Launching a startup is the in-thing these days. Like the #IceBucketChallenge, in a way. And that’s not good.

The virally popular #IceBucketChallenge is basically about YouTubing yourself getting a bucket of ice water dumped on your head, then challenging a couple of your buds to do the same. Somewhere there’s a charity donation to ALF, or EMP, or whatever.

I doubt that all those people who go through elaborate setups to get more views, will spend at least the same amount of time understanding the cause #IBC is supposed to help (ABC? AFL?). Even fewer have researched the charity to which they are giving their hard earned money (AMC?).

And, if the goal of the #IceBucketChallenge is to give to the cause, why is it that if you get a bucket of ice water dumped on your head you pay only 10% of what you would pay if you dediced not to do it?

#IceBucketChallenge, for all its good intentions, is not charity. It is a fundraising stunt. Granted, it appears to be successful in terms of virality and in terms of revenues for the foundation. But in terms of encouraging people to be charitable, it fails on so many levels. It is “pretend charity”.

And, unfortunately, that’s how I feel about most startups out there.

Most startups I come across are marketplaces or e-commerce sites, bolted together with pre-made modules, APIs and frameworks. There is very little innovation, be it technological, business or other.

My local newspaper breathlessly reports on the latest startups. Look for them about six months later, and most of the projects have been abandoned.

Startups are not about the launch. The hard part of entrepreneurship, which also makes it real, is about earning the trust and commitment of paying customers. This is dirty, sweaty, unglorious work. If you think Google Adwords and banner ads and growth hacks will get you loads of customers while you’re slurping a frappucino by your laptop, you’re missing the point.

A real entrepreneur goes out and gets face-to-face with the market, to understand their needs and figure out what will trigger them to choose what you’re offering. You will probably be in “soft launch” for a year or two building your product or service, figuring your problem-solution fit and product-market fit, and before you start seeing traction. Then you will spend another three years or more building the business to the point where it makes money for you, your team and your investors.

Launching a web site makes you just as much an entrepreneur as dumping a bucket of ice water on your head makes you a philanthropist. The real deal takes time, effort, commitment, and money.

Don’t get sucked into doing the popular thing because it makes for good YouTube or press coverage. Do it because you truly believe in it.

(Image via Flickr https://flic.kr/p/oNq8Zy Used under Creative Commons licence)

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Leadership – The Romance vs The Reality

by Coach Davender on August 1, 2014

A Facebook Friend asked a question on her wall: What two qualities come to mind when you think of “Leadership”?

The answers came fast and furious: vision, courage, determination, accepting other people’s ideas, team-builder, big-picture thinker, authentic, empathetic, sets aside ego for the betterment of the team…

Reading these answers got me thinking about the mind-picture people have about leadership: someone who makes people feel good about themselves.

What is true leadership? Is it the one who leads the parade or the one who starts it?

The romantic image of a well-loved and respected leader who fosters a happy team spirit exists only in the movies and in media stories. The big problem of today’s society is that when we look for leadership, we tend to choose charisma and mistake it for leadership. Charisma is great until the going gets tough and tough decisions need to be made.

To me, leadership is about changing the way people think and act, the willingness to make the unpopular choices which pull people out of their comfort zone towards a better future. It is about communicating a call to action that is so compelling that it makes people uncomfortable enough to do something about it.

People are happy when they are doing things they are comfortable doing. Charismatic leadership works well in those conditions. But when people are pushed out of their comfort zone, they are no longer happy, and charisma loses its power to influence.

The true leader is at the same time feared and revered. It’s the crusty sergeant-major whom the soldiers hate, but they hate him because they know deep down he’s right – and they will follow him into battle knowing their chances of a safe return are slim at best.

The ultimate test of a leader is the ability to get people to do the hard stuff. And that takes much more than charisma – it takes a willingness to go out on a limb for the cause and also for the people who choose to join in the cause. It is about focus, discipline, integrity, grit, courage, and total, unwavering commitment.

Leadership is not romantic. If done right, it won’t win you popularity contests. It is real: risky, dirty, challenging and eventually, if all works out in the end, life-changing, for you, and for the people who choose to follow you.

Which is why true leaders are few and far between. It is also why, in this chaotic and dangerous time, we need more leaders who are willing to do the hard work of confronting the status-quo and getting people out of their comfort zone to discover what they are really capable of doing when they set their hearts and minds to it.

 

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Equity is not Monopoly Money

by Coach Davender on July 20, 2014

I’ve met more than a few startup entrepreneurs who consider their idea to be the next billion-dollar sure bet, and who propose equity in lieu of cash to their new team members and to the professionals who provide them services.

At the beginning stages of a startup, cash is precious, yet there is so much to be done. Bartering services for stock can seem like a effective way out of this situation, however if the founders are not careful, it will cause many more problems down the road.

What is equity?

Equity is a percentage of shares in the company. As a startup, equity is worth very little, because no outside money has been put into the company yet (money that the founders invest in the company basically doesn’t count). Equity is granted to people other than founders in two ways: as stock options (the right to purchase a certain amount of stock at a specified price at a future date, called a “vesting period”), or restricted stock (which gets paid on exit after those who hold preferred stock, which is reserved for external investors).

A certain amount of equity (15%-20%) is reserved for employees, this is called the “option pool”. The value of the equity depends on many factors, including how much money has been invested by external funders (seed, friends-and-family, VC, etc), and how much debt the company carries.

I’m not a lawyer, however I’ve seen (and personally experienced) enough situations to provide some guidance on this complicated subject:

1. Giving equity is a promise, a commitment, and a responsibility

The moment you give equity to someone, you create a permanent connection to them. Whether or not the stock or options they hold give them a direct say in your startup, they can make a lot of trouble for you if their priorities are not aligned with yours. In particular, make sure they understand fully what they are getting into by accepting your offer of equity (including tax liabilities), and make sure you are comfortable with the idea of having to explain to them why your startup is not making them rich, especially when the going gets rough.

2. Equity is not to be given, it should be earned

Equity, either in options or restricted stock, should be only given to those who contribute in some fundamental way to the success of the startup, and only after a certain period. I’ve seen too many startups give equity to the first people who come on board, hoping they will become “co-founders”, but who leave (or are kicked out) soon after. The problem is that these first ex-employees now have equity which is difficult to take away from them.

Always have a vesting period to see if the new team-member is a good fit, to see if they are able to contribute meaningfully, and if they are really committed to the project.

I highly recommend the book “Slicing Pie” for a complete description of how to create a system where founders’ equity goes to the right team-members in the right proportions. (Also see the video at http://www.slicingpie.com).

3. Service providers should never receive equity

You need legal and financial help to get your business started, however you probably don’t have the money. Some lawyers and accountants may accept equity as consideration for their initial services, in the hopes of “locking” you in for the long term, where you will need more of their services and you will be able to pay cash.

There are two problems with this:

- You will need many service providers during the lifespan of your project. The lawyer you use for incorporation will not necessarily the best one for your intellectual property, funding rounds or your overseas expansion. I suggest starting out by hiring (for cash) an inexpensive solo-practice lawyer to do a basic incorporation, and as you grow, sooner or later you will need to get the paperwork redone.

- The practice of service providers who accept equity in lieu of cash for their services raises some sticky ethics questions, especially for lawyers and financial consultants. They could be in a conflict of interest if it is alleged that the advice they provide was biased towards increasing the value of their equity so they can cash out earlier, instead of being in the best interest of the client and of the business.

Having your lawyer, your accountant and other service professionals in your capitalization table does not provide a favorable impression to seed investors and VCs.

4. The more people you have in your cap table, the harder it is to raise money

Your “capitalization table” is the document which shows who owns how many and what kind of shares and options. Your first external investor (seed or super-seed) will want to only deal with a limited number of shareholders.

Also, depending on the type of incorporation, you may run into problems with your provincial, state or federal securities laws if the number of shareholders exceeds a certain number – for example, in Quebec, if you have 50 or more shareholders then you no longer qualify as a closely-held corporation and the annual reporting requirements become a lot more expensive. Fifty shareholders may seem like a lot, but consider if you are getting money from family to keep your project alive, and you have team members who are coming and going, you can reach that number pretty quickly (the “worst” case I’ve seen was a startup with over 40 shareholders who had raised a couple of hundred thousand dollars over the years)

5. Don’t give equity to family

Family money is a dangerous source of capital, because it comes with emotion. Can you face Aunt Betsy when you tell her that her retirement fund is wiped out because the stocks she bought in your startup are worthless?

Instead of equity, consider negotiating personal loans with interest and deferred payments of capital, or convertible notes (loan to be converted to equity at a fixed amount when you receive an external investment of a certain amount).

6. Equity is not free money

The bottom line is that equity is not free money that you can hand out. The hard reality is that your startup will most likely fail. Keep the circle of people who hold equity in your startup small and select – in this way the people who count will take as much responsibility to make your startup a success, as they will take responsibility if it flames out.

Standard disclaimer: I am not a lawyer – just an entrepreneur who has learned this the hard way. Please check with qualified counsel before taking any action on this subject. And pay them cash.

 

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