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Solve the ‘dead equity’ problem with a longer founder vesting schedule

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The four-year vesting schedule that the typical startup uses today is a problem waiting to happen. If one founder ends up quitting a year or two before the last cliff, they still own a large share of the cap table through many rounds to come. The departing founder might consider that fair, but the remaining founder(s) are the ones adding on the additional value — and resentment is not the only issue.

“The opportunity cost of dead equity is talent and capital,” Jake Jolis of Matrix Partners explains in a guest post for us this week. “Compensating talent and raising capital are the (only) two things you can use your startup’s equity for, and you need to do both in order for your company to grow large. If you want to build a big business, the road ahead is still long and windy, and you’re going to need every bit of help you can get. If your competitors don’t have dead equity you’re literally competing with a handicap.”

Instead, he argues that founders who are just starting out should consider doubling the vesting schedule to eight years or so. In one example he gives, a founder who leaves after two and a half years on a four-year plan could end up with 22% of the company even after a big new funding round, the creation of an employee stock option pool, and additional shares set aside for a replacement cofounder-level hire. On an eight-year plan, that would be only 11%, and there would be a lot more remaining to entice new cofounders.

Example cap table with eight-year cofounder vesting.

The full article is on Extra Crunch, but I’m including more key parts here given the broad value:

Given the risks still ahead of the business, this level of compensation is often much more fair from a value-creation standpoint. With less dead equity on the cap table, the startup is still attractive in the eyes of VCs and well-positioned to attract a strong co-founder replacement to take the company forward. The alternative can cripple the company, and even co-founder B won’t be happy owning a larger percent of zero. While it’s better to do it when you start the company, a co-founder unit can elongate their vesting later on as well. The main requirement is that all the co-founders believe it’s in their best interest and agree to it. Most repeat founders I’ve talked to agree that four years is too short. Personally, if I started another company, I’d pick something like eight. You definitely don’t need to. You might decide four or six is better for your co-founder unit and your company.

One final thought, from my startup cofounder years. The departing cofounder should still want to see the company succeed as big as possible to maximize the value of their own shares. On the steep slope between failure and success in this business, vesting longer is a powerful way to help the company will deliver the most back to them after the hard work of the early days.

Image Credits: FirstMark

Why one successful early-stage VC firm is getting into SPACs now

SPACs are an exciting development for any type of investor, public or private, Amish Jani of FirstMark Capital tells Connie Loizos. Indeed, his firm has historically focused on writing early-stage checks, so at first it is a bit jarring to see the FirstMark Horizon Acquisition SPAC raise $360 million and head out looking for the right unicorn. But he explains it all quite well an extensive interview this week:

TC: Why SPACs right now? Is it fair to say it’s a shortcut to a hot public market, in a time when no one quite knows when the markets could shift?

AJ: There are a couple of different threads that are coming together. I think the first one is the possibility that [SPACs] work, and really well. [Our portfolio company] DraftKings  [reverse-merged into a SPAC] and did a [private investment in a public equity deal]; it was a fairly complicated transaction and they used this to go public, and the stock has done incredibly well.

In parallel, [privately held companies] over the last five or six years could raise large sums of capital, and that was pushing out the timeline [to going public] fairly substantially. [Now there are] tens of billions of dollars in value sitting in the private markets and [at the same time] an opportunity to go public and build trust with public shareholders and leverage the early tailwinds of growth.

He goes on to explain why public markets are likely to stay hot for the right SPACs far into the future.

AJ: I think a bit of a misconception is this idea that most investors in the public markets want to be hot money or fast money. There are a lot of investors that are interested in being part of a company’s journey and who’ve been frustrated because they’ve been frozen out of being able to access these companies as they’ve stayed private longer. So our investors are some of are our [limited partners], but the vast majority are long-only funds, alternative investment managers and people who are really excited about technology as a long-term disrupter and want to be aligned with this next generation of iconic companies.

Check out the whole thing on TechCrunch.

Peter Reinhardt SegmentDSC00311

SaaS continues to boom with Databricks funding, Segment acquisition

Maybe Segment would have gone public sometime soon, but instead Twilio has scooped it up for $3.2 billion this week. The popular data management tool will now be a part of Twilio’s ever-expanding suite of customer communication products. Perhaps it’s another sign of a consolidation phase taking hold in the sector, after a Pre-Cambrian explosion of SaaS startups over the last decade? Alex Wilhelm dug into the financials of the deal for Extra Crunch and came away thinking that the deal was not too expensive — in fact he thinks Segment may have been able to hold out for a little more, especially considering the multiplication of Twilio’s stock price this year.

Databricks, meanwhile, has evolved from an open-source data analytics platform that struggled to make revenues to a run rate of $350 million. Per an interview that Alex did for EC with chief executive Ali Ghodsi, the factors in this growth included a shift to focus on more proprietary code, big customers and sophisticated features. It’s now aiming for an IPO next year.

And what about that IPO market, which was a bit quieter this week? Alex gives a letter grade to each of the 18 most notable tech companies that have gone public this year, and observes that most them are continuing to stay in positive territory from their initial prices.

Image Credits: Brent Franson for Paystack

Nigeria startup scene gets watershed exit with Paystack deal

Lagos has been building a strong local startup scene for years, and this week that translated into a win that could mark a new era for the city, country and beyond. Stripe has agreed to acquire payments provider Paystack in a deal that Ingrid Lunden hears was worth more than $200 million. With Stripe’s own aims for a massive IPO, Paystack is poised to produce ongoing returns for the company and its investors, as well as providing Nigeria with a new generation of investors, founders and highly skilled employees who are tightly interlinked with Silicon Valley and other innovation centers.

A startup hub just needs one or two of the right deals to change everything. Readers who were paying attention when Google bought YouTube almost exactly 14 years ago today will remember the ensuing surge in fundings, foundings, acquisitions and overall consumer internet industry activity that helped the Silicon Valley internet scene get back on its feet (and helped this site get on the map, too). Stripe has said it is planning more global expansion that could include additional deals like this, so more cities around the world could be getting their moments this way.

Donau City development area - Vienna, Austria

Donau City development area – Vienna, Austria

Vienna startups finding new opportunities during the pandemic

In this week’s European investor survey for Extra Crunch, Mike Butcher checks in on Vienna, Austria, which has been tallying up growth in local startup activity recently. Here’s Eva Ahr of Capital 300, which focuses on Germanic and Central Eastern European investments, regarding about the impact of the pandemic on the local markets:

Telemedicine, online education has been accelerated. We see a shift that otherwise would have taken years, especially in the relatively conservative German-speaking area. As mentioned previously, mental health solutions, hiring and employing remotely are some of the opportunities highlighted by COVID-19. Companies that are heavily exposed are those that have been serving the long tail of companies, small merchants, and local businesses that were closed down or experienced much less traffic in past months and hence are extremely sensitive around their cost base, discontinuing services that are not 110% essential.

Mike is also working on a Lisbon survey and we’d love to hear from any investors focused on the city and Portugal in general.

Around TechCrunch

Discuss the unbundling of early-stage VC with Unusual Ventures’ Sarah Leary & John Vrionis

Across the week

TechCrunch:

If the ad industry is serious about transparency, let’s open-source our SDKs

Brazil’s Black Silicon Valley could be an epicenter of innovation in Latin America

South Korea pushes for AI semiconductors as global demand grows

The need for true equity in equity compensation

Trump’s latest immigration restrictions are bad news for American workers

Extra Crunch:

How COVID-19 and the resulting recession are impacting female founders

Startup founders set up hacker homes to recreate Silicon Valley synergy

Brighteye Ventures’ Alex Latsis talks European edtech funding in 2020

Dear Sophie: I came on a B-1 visa, then COVID-19 happened. How can I stay?

What the iPhone 12 tells us about the state of the smartphone industry in 2020

#EquityPod

From Alex:

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast (now on Twitter!), where we unpack the numbers behind the headlines.

The whole crew was back today, with Natasha and Danny and I gathered to parse over what was really a blast of news. Lots of startups are raising. Lots of VCs are raising. And some unicorns are shooting to go public. It’s a lot to get through, but we’re here to catch you up.

Here’s what we got into:

And with that, we’re off until Monday morning. Chat soon, and stay safe.

Equity drops every Monday at 7:00 a.m. PDT and Thursday afternoon as fast as we can get it out, so subscribe to us on Apple PodcastsOvercastSpotify and all the casts.

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PSA: Your new iPhone 12 or 12 Pro might need need contact tracing re-enabled

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Getting a new phone is exciting, but it can also lead to spending an annoying amount of time adjusting settings, permissions and notifications for all your apps. Cloud backups are supposed to make this process easier, but they don’t always catch everything – for instance, you’ll want to double-check that COVID-19 exposure notifications are still enabled on your new iPhone 12 if you restored from a backup. They might not be, according to BBC News.

If you’re concerned you might be affected, you can re-enable exposure notifications in iOS by opening the Settings app, selecting Exposure Notifications, and clicking “Turn On Exposure Notifications.”

Users first noticed issues with the official National Health Service (NHS) contact tracing app in the UK. When some iPhone 12 and 12 Pro owners tried to open the app after restoring an earlier iPhone backup, they were presented with an error message. Deleting and redownloading the app seemed to solve the problem by prompted the users to re-enable COVID-19 exposure notifications — but also deleted all the locations the users had previously checked into.

It’s not clear if this issue is exclusive to iPhone 12 models or if restoring any iPhone from a backup might turn off the setting: we’re asking Apple and will update you with what we hear. When we restored one of our own iPhone 12 phones from a backup, we did notice exposure notifications were turned off — so we suspect the issue might be at a system level rather than with specific apps like NHS.

The exposure notification system was originally announced in April and uses your phone’s Bluetooth to let you know if you’ve come in contact with someone who’s tested positive for COVID-19. The resulting notification can also direct you to up-to-date COVID-19 information online and where you can schedule a test for yourself.

Contact tracing, whether automatic or conducted manually, is not a magic bullet to get COVID-19 outbreaks under control. But it is one of many steps, including a robust and easily accessible testing program, that can help you find out if you’ve been infected sooner so that you don’t contribute to the spread. Re-enabling these notifications is a low effort way – along with wearing masks and washing your hands – to keep people out of harm’s way.

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Samsung’s original Galaxy Fold adds some of the Z Fold 2’s smartest features for free

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One of the Samsung Galaxy Z Fold 2’s coolest new features was the ability to use the phone’s front display as a viewfinder for the back cameras, which could be really useful for things lining up higher-quality selfies. If you’ve wanted that handy way to take better selfies but have been holding on to the original Galaxy Fold, you’re in luck: Samsung is bringing that selfie functionality and a number of other features from the Z Fold 2 to the first Fold through a software update that’s available starting today.

Samsung will let you use the front screen as a viewfinder for the Fold’s back cameras.
Image: Samsung

The Fold isn’t just getting a new way to take selfies. The update also brings Capture View Mode, which lets you frame a photo with one half of the Fold’s main screen and review up to five of the latest photos or videos you’ve taken on the other half. And Pro Video mode will now let you capture video in a 21:9 aspect ratio and at 24 fps.

The original Fold also gets a few features from the Z Fold 2 intended to improve productivity. App Pair, for example, lets you set a shortcut to launch up to three apps at once in your preferred split-screen layout. That means that if you like to have Twitter open on one half of your screen and YouTube on the other, you can make a shortcut to launch those apps together and set up the way you like them. You now can arrange split-screen windows horizontally, too,

Samsung’s blog notes that the launch date and the features included with the update “may vary by carrier or market,” however, so the update may not be available for your Fold just yet. Samsung tells The Verge it’s looking into when the update will be available in the US.

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Gillmor Gang: Unsuppressed

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[embedded content]

Not just the future of civilization is up for grabs this November. In this age of mobile social computing, we’re figuring out how to vote, entertain, teach, learn, and commit to meaningful change. Thanks to the pandemic emergency, our plans for transforming our country and planet are subject to immediate recall.

Much of the current political dynamic is expressed through the lense of “how much change can we afford to make?” The swing states in the race for the electoral college are those most profoundly affected by the transition from fossil fuel to renewable energy. The choice: how many jobs will we lose by shifting away from oil and gas to wind and solar. Workers in Pennsylvania, Ohio, Texas, and Michigan are fearful of losing their livelihood to a future of retraining and disruption.

Regardless of where we sit along the left/right spectrum, we share the increasing understanding that government doesn’t work. Running for office is a gauntlet of fundraising and promises you can’t keep; legislating is a lobbyist playground where special interests are neither special nor in our interests. The courts are overwhelmed by political power plays timed to inflame and suppress voting turnout. It’s no wonder that the common reaction to this week’s final presidential debate was relief that the campaign is almost over.

The most important fix to the body politic is the mute button. For a brief moment in the debate, we got to experience a few seconds of not talking. Time seemed to stand still, as if we were being handed down a digital tablet of things to not do: don’t interrupt, don’t disrespect, don’t mock, don’t waste our time. Above all, don’t forget the people we’ve lost to the virus. Remember the days when our biggest problems were what show to watch, what music to play, what jokes to tell. It’s amazing what you can hear when the agenda is turned back to ourselves.

In that moment, you can hear things that smooth the soul. In that moment, you can hear the words leaders will have to speak to get our vote next time. I feel much better about the next election no matter how this one turns out. The explosive numbers of early voting tell us a lot about how this will go. The genie is out of the bottle and people are beginning to connect the dots. If the vote is suppressed, it only makes us try harder.

Mobility is about a return to value, to roots, to resilience. Working from home is a big step toward living from everywhere. AR stands for accelerated reality, VR for valued reality. If we want to know what social is good for, switch on the mute button and listen to what you’ve lost. If you can mute the sound, you can unmute it and find your voice.

At first, the mute button was a defensive move. It counteracted the business model of the cable news networks, the repetitive time-filling of partisan perspective mixed with not listening to the grievances of the other side. The hardest thing I’ve had to do is be open to the truth emanating from the least likely location. We are taught to attack our opponent’s weaknesses; a better strategy might be to respect their strengths and adopt them as your own. Don’t worry, though. You probably won’t find too much there to reflect.

Once you experience the mute button envelope, you can hear it even if it’s not there. The rules of the revised debate were that the first two minutes of each candidate’s response used the mute button, then the old rules returned. Even then, the experience of using the mute button informed the rest of the debate. Particularly noticeable was Joe Biden’s response to a series of back and forths when the moderator asked if he had any further response. “… … … No.”

There have been other mute buttons in history. The 18 and a half minute gap spoke loudly when Rose Mary Woods erased a crucial Watergate tape. Before that, we assumed there might be a smoking gun. After that, we knew there might be others, too. Throughout the campaign, we could learn more about what was really going on by listening for the moments when key questions were left unanswered, ducked, or bounced back to the opponent like some Pee Wee Herman playground retort.

Soon we’ll know the answer to the important question: how do we confront the virus? I vote for listening to the science, wearing a mask, socially distancing both off and online, rapid testing, and contact tracing. And the candidates who agree.

__________________

The Gillmor Gang — Frank Radice, Michael Markman, Keith Teare, Denis Pombriant, Brent Leary, and Steve Gillmor . Recorded live Friday, October 23, 2020.

Produced and directed by Tina Chase Gillmor @tinagillmor

@fradice, @mickeleh, @denispombriant, @kteare, @brentleary, @stevegillmor, @gillmorgang

For more, subscribe to the Gillmor Gang Newsletter and join the backchannel here on Telegram.

The Gillmor Gang on Facebook … and here’s our sister show G3 on Facebook.

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