nivi

When your existing investors don't maintain their pro rata in a new financing, prospective investors will wonder why. This assumes that the existing investors: (1) Have already invested in your company (duh), (2) Have some knowledge of the company (e.g. served on the board), (3) Make it a habit to invest in follow-on financings like yours.

You can still get around this if you have a good excuse, e.g. "Our existing investors are out of money". And your existing investors confirm your excuse when prospective investors inevitably call them.

So if USV didn't participate in the latest Twitter round, the company and USV probably had a good excuse, e.g. "Our fund isn't structured to make acceptable returns at $1B valuations". When a random angel who isn't on your board doesn't invest your Series A, most prospective investors won't wonder why.

Regarding YC-Sequoia:

The firms who are likely to invest in post-YC companies are likely to be mavericks who can think for themselves. That's the kind of investor you want anyway. You don't want to tell prospective investors that Sequoia spent three weeks intensely studying your company and decided to pass. But the fact that Sequoia could have looked closely at your company, but didn't, will probably be irrelevant.

On the other hand, if Sequoia and other YC insiders are cherry-picking the best YC investments before they hit the mass market, good investors are going to get less interested in demo days. That will hurt YC companies.

I don't know how these forces and other forces will play out in the marketplace. And since we're talking about game theory, the existence of this thread will influence the outcomes.

The iPod Touch has always been good for games. But it wasn't always positioned as a game player. Or a pocket computer. Now it is.

There is a lot to be learned from a lot of "MBA" professors including Drucker, Christensen, Pfeffer, Ackoff, and more. And there are a lot of great graduates of MBA programs.

But the MBA programs have already de-valued themselves into the garbage can. The burden is on MBA programs to prove that they are valuable as these blogs, not the other way around.

What are you looking for? Let me know and I'll do what I can.

Some people (like me) have a problem asking for things. "Hesitation" is why Steve Blank suggests considering hiring a "sales closer" when you get to the customer validation stage (the stage where you are asking for the customer's money).

Regarding negotiation, low-balling and high-balling don't make sense in all situations. Especially if you are in a situation where the relationship between the negotiating opponents after the transaction is important.

The best book for negotiation is "Bargaining for Advantage" http://bit.ly/HZwdW. "Getting to Yes" is also great: http://bit.ly/oHSCL.

Avoid any negotiation book with "Power" in the title. =)

I'm one of the authors. It is totally OK. Thanks for thinking of us!

The author, Eric Ries, put this draft together quickly based on an email conversation. He bravely embraces the "release early and incorporate feedback mantra."

I probably would have revised it many more times. Which approach has the highest benefit or the lowest cost, I don't know.

This is a long way of saying that we're looking for feedback. What do you think?

A hammer is not a best practice for peeling potatoes.

The concept of "best practices" is insidious. "Best" for what? We need to know what we are, our context, and our objective before we can consider the practices that will optimize our objective. Are we a tiger or a snail? Are we in a cage or a forest? Are we trying to eat or mate?

Practices provide the know-how. To provide the know-why, we must understand ourselves, our context, and our objective.

We also need to understand whether we (our system and sub-systems) and our context (our super-system) are purposeful: can any of these systems select their own means and ends. Don't ask me why—I'm still figuring this piece out myself.

For more, see Russell Ackoff: http://bit.ly/iHwQ.

I second "Certain to Win".

Game theorists might define a strategy as an approach to optimal decision-making while you are surrounded by other actors whose actions interact with yours. Chess strategies are a good example.

The author of Certain to Win, Chet Richards, takes a different approach. He defines strategy as "a scheme for creating and managing plans." It is a means to generate, act upon, and discard plans. Strategy is how you "plan to plan." OODA loops are a good example of this approach.

I updated the post to read, "under the same conditions." Thanks!

I enjoyed reading the book's case studies of companies where I would otherwise assume that "money is the best motivator": Men's Wearhouse, AES (a power company), NUMMI (a GM factory), etc.

Thanks Matt, it is poorly phrased. I will change it.

Hi dmv,

Are you still having a problem? Sometimes the Twitter widget in the sidebar at http://venturehacks.com gets a little wacky. I believe it is an intermittent problem with Twitter.

I thought it was very rare but perhaps it is more common than I thought? Is anyone else having this problem? I couldn't recreate it. Thanks!

Thanks for the diligence guys. I pinged the original author of the article. He says:

http://www.evolvingexcellence.com/blog/2008/01/no-titles-exc...

"They do have the handful of titles required as a public company... CEO, CFO, and the like. As of last January when we visited, that was it. Presumably they also have to "title" job postings so people know roughly what skills they're asking for!"

Big ups to the author of this post for getting me to read what is essentially a job posting.

The best resource on term sheet basics is

http://www.feld.com/blog/archives/2005/08/term_sheet_seri.ht...

http://www.startupcompanylawyer.com is also often quite good on the basics.

As an experiment, I didn't post directly to the article.

Instead, I posted the link to my FriendFeed "blog" which includes a juicy quote from the article.

See http://en.wikipedia.org/wiki/Toyota_production_system

But I think it is easier to learn Extreme Programming first because TPS is somewhat abstract. XP is very concrete. Check out Kent Beck's Extreme Programming Explained.

That is a good idea. Slack (a.k.a. 20% time) is built into lean. Why? Because running at 100% leads to waste... if you don't have slack, you increase your cycle time and you end up sub-optimizing the whole system.

Efficiency is a by-product of removing waste. It isn't the goal. Who can argue against eliminating waste? =)

The next step is learning to see waste. And chasing radical ideas is not necessarily waste. Experimentation is not necessarily waste.

Toyota employs something called "set-based product development" where they develop multiple versions of a product at once. Talk about "wasteful experimentation."

Imagine developing three versions of a web site in Prototype, JQuery, and Flash -- all at the same time.

I think every company that is trying to figure out its customer is a startup. =)

I pulled out some highlights on Venture Hacks: http://venturehacks.com/articles/khosla-society

Fixed. =)

Hi sanj, that is still called a liquidation preference. The article is fine.

You exercise the options before they vest and the company maintains a right to repurchase the options that expires over time.

From the perspective of the company, it is like reverse vesting.

Talk to a lawyer for the myriad details but if you ever hire someone who knows his stuff, he will want to exercise his options immediately.

Hi Randy, can you elaborate? Thanks!

Agreed. We'll cover liquidation preferences in Part 2.

In general, I like to look at the "lottery ticket" value of the options. What are the options worth if everything works out?

Especially when the startup can afford to pay a reasonable salary, I think of the options as a free lottery ticket.

That sounds like a good approach.

You should also include unallocated options in the calculation of your percentage. For example, how many options does the company plan to issue in the next 12-18 months?

This is like including unallocated options in a fully diluted basis.

In an acquisition, the preferred stock is converted to common and the acquirer pays the same price for every share of common stock.

Setting the acquisition share price to the preferred share price of the last round is a good start.