have ever broken into the the top 500 rankings, and are unlikely to do so in the next decade based on the current level of investment and international professors’/students recruitment policies. Under the given budgetary and political limitations it would be difficult to finance, but effective and rapid change can be achieved for example through making it possible for all Estonian university students to study abroad for 1 year, and making it a graduation requirement. But long term solution will require more investment form the state as well as strategic private partners.
Israeli military history is also difficult to transfer to Estonia. Estonia currently has virtually no military to civilian technology transfer. The last remaining Estonian military company E-Arsenal (which had been attempted to bring optical technology manufacturing into Estonia) was recently turned into a real estate company to manage its Tallinn property. Estonia should certainly consider providing direct government financing for private companies able to bring high-tech military R&D projects into Estonia. Estonia’s current active participation in NATO operations, NATO’s cyber-defence centre in Tallinn, and Tallinn potentially winning the EU IT headquarters project – Estonia should be able to participate at a minimum in communications and cryptography projects which could bring unique know-how with advanced technologies to Estonia.
Finally, there is much to be learned from the Israeli experience of venture capital incubation through building incentives for privatization into the program. The likelihood that local VC firms begin to strengthen and emerge would be significantly enhanced by this approach. The private VCs are much better able to deliver the “smart” part of smart money – by providing, in addition to investment, better level of access to credible mentoring, introductions to international investors, top professionals, prospective acquirers, new customers and strategic partners. This seemed logical enough for the Irish in 2008 when they launched a €500 million “innovation fund” designed to copy the Yozma model.
Theo Paphitis one of the stars of UK’s Dragon’s Den has taken to advising nine companies with their plans to enter into rapidly expanding global markets. The whole process has been documented by the BBC in an interesting new series “Adventure Capitalist.” In the three episodes Paphitis takes his protégés away from the market report, rumors, urban legends and Googling, to face the actual target markets (Brazil, India, Vietnam).
Intellectually we all acknowledge that if it was easy, someone would have already done it, but our ego often tempts us to believe that we are the first to have some unique insight or solution to the problem. Initial contact with the target market is therefore often a surprisingly painful and uncomfortable experience for most entrepreneurs, creating challenges to their ego and often disillusionment. The mirage of a big fat market that is just dying to get your product, is replaced with a long list of new local challenges (often the very reasons that previous attempts at market entry by others have failed). If the CEO’s can weather the initial blows and roadblocks, and creatively re-focus his/her attention – innovative solutions can emerge.
Here’s three good examples:
Bremont (product – luxury watches)
Founded by two bothers as a fruition of their life’s passion for watches. Three years ago they started selling their distinctive aviation related designs and established some brand recognition in the UK market. So far they have invested over a £1.5M into building the brand. India is one of the fastest growing economies in the world, with a 300 million large middle class, and more per capita millionaires in Mumbai than anywhere else. Bremont seeks to become more global and expand into India’s upscale watch market.
Culture shock: Most Indian luxury watch customers prefer gold, gold plated and gold tone watches instead of the stainless steel like Bremont’s watches. Indian market penetration with a new product requires a celebrity endorsements, instead of the planned air force or other reasonably priced endorsements. Moreover, Bremont pricing strategy was unrealistic: seven different taxes and duties totaling over 75%, customer expectation haggle 30-40% of the retail price, and the dealer cut together more than doubled the expected watch price from the already high £6,500.
Resolution: Bremont listened to the customer feedback, and deciding to start very slowly with only one or two displays at shops in India before they can do proper advertising and marketing.
Regenatec (product – biodiesel converter kit)
Regenatec, a five year old start up company’s £500,000 in R&D produced the RG100 – converter that lets any diesel engine run on biodiesel. also sells “ethical” biodiesel (no food oils). India is the biggest diesel market in the world, also the fastest growing oil market.
Culture shock: Jatropha plantations in India are still in the experimental phase, with no regular commercial volumes available. Indian government heavily subsidizes standard diesel bringing its cost per liter down to 35 rupies, while jathropra biodiesel is at an economically uncompetitive 50 rupies per liter. With no reliable supplies of reasonably priced biodiesel, there is no way that Regenatec can pursue its business model in India. Finally, the conversion violates Indian vehicle type certifications, and needs to be recertified after the conversion – a bureaucratic headache.
Resolution: Field trial stage with one bus and one generator, and seeking $2 million to continue entry into India’s market.
Marmite (product – English spread for toast)
Small (£40M sales) subsidiary of food giant Uniliver, Marmite is a century old UK company that got popular during WWI (cheapest way to get vitamins added into peoples diet) as a replacement of jam on toast. Marmite has started to internationalize, and has had success in countries like Sri Lanka where they have 30% market share. Marmite seeks to target India’s very large middle class of moms that make the meals for their families.
Culture shock: Focus groups showed that Indian moms thought that toast with Marmite tasted strange, smelled funny and reminded everyone of medicine. Most Indians simply did not like Marmite on toast.
Marmite refocused, and pitched the spread as a cooking ingredient, a type of flavor enhancer. Marmite consulted with Indian chefs to create some dishes for new focus groups and testers. Turns out the potential customers really enjoyed the yeasty and tangy flavor that the spread added to Indian food.
Resolution: Marmite was able to approach the Indian market from another angle by pitching their spread as a cooking ingredient. They also understood that market entry will require a robust marketing strategy with an initial investment of £500,000. Marmite decided to get a local celebrity chef, advertising, in-store displays and sampling, recipe campaigns and other targeted promotions. Marmite does not expect to turn a profit for 3 years, plowing all revenues back into marketing, but remains optimistic about the prospects of success in India.
Paphitis is an experienced entrepreneur that started out as a tea boy and filing clerk, but now is on the Sunday Times Rich list of the wealthiest UK residents. He made most of his fortune with the £100 million sale of Canadian underwear retailer La Senza.
Much of what he has to say seems simple and obvious – but very difficult to actually carry out – as most true things in life. Theo’s commentary is available here.
We all have our favorite “computer guy,” “theater gal” or “tax guy” – to whom we turn to, and who’s sage niche expertise we blindly and gladly follow, because it just makes no practical sense to try to replicate their passion and depth of understanding. The system works great — a more personalized and astute human version of Amazon’s recommendation engine. Latest proof, a recommendation from my “quality reading guy,” and a very funny local author. He passed on this gem of an article New Yorker by David Owen “The Inventor’s Dilemma.”
David Owen’s story gives an insightful glimpse into Saul Griffith’s life – MIT’s supercharged “invention engine” who’s projects are financed by the likes of Google. Griffith gives a very practical description of how difficult it is sometimes to define from which side to approach global problems – technology or market.
Successful startups are lectured on the need to be addressing real market problems with their solutions. Easier said than done. Griffith found out that despite his invention of a simple machine that makes lenses for glasses so cheaply that they become affordable even to the poorest of the world, this was not the problem that needed solving. The solution actually already existed (cheap Chinese lenses), and the real problem was — lack of professionals to deliver prescription eye testing to the poor, for which Griffith had no technology solution.
Griffith’s also believes that capping greenhouse gases at levels currently recommended by climatologists to keep the global warming under control would require the biggest public works project in the history of the world and is financially and technologically impossible at this time.
It’s not the trilateral commission or some other shady organization blocking all the useful inventions – it’s just that coal (the most abundant fossil fuel) is simply too cheap right now, and the other energy technologies have not advanced far enough to be competitive. Griffith’s insights into power storage are concise and to the point:
Unfortunately the difference between the world’s best battery and gasoline, in terms of energy storage per kilogram, is not a factor of ten; it’s more like a factor of hundreds or thousands.
Griffith makes you wonder if sometimes we choose to narrowly solve technological problems because the alternative – changing social/market habits seems like a much more expensive quixotic quest. All start-ups, and especially “saving the world through green energy” start-ups, take pause to consider — will the technological solution you offer really solve the problem or merely expose the underlying social/market barrier.
Buyology by Martin Lindstrom does not quite deliver on its cover claim of “How everything we believe about why we buy is wrong” but the book is a worthwhile intro to the topic of neuroscience marketing. People enjoy thinking that we are rational and calculating, but studies show that in reality we are often driven by chemical messages and backwards-rationalizing our decisions.
Companies have realized that using focus groups and self-reporting is often highly inaccurate because test subjects often do not know themselves why they prefer one product over another. This could also explain why 52% of all new brands and 80% of all new product launches, even if supported by major advertising campaigns, fail within the first few months.
This is where fMRI brain scans and STT electroencephalographs come in – measurement of target consumers allows advertisers to create truly effective targeted advertising. Now images and messages are tuned so that they have the maximum impact in releasing endorphins or dopamine. Interesting findings from the research in the book:
Maybe I am just too jaded, but I already believed that companies are using various subtle ways to increase our spending. So I have grown a thick skin and try to ignore the marketing messages. Apparently so do most people, as people could on average, according to Nielsen’s surveys, recall details of only 2.2 commercials of all the commercials they had ever seen.
Lindstrom’s Buyology confirmed that companies are not satisfied with the dismal performance of advertising 1.0 and have taken sales to the next level by incorporating neuromarketing into the design of their sales campaigns.
Superb post from the original and irreverent mind on Morten Lund. Lund found and/or invested in over 40 tech startups, among them names like Skype and ZYB. However the newspaper business proved to be Lund’s kryptonite.
In 2006 he founded a free Danish newspaper that quickly grew to be the most widely read paper in Denmark with half a million circulation. Nevertheless, the top spot did not deliver sufficient revenues and despite help from his frends at Draper Fisher Jurvetson, money ran short. To keep the project going Lund commited DKK 105 million in funding for the project (backed by personal guarantees. However, with the collapse of the advertising market the paper lost its life blood and was forced to close in 2008. [colorful description by Lund of the sinking ship can be found here and here]
As a result of the personal guarantees and facing a severe liquidity crisis Lund was forced to declare personal bankruptcy in 2009.
Despite the stress and emotional drain of the government sponsored “re-boot” Lund seems to have re-discovered his mojo and is back at it. Inspiring example of true entrepreneurial spirit! (Oh – and this should be a lesson learned for everyone regarding the net effect of personal guarantees).
Here is the message that he wrote to his fans and devotees:
This picture reflects UPSIDE DOWN TO ME
- and the WORLD IS 100% UPSIDE DOWN WHEN:
The Banks Are Out Of Money,
AIG got 180bio$ in Gov Aid – market cap today 5,3bio$
Im Bankrupt but feel better then ever.
Climate change has made Danish summers AMASING.
The Hedgefunds forgot to HEDGE.
56% of all twitter users follow no one.
Obama came out of NO WHERE because he made a deal with the weapon industry and therefor he can challenge doctors and pharma to on a HEALTHCARE REFORM.
People talk much more to each other during crisis – we suddenly have something in common.
Wireless power seems to be a consumer facing reality soon
I have been thinking lately – (to twitter or blog or video) – I wanted to write a story about how upside down the world is now – how much I have learned from my bankruptcy situation and how my world has changed again. Only for the better. In very short – I’m much better, sharper, ore alert and happier in this situation. I feel like I’m home and I feel richer then ever – since 90% of my friendships showed out to be non related to my wealth – and people still buy into my visions… BASICALLY: I started with NOTHING – and here we go again – Nothing + A Network that beats even the wildest imagination for a dyslectic from suburbia + a bag of experience that NOW consists of things NEARLY NO ONE ELSE ON THE PLANET HAS TRIED.
To entrepreneurs: TIME IS NOW
Benchmark Capital’s Bill Gurley wrote in his Post that we may be on the verge of witnessing a drastic reduction of the venture industry.
Before joining Benchmark in 1999, Gurley was a partner at Hummer Winblad Ventures. As if that is not enough street cred, he has a background as a highly touted research analyst at CS First Boston. So banter of a 50% reduction from Gurley should be taken pretty seriously – considering the full implications for entire sectors of technology that are entirely dependent on venture financing. No wonder that the new mantra being repeated at all start-up events is “cash-flow is king.”
Mind you 50% figure is not a hyperbolic tweet taken out of context, but a very well reasoned analysis showing how pension funds, insurance companies and foundations have lost a lot of money by exposing their portfolios to more venture capital investments. The credit crisis combined with the inability of the venture industry to deliver significant returns from IPOs or blockbuster M&A deals spells – reallocation.
Predicting that institutional investors will likely cut exposure to “alternative assets” by reducing their portfolio allocation by 50%. Logically, Gurley expects a proportional cut in money available to those venture capitalists raising new funds.
This very much mirrors the comments from my contacts in the venture industry – trouble has hit home with many Estonian and Scandinavian VCs that have been unable to start new funds, or have to settle for unexpectedly small funds.
On 23 July 2009 Apple pulled the developer license for the one of the world’s most prolific iPhone developers – Perfect Acumen. The Pakistani development team led by founder Khalid Shaikh has launched 943 applications on iTunes – which is about 5 apps a day, every day, for 250 days. This armada of apps was reportedly earning a total of several thousand dollars per day (full list of his apps http://www.yappler.com/Developer/98920/Khalid-Shaikh.aspx )
Other development houses such as Brighthouse Labs have also capitalized on the strategy of releasing a flood of cheap simple apps, with over 2,000 apps available at $0.99. Together these two companies’ apps accounted for about 5% of all applications for the iPhone.
Shaikh’s revenue model was simple – develop simple apps such as news readers targeted at every major niche topic -“US Army News” (military) “WWE Updates” (wrestling), “Skin Care Updates” (cosmetics),”iSoaperStarsUpdates” (soaps) etc. The price of the app was $4.99, and their only function was to pull news feeds for internet sites with keywords for that target niche.
Over the course of 9 months and 900 separate reviews and approvals, Apple did not detect what it now asserts to be hundreds of Shaikh’s apps using copyrighted images without permission. Clearly this shows that enforcement was not overly stringent during the past year. The mere volume of apps being published over such a short period of time under one developer name should have triggered some additional scrutiny.
The decision to ban Shaikh appears to signal Apple’s strengthened enforcement of its developer policies. Now that Apple has reached 50,000 app milestone, enforcement of application quality will likely go up the priority list. Even though the price of the apps is 4.99 or less, customer expectations are surprisingly high and buyers feel cheated when they realize that all they get is a second rate RSS feed.
It is important to note that Apple did not ban Shaikh because it sold applications with poor quality and low value to the customer (such a termination would be contractually very difficult to defend), but it had to premise the termination on the alleged IP violations. To improve customer experience Apple is certainly willing to enforce it’s developer agreements, and updated restrictions seem likely in the future.
Unlike the usual outrage by developers against Apple’s ban decisions, the Shaikh’s license revocation has been greeted with a modicum of support. Everyone agrees that iTune’s customers in general are willing to tolerate only a handful of purchases gone bad and cases of buyer’s remorse before considering switching to other providers – whether that is going to push customers to look for big brand and/or famous studio apps (read EA and ), jail-broken apps or downloading free apps from torrents.
Regardless of which of these three options diverts customers, it is not good for independent developers. Shaikh was an easy target, but the diffult task is still ahead – it is in the interest of Apple and all indi-developers to resolve the issue of perceived value and transparency in application quality.
Joltid Ltd, a British Virgin Islands company founded in 2001 by Niklas Zennstrom and Janus Friis, the team that created Skype, Kazaa, and Joost, is threatening to shut down eBay’s Skype service. Skype’s approximately 450 million users generated $500 million in revenues in 2008, a figure expected to grow to $1 billion for 2011, according to the Wall Street Journal.
eBay bought Skype from Joltid Ltd in 2005 for $2.6 billion, but the deal did not include the complete assignment or transfer of the “Global Index P2P software,” merely a license for this core technology component.
Joltid Ltd. still holds a key patent on the content distribution platform technology that allows Skype to manage bandwidth efficiently. US Patent number: 7480658 filed on 14 July 2004 lists Joltid Ltd as the owner, and the Estonian programmers Ahti Heinla and Priit Kasesalu as the inventors of the technology.
eBay’s 10Q quarterly report filed with the SEC disclosed that in March 2009, Skype Technologies S.A. filed a claim in the English High Court of Justice (No. HC09C00756) against Joltid Ltd. due to its cancellation of the software license, and Joltid counterclaimed for copyright infringement and license repudiation. The outcome of the dispute will be determined by the UK trial scheduled for June 2010.Joltid has now canceled eBay’s license, and if effective, the cancellation could disable the whole service, as re-engineering the entire P2P architecture for half a billion users around the world within 10 months would be a mission to mars. eBay would have to rapidly develop, test and roll out world wide an alternate non-infringing technology, license an alternate technology, or abandon the service altogether. According to the 10Q eBay has chosen to try to develop an alternative technology.
This kind of an IP disaster is reminiscent of the Volkswagen deal to buy various Rolls Royce and Bentley factories and assets, but failing to buy the Rolls Royce trademark which was sold to BMW. For more embarrassing IP disasters look here.
The moral for entrepreneurs – make sure that you get qualified advice when negotiating and documenting technology deals to avoid such colossal PR, technology and financial disasters. The advice applies equally to those start-up founder/heroes that fancy themselves Renaissance-men capable of playing any role in any company, consultants that attempt to give occasional IP advice as an up-sell on their other services, and those CEOs thinking that their in-house lawyers should be able to handle it – I mean – how hard can it be?
eBay and Volkswagen found out the hard way.