Key Metrics for Startups on Marketing, Sales and Customer Success

key-startup-metrics

Most of the metrics we are going to see here will sound obvious but I’ve seen even some matured companies do not actively follow it. In a startup company discipline becomes very crucial, keeping things simple and measurable helps a lot. There are more complex metrics like Customer Acquisition cost (CAC), Lifetime value of the customer (LTV), Average revenue per customer (ARPA) etc, but I feel it’s better to have basics correct before complicating it too much.

Marketing Metric

Lead Quota: One of the common mistakes I’ve done in early stages is not setting up a lead quota for the digital marketing team. We simply allocated a monthly budget and not actively measured exactly how many leads we have generate for that month. The goal of marketing team should be increasing the number of leads (quality) we receive every month. If we can measure just this one metric then the other metrics become irrelevant from a top management perspective, example volume of visitors to the website.  The number of visitors to the site really doesn’t matter, it’s the quality of conversion that matters. This will push the marketing guy to look deep into finding new channels, tuning the existing channels, A/B testing the landing pages etc to increase the lead quota.

Cost of Lead Acquisition, this becomes the second part. How much money are we spending each month to acquire X number of leads? In an ideal situation, we wanted to generate a maximum number of leads from the minimum amount spend. Once you have a baseline number say for example 200 leads cost $20k, the cost of lead acquisition is $100 then we can push on optimizing it and bringing the expense down or increase the budget and hence the lead quota. One of the major problems in the digital marketing is if you are not careful it’s literally throwing money in the fire. PPC platforms like Google, LinkedIn, Facebook etc will all just observe it as much as you throw at them.

Sales Metric

Sales Quota – also termed as revenue generated per SDR (sales development rep). This will hugely vary from startup to startup, most likely in the range of $2k-$3k MRR (monthly recurring revenue) in a typical SaaS startup. It’s important to balance out the number of leads required for the SDR to achieve the assigned sales quota. The number of leads that can be handled by an SDR will be industry specific, in a B2B long tail sales pipeline typically a 1 or 2 quality lead per day is a good number, whereas in a short sales cycle SaaS startups it can go up to 8 per day. Don’t go beyond this, it’s practically impossible for the SDR to handle since you also need to consider the backlog follow-ups that add up quickly.

Customer Success Metric

Once your SaaS startup gets enough traction and you have a handful of customers, it’s important to set up a Customer Success team to make sure the existing customers are happy and address their concerns as soon as possible before they become unhappy and start looking for alternate solutions. The startup founder should give as much importance to customer success as marketing and sales team. I’ve seen companies focusing purely on acquiring new customers and not paying attention to churns, if you think the amount of effort gone into acquiring those customers, it’s become vital to preserve them. It’s 5 times harder to acquire a new customer.

Expansion Revenue is the revenue that gets generated from existing customers. Ex: If you are help desk product,  the expansion revenue is the additional revenue generated by existing customer either buying more agents or moving all of their agents to higher tiers.  This could be one rewarding metric for CS team.

Churns: The goal of the customer success team should be predominantly reducing the churns, and any expansion revenue they generate is a bonus. The culture of the team shouldn’t be set for increasing the revenue, rather it should be set for pure customer happiness and reduce the churns.

You can monitor the expansion revenue and churns as metrics for customer success teams.


Passion towards motors

I always loved motors in one form or the other.

When back in India during 1997-2000 it was motorbikes especially those Yamaha RX 100 cc. I went to an extent where I asked my dad to get me a bike and not pay the capitation fee to study in a full-time college for my masters. Looking at my passion towards bikes and my persistence, my late grandfather gave me Rs.50,000,  which I used to buy a brand new Yamaha RX 135 ( next gen to RX 100) back in 1998.

At the age of 23, I came to the UK right after my MCA graduation in June 2001 with £100 in my pocket + a Job.  In the third month (August) I bought an old used car (Vauxhall Cavalier – Opel in India) for £1000 + applying for UK driving license. You were allowed to drive for 1 year with your Indian license (that time). I won’t forget the date I cleared my driving theory test, it was 9/11 (world trade center disaster). I must have driven around 60,000 miles in that old/rusty car for 2 years all over the UK before it was completely broken.

In that weekend, I bought a Toyota MR2. A fun two seat car without any boot space and crashed it very badly within 3 months in a road accident on a rainy evening.

Next step is one of the craziest things I have done. At the age of 25 in 2004, using all my credit cards + some savings I bought a BMW Z4 (again a two seater) for £25,000. The second production car in the series made by BMW. If that money was invested in a land/house in India/UK that time, it would have roughly been worth 10-15 times now. But I have no regrets, I loved every journey I have made in that car all the way up to the tip of Scotland and many little islands surrounding the UK – Isle of Man, Isle of Wight etc.

BMW-Z4 BMW-Z4

I had the BMW Z4 for 2 years, just 2 months before my son was born, I didn’t have a choice but to swap a sports car to a family car in 2006. I still remember that Saturday morning drive from Leeds to London, not really excited to swap the BMW Z4 with a boring family car.

In 2006, I bought BMW 320d M-Sport, nothing fancy but a standard family car, however, still a very good car. Then life priorities changed, 2007 to 2010 it’s all about family and kids. I have driven 1000’s of miles in this car purely for work across the country.

BMW-320d BMW-320d

From 2010 to 2015 my complete focus was taken over by BizTalk360, there was no room to think anything outside BizTalk360 (24×7).

In mid of 2015, I thought it’s time to think about a new car after owning the current 320d for 10 years. Spent about 6 weeks looking for the car we wanted and settled down for BMW X6 in Aug 2015.  It’s a beautiful machine.

BMW-X6 BMW-X6

Things moved on, as usual, we made some exciting trips in the car, spending the 2015 Christmas break without any plans traveling across the country covering 2000 miles in 7 days in the X6.

For a car enthusiast like me, there is always a list of dream cars you wanted to own. Of course, there is no limit to the amount you can spend on these dream machines, as and when you reach a stage and afford something in that category you wanted to own it.

Porsche 911 will be there on the list for anyone who likes sports cars because it’s the only practical day-to-day sports car designed for a family.  It looks like a 2 seater but there are 2 small bucket seats at the back for kids, and it doesn’t require too much special attention.

In the beginning of this year, I made the decision it’s time to think about it, given 2017 is a special year for me, my 40th birthday is just around the corner. Sometimes you need to treat yourself, life is all about little things that will make you happy here and there. Also thought, if I leave it too late, then it probably may not be appropriate to own a 911, especially kids will grow up too soon.

Understanding Porsche 911 models are quite complex, given there are 21 different variance. I spent some time reading about it and finally decided on the model, color, and options I want in the car. Started the hunt and found the car in 2 weeks.

Porsche - 911 Porsche - 911

Driven 400 miles on day one, and honestly felt what an awesome piece of engineering. A very raw machine, the focus is not on luxury items on the car, but basic things built to very high quality.

I’m happy with both the cars (X4 and 911) and can just enjoy it for few more years before the next level kicks in.

Back to business now.


Life is not perfect – be prepared to do 50% of what you don’t like to do

Life is not perfect

I meet and work with a lot of people these days, frequently I hear these statements “my work became so monotonous”, “I’m doing things which I don’t like”, “my job is pretty boring” and many more along the lines of expressing they don’t like the job they do.

In a perfect ideal world, I understand you would love to be in a job which fits with 100% of your passion.  Ex: I love racing, I would love to be inside the cockpit as much as I can, visit exciting circuits around the world and keep racing. Let’s take a bit more concrete example Lewis Hamilton, the Formula 1 driver. Lewis will love to be inside the car racing all the time, but the reality is he would probably spend less than10 hours per week on the race car (approximate assumption: 2 hours on race weekend, 2 hours during qualifying, about 6 hours on pre-practice). It doesn’t mean Lewis is going to work only 10 hours per week, he probably will work for more than 50 hours.

So where does all the remaining 40 hours in a week go? the majority of them will be that boring, monotonous things which he probably doesn’t like to do. It will involve things like few hours in the simulator, few hours in the gym, PR, media interviews, advertising/sponsors commitments, traveling, dealing internal team politics, time away from family, etc. etc. the list will be so long.

All these things will apply to any top sports personality (or any other profession), “Life is not perfect”, be prepared to do 50% or more of things which you really don’t like to do. Here we are discussing only the professional life, which normally is less than 1/3rd of the time we all have in hand (about 8-10 hours/day however we need to exclude holidays/weekends). This professional working time is what fuels the happiness in your personal/family time. I wanted to buy a BMW, I wanted to go on exotic holidays, I wanted to put kids in the top university are all possible only when you are successful in your professional time.

Any one point in your professional life, there will always be 50% of the work you probably don’t like to do. You move up in the career stage by stage, and the boring things will also shift. Let me give my own example. In the beginning days of BizTalk360 where I was alone or had less than 5 people in the team, I used to do everything quote request, demos, support, development, documentation, blogging, speaking, partner/customer visits the list is long. You probably can guess 70-80% of the tasks are not something either I’m good at or willing to do. But I understood the only way I can make it work and build the company is by doing all the activities.  If I have chosen to work on only the activity which I love the most development and building products then there is a very little chance we would have brought BizTalk360 to the level we are today.

As we have grown, we added more people on board and was able to delegate a lot of work, we have dedicated support team, documentation team, accounts payable team, big development teams etc. Did it mean all my boring tasks are gone away and I’m enjoying my time with only interesting things? Absolutely not, as we have grown, now we are faced with  a new set of challenges and a new set of boring activities which I have to perform.

Today I’m faced with tasks like hiring people, marketing/sales strategies, having difficult internal conversations, tough sales negotiations, keeping everybody happy across the board, product vision, new product ideas, constant decision making etc. As you can clearly see, one person is not going to be passionate about all these things, however, I should do it in order to move the company to the next level.

So what’s the summary!  If we start separating interesting and boring tasks and keep moaning about it, it’s never going to fix the problem. We need to accept the fact, it’s nearly impossible to land on a perfect thing, there will always be a combination of interesting and boring things. Of course, you wanted to make sure, the interesting things overweigh the boring activities. We should look at the big picture, the big goal and balance it out and see how happy you are overall. In my case, the growth of BizTalk360 and the influence I can have on 40+ employees and their families, making a lot of customers happy are what drives me to do anything that’s required to be done. This ultimate goal will vary from person to person, you need to think what keeps you motivated, consider your professional and personal time together, they are more interconnected than you think.


Terms I’ve learned about startup financing

In the past few days I’ve spent considerable amount of time going through different articles, blogs, and speaking to my friends who have raised money, established an option pool etc to understand  the various aspects of startup financing. Even though I’m not looking for any investor money at this stage, I thought it will be good to understand certain terminologies and educate myself. I’ve captured a lot of useful terms and what it exactly means in this article, I don’t claim the content to be original here, it’s just a curation of  best piece of definitions/explanations I’ve found while searching (you can see the references at the bottom). This will save me lot of time in the future, I don’t need to do the same exercise of searching and reading tons of articles to get to the points. I hope some of you might find this interesting.

Valuation

Lets start with valuation. This is extremely tricky one and there is no definitive guide to derive your company valuation, whether you are an early stage startup on stealth mode or you are generating some revenue.  It looks more of a guesswork than any scientific formula to derive your company valuation. I’ve spoken to few founders who raised funding, the more I speak the result are more obscure. I’ve come across founder currently doing $1m/annum valued at $20m and also a startup just begin their journey and making about $200k/annum still valued at $20m. It comes to factors like founding team, product, the market potential, investors confidence on the market and the team etc. It’s also common sometime you get x-multiples of your current revenue. Ex: $2m/annum might get you to $20-$25m at 10 to 12x multiples. Somehow you need to make the person who is either going to invest or an employee accepting an stock option to believe the valuation is approximately correct. Also, remember the valuation is analysis at that point in time and it will change over the course of the startup journey month on month.

Pre-money vs. Post-money Valuation

The difference between pre-money valuation and post-money valuation is simple. Pre-money refers to your company’s value before receiving funding. Let’s say a venture firm agrees to a pre-money valuation of $10 million for your company. If they decide to invest $5 million, that makes your company’s post-money valuation $15 million.
Post-money valuation = pre-money valuation + new funding

These terms are important because they determine the equity stake you’ll give up during the funding round. In the above example, the investor’s $5 million stake means he’s left with 33% ownership of the company ($5  million/$15 million).

Let’s consider a counterexample. Say the company was valued at $10 million post-money instead, implying a $5 million pre-money valuation. This means that the investor’s $5 million counts as half the company’s valuation. He comes away with 50% of the company in this scenario, rather than 33%. Given the difference in equity, you can see how important it is clarify between pre and post-money valuations when discussing investment terms.

Convertible Notes

When a company is young, quantifying its valuation is often an arbitrary, pointless exercise. There may not even be a product in hand, let alone revenue. But companies at this stage may still need to raise money. Convertible notes is a financing vehicle that allows startups to raise money while delaying valuation discussions until the company is more mature. Often notes convert to equity during a Series A round of funding.

Investors who agree to use convertible notes generally receive warrants or a discount as a reward for putting their money in at the earliest, riskiest stages of the business. In short, this means that their cash converts to equity at a more favourable ratio than investors who come in at the valuation round.

Capped vs. Uncapped Notes

As discussed above, convertible notes delay placing a valuation on a company until a later funding round. But investors often still want a say in the future valuation of the company so their stake doesn’t get diluted down the line. When entrepreneurs and investors agree to a “capped” round, this means that they place a ceiling on the valuation at which investors’ notes convert to equity.
So if a company raises $500,000 in convertible notes at a $5 million cap, those investors will own at least 10% of the company after the Series A round ($500,000/$5M).

An uncapped round means that the investors get no guarantee of how much equity their convertible debt investments will purchase, making these kinds of investments most favourable for the entrepreneur. Let’s consider a company that raises $500,000 in an uncapped round. If they end up making so much progress that they convince Series A investors to agree to a $10 million, this means that their convertible note investors are left with just 5% of the company, half of what they would get if they capped the round at $5 million.

Cap Table

The capitalization or “cap” table reflects the ownership of all the stockholders of a company — that includes the founder(s), any employees who hold options, and of course the investors. For most people to understand how much of a company they actually own, all they really need is the fully diluted share count, the broader breakout of ownership among different classes of shareholders, and a couple other details.  The fully diluted share count (as opposed to the basic share count) is the total of all existing shares + things that might eventually convert into shares: options, warrants, un-issued options, etc.

Here’s a new company that has no outside investors, and existing stock allocated as follows:

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If someone were offered 100 options, those shares would come out of the 1,000-share option pool, and so they’d own 100/10,000 or 1.0% of the fully diluted capitalization of the company.

I found couple of good resources for cap table here (venturehacks) and here (captable.io)

Common vs Preferred shares

Most startups have both common and preferred shares. The common shares are generally the shares that are owned by the founders and employees and the preferred shares are the shares that are owned by the investors. So what’s the difference? There are often three major differences: liquidation preferences, dividends, and minority shareholder rights plus a variety of other smaller differences. The biggest difference in practice is the liquidation preference, which usually means that the first thing that happens with any proceeds from a sale of the company is that the investors get their money back. The founders/employees only make money when the investors make money. In some financing deals the investors get a 2x or 3x return before anyone else gets paid. Employees typically get options on common stock without the dividends or liquidation preference. The shares are therefore not worth quite as much as the preferred shares the investors are buying.

Ownership

Any analysis of percent ownership in a company only holds true for a point in time. There are lots of things that can increase the fully diluted share count over time — more options issued, acquisitions, subsequent financing terms, and so on — which in turn could decrease the ownership percentage. Of course, people may also benefit from increases in options over time through refresher or performance grants, but changes in the numerator will always mean corresponding changes in the denominator.
This is something to keep in mind, a ownership of 5% equity in a business will not stay the same forever.

Original issue price, Conversion price, Exercise price

Dilution

Dilution is a loaded word and tricky concept. On one hand, if a company is raising more money, it’s increasing the fully diluted share count and thus “diluting” or reducing current owners’ (including option-holding employees’) ownership. On the other hand, raising more money helps the company execute on its potential, which could mean that everyone owns slightly less, but of a higher-valued asset. After all, owning 0.09% of a $1 billion company is better than owning 0.1% of a $500 million company.

If the company increases the size of the option pool to grant more options, that too causes some dilution to employees, though hopefully (1) it’s a sign of the company’s being in a positive growth mode, which increases overall value of the shares owned (2) it means that employees might benefit from those additional option grants.

Let’s return to the example we introduced above, only now our company has raised venture capital. In this Series A financing, the company got $10 million from investors at an original issue price of $1,000 per share:

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The important thing to keep in mind here is the magic number 100% is never going to change, it’s only the number of shares and corresponding price per share (value) going to keep changing constantly over the life of the company .

The fully diluted share count increases by the amount of the new shares issued in the financings; it’s now 20,000 shares fully diluted. This means the employee’s 100 options now equate to an ownership in the company of 100/20,000, or 0.5% — no longer the 1% she owned when she first joined. But… the value of that ownership has increased significantly: Because the price of each share is now $1,000, her stake is equal to 100 shares * $1,000/share, or $100,000.

Anti-dilution protections

While not all dilution is equal, there are cases where dilution is dilution — and it involves the anti-dilution protections that many investors may have. The basic idea here is that if the company were to raise money in a future round at a price less than the current round in which that investor is participating, the investor may be protected against the lower future price by being issued more shares.

Most anti-dilution protections — often called a weighted average adjustment — are less dilutive to employees because they’re more modest in their protection of investors. But there’s one protection that does impact the other shareholders: the full ratchet. This is where the price that an investor paid in the earlier round is adjusted 100% to equal the new (and lower) price being paid in the current round. So if the investor bought 10 million shares in the earlier round at a price of $2 per share and the price of the current round is $1 per share, they’re now going to get double the number of shares to make up for that, equalling a total of 20 million shares. It also means the fully diluted share count goes up by an additional 10 million shares; all non-protected shareholders (including employees) are now truly diluted.

Ideally, anti-dilution protections wouldn’t come into play at all: That is, each subsequent round of financing is at a higher valuation than the prior ones because the company does well enough over time, or there aren’t dramatic changes to market conditions. But, if they do come into play, there’s a “double whammy” of dilution — from both the anti-dilution protection (having to sell more shares, thus increasing the denominator of fully diluted share count) as well as the lower valuation.

Liquidation Preferences

The preferred stocks hold by the investors will normally come with liquidation preferences that attach to their shares. Simply put, a liquidation preference says that an investor gets its invested dollars back first — before other stockholders (including most employees with options) — in the case of a liquidity event such as the sale of the company.

To illustrate how such a preference works, let’s go back to our example, only now assume the company was sold for $100 million. Our Series A investor — who invested $10 million in the company and owns 50% of the business — could choose to get back its $10 million in the sale (liquidation preference), or take 50% of the value of the business (50% * $100 million = $50 million). Obviously, the investor will take the $50 million. That would leave $50 million in equity value to then be shared by the common and option holders:

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Given the high sale price for the company in this example, the liquidation preference never came into play. It would, however, come into play under the following scenarios:

Scenario 1. If the sale price of a company is not sufficient to “clear” the liquidation preference, so the investor chooses to take its liquidation preference instead of its percentage ownership in the business.

Let’s now assume a $15 million sale price (instead of the $100 million) in our example. As the table below illustrates, our Series A investor will elect to take the $10 million liquidation preference because it’s economic ownership (50% * $15 million = $7.5 million) is less than what it would get under the liquidation preference. That leaves $5 million (instead of the $50 million) for the common and option holders to share.

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Scenario 2. When a company goes through several rounds of financing, each round includes a liquidation preference. At a minimum the liquidation preference equals the total capital raised over the company’s lifetime.
So, if the company raises $100 million in preferred stock and then sells for $100 million, there’s nothing left for anyone else.

Scenario 3. There are various flavours of liquidation preference that can come into play depending on the structure of the terms. So far, we’ve been illustrating a 1x non-participating preference — the investor has to make a choice to take only the greater of 1x their invested dollars or the amount they would otherwise get based on their percentage ownership of the company.

But some investors do more than 1x — for instance, a 2x multiple would mean that the investor now gets 2x of their invested dollars off the top. The non-participating can also become “participating”, which means that in addition to the return of invested dollars (or multiple thereof if higher than 1x), the investor also gets to earn whatever return their percentage ownership in the company implies. The impact of this on other stockholders can be significant.

To isolate the effects of these terms, let’s first look at what happens when our Series A investor gets a 2x liquidation preference. In the $100 million sale scenario, that investor will still take its 50% since $50 million is greater than the $20 million (2 x $10 million liquidation preference) it’s otherwise entitled to. The common and option holders are no worse off than they were when our investor had only a 1x liquidation preference:

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But, if the sale price were the much lower $15 million, the investor is going to capture 100% of the proceeds. Its 2x liquidation preference still equals $20 million, but there’s only $15 million to be had, and all of that goes to the investor. There’s nothing left for common and option holders:

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Finally, let’s take a look at what happens when we have participating preferred, colloquially referred to as “double dipping.”

In our $100 million sale scenario, the Series A investor not only gets its $10 million liquidation preference, but also gets to take its share based on its percentage ownership of the company. Thus, the investor gets a total of $10 million (its liquidation preference) plus 50% of the remaining $90 million of value, or $55 million in total. Common and option holders get to share in the remaining $45 million of value:

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In the $15 million scenario, the common and option holders get even less. Because the Series A investor gets its $10 million in preference plus 50% of the remaining $5 million in proceeds, for a total of $12.5 million, only $2.5 million is left for the rest of the shareholders:

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Employee Stock options

“Stock options” as typically granted give you the right to buy shares of stock in the future for a price which is determined today. The “strike price” is the price at which you can buy the shares in the future. If in the future the stock is worth more than the strike price, you can make money by “exercising” the options and buying a share of stock for the strike price.

Startup employees get stock options that typically vest over a four-year employment period, so if they choose to leave the company after four years (or at any time for that matter), they have only 90 days in which to exercise or forfeit the options. And that’s the catch: Exercising requires cash. Not only do you have to pay the company the exercise price for each share (because they are stock options, not actual restricted stock units), the IRS then taxes you at year end on the difference between the then-existing fair market value of the stock and the exercise price.

There are four groups of people who will own the company: investors, founders, employees, and former employees. When a company is first started, the CEO often puts aside a pool of common stock from which to grant employee options, generally around 15% of the company’s capitalization.

Over time, that pool shrinks as options are extended to new employees or as existing employees are given additional grants. The pool can be replenished when employees leave — either because they leave before their options are fully vested or because they don’t exercise vested options within the 90-day period that currently exists — so those options go back into the pool. When the pool gets exhausted altogether, the company will often ask shareholders to increase the size of the pool (i.e., getting them to approve an increase in the number of authorized shares the company can issue).

But, the pool can’t magically increase without impacting all existing shareholders, because 100% = 100%. If an employee owned 1% of the company before the pool increase and then the company increased the option pool by 10%, that employee now owns 0.9% of the company. Increasing the pool dilutes ownership. Just because a company can increase the nominal size of the pool to whatever level it wants, doesn’t change what the company was worth before it increased the pool.

Many early startup employees are generally okay with some dilution because, at least in theory, increasing the option pool to hire more people helps grow the company — which in turn hopefully increases the value of the company. So while an employee might own less of the company than before, he or she would rather own 0.9% of a company worth $1 billion than 1% of a company worth nothing. 1% of 0 is still 0 after all.

How Does a Employee Stock Option Work?

The following shows how stock options are granted and exercised:

Expiration and termination : Options typically expire after 10 years also typically in 90 days, which means that at that time they need to be exercised or they become worthless. Even if they are vested, you need to exercise them or lose them at that point.

Stock options – Mergers & Acquisitions

One of the most frequently asked questions about options is what happens to them if a startup is acquired. Below are some possible scenarios, assuming four years to fully vest but the company decides to sell itself to another company at year two:

Scenario 1. Unvested options get assumed by the acquirer.

This means that, if someone is given the option to stay with the acquirer and choose to stay on, their options continue to vest on the same schedule (though now as part of the equity of the acquirer). Seems reasonable… Unless of course they decide this wasn’t what they signed up for, don’t want to work for the new employer, and quit — forfeiting those remaining two years of options.

Scenario 2. Unvested options get cancelled by the acquirer and employees get a new set of options with new terms (assuming they decide to stay with the acquirer).

The theory behind this is that the acquirer wants to re-incent the potential new employees or bring them in line with its overall compensation philosophy. Again, seems reasonable, though of course it’s a different plan than the one originally agreed to.

Scenario 3. Unvested options get accelerated — they automatically become vested as if the employee already satisfied her remaining two years of service.

There are two flavors of acceleration to be aware of here, single-trigger acceleration and double-trigger acceleration:

In single trigger, unvested options accelerate based upon the occurrence of a single “trigger” event, in this case, the acquisition of the company. So people would get the benefit of full vesting whether or not they choose to stay with the new employer.
In double trigger, the occurrence of the acquisition alone is not sufficient to accelerate vesting. It must be coupled with either the employee not having a job offer at the new company, or having a role that doesn’t quite match the one they had at the old company.

Note, these are just general definitions. There are specific variations on the above triggers: whether everything accelerates or just a portion; whether people accelerate to some milestone, such as their one-year cliffs; and so on — but we won’t go through those here.
Not surprisingly, acquirers don’t like single triggers, so they’re rare. And double triggers give the acquirer a chance to hold on to strong talent. Still, it’s very unusual for most people to have either of the above forms of acceleration. These triggers are typically reserved for senior executives where it’s highly likely in an acquisition scenario that they won’t — or literally can’t (not possible to have two CFOs for a single company for example) be offered jobs at the acquirer — and thus wouldn’t have a chance to vest out their remaining shares.

The simple way to think about all this is that an acquirer typically has an “all-in price” — which includes up-front purchase price, assumption of existing options, new option retention plans for remaining employees, etc. — that it is willing to pay in the deal. But how the money ultimately gets divided across these various buckets can sometimes diverge from what the initial option plan documents dictate as acquisition discussions evolve.

Pay attention to option pool shuffle

Option pool is a term used to refer to a chunk of equity reserved for future hires. The size of your option pool, as determined during a round of funding, has a direct impact on your company’s valuation and hence, your ownership.

This is because the option pool is often included in the pre-money valuation of a company. So let’s say investors agree to invest $2 million at a $10 million pre-money valuation, implying a $12 million post-money valuation. Option pools are expressed as a percentage of post-money valuation, so if the deal includes a 20% option pool, that means the pool is worth $2.4 million. Your $10 million pre-money valuation is now effectively a $7.6 million pre-money valuation. The investor isn’t taking a larger percentage as a result—they’ll still own 16.7% of the company in this case—but you will be substantially diluted because the option pool will come directly from management’s stake. So if you owned 100% and think you now own 83.3%, you’re wrong. That 20% option pool, reserved for future employees, means you now own 63.3% of company.

Vesting

A vesting schedule is imposed on employees who receive equity, and determines when they can access that equity.  This is useful because it means that if you give 5% of your company to a partner, that partner can’t just quit a couple of months later and keep the equity. A typical vesting schedule takes four years and involves a one year cliff.

The “cliff” means that none of the employee’s shares vest for at least one year. After that year, typically 25% of the employee’s equity is released, and the rest vests on a monthly or quarterly basis. The cliff is there to protect the company – and all the shareholders, including other employees – from having to give shares to individuals who haven’t made meaningful contributions to the company

References used:


Technique of customer acquisition using channel partners

Few weeks ago when we were doing our regular grocery shopping we found out some interesting offers printed on some of the Kellogg’s cereal boxes “Grown-ups Go Free”

Kellogs - Grown-ups to Free - offer

It’s a very simple and straightforward offer, for every fully paid child ticket you buy on the counter (not online), you get a free adult ticket, with choices of all the top UK theme park attractions, with a validity of 1 year.

The offer was genuinely interesting because it’s summer and pretty much we are planning to go to one or more of the theme parks with kids this summer. It’s kind of a no brainer to save on adult tickets, which are normally around £40. So we straight away brought 6 packs of cereals. Without the offer we probably would have bought one or two, maybe different brands as well.

It was just puzzling on my mind, how can a cereal box with less than £5 selling cost can produce an offer worth £40? It must be some kind of brilliant marketing effort or there is a catch somewhere?

The day has come and we decided to go to one of the popular theme parks in the UK “The Chessington Park”, since we had the offer already and that’s also valid only for onsite park entry, I didn’t bother to check the prices online we just turned up on the park and purchased the tickets.

So how did both Kellogg’s and Chessington managed to acquire new customers?

Kellogg’s story is pretty straightforward, they sold more cereal boxes, so if they are not paying anything to Chessington, they simply increased their revenue by printing a small coupon on all their boxes.

Let’s take a look at the story from Chessington perspective. The total price we paid for 4 tickets is £43.60 * 2 = £87.20 + £3 (parking) and additional £60 we spent inside the park. In this case, the £150 is complete new money Chessington managed to generate purely because of the channel partnership they created with Kellogg’s. If you look at the prices below carefully, Chessington is anyway happy with someone paying £27.60 for a ticket with their own early bird offer, so if we booked our ticket 5 days in advance we would have paid £110 without any external offers.

So the cost of customer acquisition for Chessington is around £5/ticket, which they would have spent anyway. Even for their early bird offer they might be spending around £5 on online advertisements like Google/Bing to direct customers towards their website.

Chessington price list Chessington price list

I’m even speculating Chessington might even pay £5 for each converted customer back to Kellogg’s to cover their marketing and operational expenses.

If you look at the whole equation, in this case, every party got benefitted. As a consumer we received the benefit of just turning up on the day and getting a better deal than an early bird offer, Kellogg’s managed to sell more cereal boxes and Chessington managed to acquire new customers/revenue.

Any channel partnerships must be done in a way, every party is getting mutually benefitted, otherwise, the weaker partner will not have the same enthusiasm or commitment in pushing the deal.

You can always pick up interesting business lessons from day to day life.


Stop thinking about avoiding mistakes

Stop thinking about avoiding mistakes

One of the common things start-up founders tend to do is spending a lot of time trying to educate them by reading tons of articles and video on topics like “How to avoid start-up mistakes”. Few examples here

5 Fatal Startup Mistakes — and How To Avoid Them
9 Brutal Startup Mistakes That Can Kill Your Business
7 Mistakes to Avoid When Starting Up
10 Mistakes You Will Make as a First Time Entrepreneur

The real truth is, just don’t bother too much. If you come across these articles by accident, you can glance through them quickly, pay little attention to the headings and move on.

Running a business whether it’s small or big, comes with all kinds of challenges. Every day is different, every business is different. In my experience so far running BizTalk360 for 5+ years, you never know what surprise you are going to get next. It may be something like your website gone down, your competitor released a big update, one of your core employee resigned, sales team lost a big contract,  angry customer fuming in social media etc, etc. The list is literally endless.

In almost all cases you really can’t avoid them, you can only deal with them in the best way possible. Stop worrying about things that didn’t happen and focus on things that matter the most “Getting things done”.

Even though you are a small start-up founder, compare yourself with great CEO’s like Satya Nadella and  Mark Zuckerberg. We all have exactly same amount of hours in a day, you cannot keep thinking and worrying about endless things that come to your mind. Keep your mind clear and focus on what’s important.

I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.
-Jimmy Dean


Brilliant marketing idea to make people share your content

Donation Optional

Today I received an email newsletter from Pluralsight, a world renowned online learning company (some of their competitors include Udemy, Linda.com – acquired by LinkedIn) about their virtual event for developers “hack.Summit()

There are two things that caught my attention from the newsletter and the website. The first one is, they are conducting this event as a virtual event instead of in-person one. That makes perfect sense, given the business model of Pluralsight they wanted to attract all the developers across the world, the only way to do it is by doing it virtually and being an online company it’s a bit pointless to do an in-person event, it will go against their core values.

The second thing I’ve noticed is their brilliant idea of making people share the content. I’m not sure whether they have done this intentionally or it was a pure accident.

For any marketing campaign’s these days the biggest impact is achieved by making people share the content and make it go viral. These days it’s getting harder and harder for companies to make people share their content. They need to think about new innovative ways in which you can encourage readers to share it.

When I saw this caption “Donation Optional. Not in a position to donate? Attend for free by sharing on social media, to help find more donors” – I thought it such a clever idea,  it immediately struck me the content I read in the book “The Drive” by Daniel Pink.

In the book Daniel Pink referred to the sociologist, Richard Titmuss’s most memorable and influential claim that the British system of voluntary blood donation led to better outcomes – healthier blood, supplied in a more timely fashion – than the American system of paying blood donors.

Richard Titmuss concluded that paying citizens to donate blood would actually lead to a reduction in donation rates as it would move the donation from a socially responsible act of altruism* to being financially motivated.

When you relate Richard Titmuss blood donation theory with Pluralsight sharing content concept, I feel they are connected. Instead of asking people to share the content for monetary benefits like money, free subscription etc you are encouraging them to share by working with their emotions and guilt. There are some things that money can’t buy.

In this case, the readers share the content because you make them feel they are doing it for a good cause (“To raise money for coding non-profits”) and second the feeling of guilt if you are going to attend this conference for free and not donating then you share the content to compensate (for the good cause).  Both the messages are very powerful and there are more chances of encouraging people to share it.

I think it’s a brilliant effort from a marketing perspective. There is something to learn from this for all business owners.

*altruism – feelings and behaviour that show a desire to help other people and a lack of selfishness


The Entrepreneurs Journey

As a founder of a growing business, I’m always in a look out for opportunities to learn new techniques, connect with relevant people and bring some fresh ideas to table. On that basis based on one of our friends recommendation I attended a workshop called “Brand Expansion Workshop” delivered by Daniel Priestley. Daniel is originally from Australia and has successfully built and exited few business at very young age. In the recent years Daniel and his company are trying to coin the term “Key Person of Influence”.

The basic idea behind KPI is to choose your narrow niche and become the key person of influence in that area. This is not just a software workshop, I got a chance to meet people from different backgrounds like a doctor who wants to become a KPI in specific specialization, a guy who want to become a KPI for arranging holidays for disabled people etc.

A lot of times Entrepreneurs think their business problems are unique and keep struggling to find solutions to it. But in reality most of the business problems are pretty common, it will depend on what stage of the business you are in, and where you wanted to go next.

I really liked this particular slide, where it showcases the Entrepreneurs journey or the state of the business. 

The Entrepreneurs Journey

Start-up: Very early days, no money, no customers you got some idea and trying to make it work.

Wilderness: Where you have a product (some asset) you can sell, you are about 3 people company and annual revenue of 300k. This is pretty true, majority of the business (about 70%) will be within this territory. This is really a “Red Ocean” zone, where you are literally fighting for survival with items as shown below.

Blue vs Red Ocean strategy

Blue Ocean Strategy is another interesting concept.

Lifestyle Business: The next stage is Lifestyle business where you scaled your company to about 12 people and somewhere making less than 2m in annual revenue. The business is run like a family business, where you all know each other very well, no big processes in place, everyone know what they are doing etc. Here the founder will get some helping hands and he will not kill himself with 70 hours work week. A lot of people will be happy to stay in this zone and may not look into go beyond.

Desert: This is again kind of wilderness zone, where you are moving away from your comfortable lifestyle business and start moving your company into a performance zone. This is one of the risky places, it can go either way. Once you employ your 13th employee into the company, all of a sudden the soft cushion of closely connected people/family business kind of bond will start to break, you will start looking into putting processes in place like holiday policies, stationary shelf, performance reviews etc. Your 12 member team will start to split into multiple 4-5 member teams and they will all be doing things of their own. In this stage normally founders get into a lot of trouble like relationship issues, financing issues, etc.

Performance Business: This is ideally where most of the passionate entrepreneurs want to get to. About 50+ people in the team, with an annual revenue of 10m+. At this stage your business is completely self-run and not relying on founder(s) alone. The majority of the business will not make it into this stage since they need to cross the desert.

Unicorn: The final stage of the journey is unicorns, where you reached 1bn+ revenue in 7 years or less. In general, you do not learn much from unicorn companies. The majority of the time unicorn companies are created based on facts like the right idea, the right time, the right team, right execution, perfect product-market fit etc. Examples include Facebook, Uber, Whatsapp, Instagram, etc. It’s very difficult to replicate that model, and the probability is about 1 in 15m, worst than winning a lottery.

It’s a no-brainer for the founder to know which stage of the business you are in. There are only 2 obvious choices, whether to stay where you are or put the plans in place to move to the next level. Not necessarily all of them want to move to the next level, it will depend on founders preference and what you need to achieve in life. It’s perfectly ok to have a lifestyle business and be happy, at the end of the day 2m/annum is a lot of money and can bring comfortable lifestyle than many people in the world. But if your ambition is to create an ecosystem, wealth for not just the founder but for the people who trusted you (employees, investors) etc then you should think about moving to the next stage.

When you decided to move to the next stage, then you need to put plans in place how you are going to achieve it, getting prepared for the obstacles that will come in your way.

Another interesting thing I liked from Daniel’s workshop is writing a handbook showing where you are now, where you want to be in 3 years time and write down all the obstacles you’ll see in between.

This blog is just about 45 minutes coverage of Daniels workshop, I’ll try to cover the remaining learning in another 1 or 2 blog posts.


REWRITE – notes from David Heinemeier Hansson talk at Business of Software 2015

I’ve taken few notes during the Business of Software (2015, Boston) talk given by David Heinemeier Hansson (Basecamp, Ruby on Rails fame) on the topic “REWRITE”. It was such an excellent talk, I just wanted to elaborate my notes so that it will make sense for me after few weeks.

David Heinemeier Hansson

The main essence of David’s talk is all about, as part of your growth should you go and rewrite your software from scratch or evolve your current product gradually keeping your current paying customers in mind. His talk mainly focused around 10+ years of running Basecamp and their recent effort in building version 3.0.

Idea of Transcendent software

It’s a great analogy to think about your software as physical object. Most of the time people do not give same respect to the software since it’s not a tangible asset, which you cannot touch and feel. But if you start thinking of your software as a physical object it will change the whole perception. Think  about a table or chair, when you are choosing it no one likes to buy a crappy looking table or chair. You wanted it to look good, you wanted the colours to be perfect, shape should be perfect and so on. If you bring the same perception to your software then the way you think about it will change completely.

Need to measure the cost of change VS value of change

David referred to the famous article by Joel Spolsky about “Things you should never never do”, where it’s generally not a good idea to scratch your legacy software and thinking about starting again. This will be one single worst strategic mistake you’ll ever make. Netscape did this mistake by deciding to rewrite their software from version 4.0 to 6.0 (never releasing 5.0), basically no innovation for 3 full years!!.

You always need to measure the cost of change vs value of change. If it cost you $10 to build a feature but the real value for the customer is only $8, it’s better off not to make that change.

Builders normally fall in love with their creations

In general developers fall in love with their creations and treat them like a teddy bear, they are so attached to it. But in reality the customers view your software similar to a fax machine. There is nothing sexy, it’s just used to get things done. The job of the fax machine is to send and receive faxes, that’s it. No one falls in love with the fax machine. Software for lot of people simply mean getting things done. When people move from job to job or position to position, the usage of the software might become redundant. In the case of the fax machine, it will be something like “I’ll use your fax machine, if I need to send/receive any more faxes, but now we have switched to emails, we no longer need your fax machine”

Compete with your very best ideas

Successful software is like golden cuff, in general once you have paying customers and the profits are coming gradually you are reluctant for a change or sceptical about taking features away. You must be prepared to make changes at the hardest possible time, when things are extremely good, if you wait till it goes bad, then it’s too late. Be prepared to compete with your very best ideas, it’s generally a bad practice to just ask few customers and work based on their feedback, they generally do not represent the whole population. If you go down this route you end up building a solution to a customer(or customers) not a world class product.

Sun setting the old version

You have to honour your legacy. In general killing an existing product (or sun setting in a nice way) generally doesn’t transition your current customers to newer versions, instead it will take them back to the market for shopping. In the later speech Rich Mironov highlighted the same issue, when Sybase decided to sunset their current version not thinking about the cost of change to their customers, customers moved to Oracle instead of moving to the new flashy version of Sybase.

Do not force customers to use new versions, let them continue using the current version however long they want and let them move to new version in their own pace. Basecamp 3.0 doesn’t have a import functionality, if customers want to use the new feature they can use it for new projects. The idea behind building a new version is mainly for new customers, existing customers are not targets for new customers. It’s not about forcing all of your current customers  into new versions. Customers would have spend years working on your software, setting up their system etc, it doesn’t make sense to force them to move.

Do not sunset your current version. Google Reader is a classic example, millions of users were relying on it for news reading, all of sudden Google decided to kill it. It’s not very nice from a customer perspective. Google was able to get away, but it will not be the same for all of us.

May be version 1.0 or 2.0 is over, you lock it down. Build 3.0 and let customer move there at their own pace. If they are happy with 1.0 or 2.0 let them continue using it. Basecamp have done the same thing for their Ta-Da list, they gracefully retired it https://basecamp.com/tadalist-retired. You cannot subscribe as a new user any more, but if you have an account you can continue using it.

Conclusion

I have few key takeaways from the excellent talk given by David

1. Think about your current customers : Look after your legacy code and current customers, they are very important. You don’t want them to go around shopping.

2. Bring new versions without effecting existing ones: It’s essential to bring changes to your software periodically, you need to compete with your best ideas. But make sure your new versions are not killing your current ones.

3. Measure the cost of change: Question yourself constantly, whether the change is essential. It’s important to understand the cost of change vs value of change.


Sometime your successful product, dictates your company name. ALPHABET is an example

image

Google recent restructuring of the company with a parent company called “Alphabet”, shows it’s really hard to get your company name correct in lot of instances, or sometimes your successful product will dictate the future name.

Technically speaking, Google could have continued using their existing name, but we can see the problems they are getting into.

People mostly associate the term Google to web search, yes Google got a lot of other products like photos, mail, calendar, self-driving cars, etc. But when people say Google it’s all about search. This heavily restricts the company from exploring or introducing new products/offerings in a smooth way.

One option Google could have taken is naming the parent company as Google, and JUST introduce a new name for search ex: Alphabet could have been just for search. But this would have resulted in such a big risk for the company, after all it took so long for the company to make “Google it..” as verb simply meaning “Search for it”. I can’t think of people saying “Alphabet it..”.

This change will also help Google to run each independent products in a very agile way, and make each one of them accountable. This will also help them to acquire or invest in companies/technologies that are not really connected to their core business of search. Example: Nest, Project Wing (drones). I’m expecting “T” for twitter soon. 

Finally, this is my speculation. Every company get’s into some resource war and do whatever it takes to preserve its core employees. They might have reached a point to step up “Sundar Pichai” before losing him.  Sergey and Larry are too young to step down or move away from their baby. The only option for them to do it in a smooth way is to make Sundar Pichai CEO of Google and create an entity bigger than that oversee the full operations. 

Some companies like Microsoft has done extremely well in this area, as it’s very clear the company produces bunch of software and products like Windows, Office, Xbox, Surface etc

Some companies like Google need to do it in a hard way, but it’s inevitable to do it keeping long-term benefits in mind.