Naval Ravikant Curated

Indian American entrepreneur and investor. Nav...

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This profile has been added by users(CURATED) : Users who follow Naval Ravikant have come together to curate all possible video, text and audio interview to showcase Naval Ravikant's journey, experiences, achievements, advice, opinion in one place to inspire upcoming entrepreneurs. All content is sourced via different platforms and have been given due credit.

  • Do you think the granting of stock to people is an outdated model?

    I think it’s better than the other model, which was no stock. But I do believe it’s outdated. So we do six-year vests. Venture capital firms do ten-year vests. So I think in a rational model you would not only do longer vests, but you would also probably not have permanent issuances of value. Maybe you would have stock for the early people, because they’re creating scaffolding that then turns into a big company. But the older a company gets, the further along it gets, the more your grants should shift to profit sharing.

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  • Do you think the granting of stock to people is an outdated model?

    I think it’s better than the other model, which was no stock. But I do believe it’s outdated. So we do six-year vests. Venture capital firms do ten-year vests. So I think in a rational model you would not only do longer vests, but you would also probably not have permanent issuances of value. Maybe you would have stock for the early people, because they’re creating scaffolding that then turns into a big company. But the older a company gets, the further along it gets, the more your grants should shift to profit sharing.

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  • How do you know when to stop hiring?

    The nature of human beings is that you come into a company, you work like a dog, you work really hard, and then you get tired and hire someone to do your job. And it always takes two new hires to do your job. Just repeat that ad nauseam, and you end up with five thousand people sitting around at a web app company. And everyone from the outside is like, “What are all these people doing?” That’s a simple web app. Why do you need thousands of people to do it? Then, sure enough, the new CEO comes in and knows that they have to fire half these people, but they don’t know which half. That’s the dilemma that everybody faces, because they’re all politicking, so nobody knows who’s actually doing the work. And once you’re in that situation, you’re in trouble. So I think you should hire extremely slowly. Hire only after there’s a burning need for that person. I think you have to be ruthless about firing and trimming the ranks. And I know that’s not popular—I know people don’t like that model—but it’s worked well for me and for us. The founder just has to keep a very, very tight eye on waste. And there’s always waste.

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  • How should people think about the new sources of capital, and what do you think are the trade-offs?

    I actually think it’s a positive development for entrepreneurs. I know VCs like to bash on them as dumb money. But you have to keep in mind that that’s like your local laundromat owner getting angry that a new laundromat opened up down the street. They don’t like competition. So you always have to filter venture advice through venture incentives. As far as an entrepreneur’s concerned, more people vying to give them capital is good. More competition for something that they have to buy that’s normally expensive and painful is good. Fundamentally, venture capital is a bundle—it’s a bundle of advice, control, and money. The more options you have, the more you can unbundle those three things, and get the advice from the people you want and the money from the cheapest source of money, and leave the control behind. So I think it’s good. Now that said, a lot of these people who are newcomers—what are the downsides? The downsides are that these new types of investors are hot money, so they might not support you in a future round. They may not be smart money. What that means is not that they’re not going to add value, because almost nobody adds value as an investor in a later-stage company. It’s just that they might screw you up in a future round by not doing their pro-rata, by trying to veto something they shouldn’t. The way you solve that is by not giving them control in the first place, and not expecting more money out of them in the future. And then finally, money has karma too. You cannot take someone’s money without having a moral, ethical obligation to them. You can’t do it without committing your time. And you don’t want to get sued by them, because that makes you untouchable later on. So you do want to make sure that you have a good relationship with the people you’re getting the money from.

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  • Do you think people are raising too much money? And if so, why?

    I think they’re raising money because money is cheap and available. The Federal Reserve and central banks of the world are printing money like crazy to fight deflation. Money is just cheap. Money is available. So why not? It’s insurance. It’s a scorecard. It’s a tool that you can use for acquisitions. You can hire a few more people. It’s brutally competitive to hire people, so you can pay them better—Google and Facebook are paying through the nose. But the downside, the subtle difficulty of raising money, is that when you raise more money you do spend more money. There’s just no way around that, no matter how disciplined you are. And what’s worse is you move slower. You get less stuff done. The meetings are bigger, the groups of stakeholders that have to be coordinated are larger. You’re less focused as a company; you take on too many projects because you have all these resources. So it’s just human nature that when you have money you will spend it, and not always for the better. I think it takes your eye off the ball. In that sense, it is true that companies that are at least somewhat cash-constrained do better. Pierre Omidyar is a famous example—this is back in the old days, from eBay. He had a lot of competitors, and he actually credited his success to being the only one who didn’t have much outside financing for a long time. So when people were trading on his site, doing auctions, he came up with a rating system, which was very novel at the time. It seems obvious in hindsight, but his was one of the first sites to have automated ratings. Everybody else wanted to have a better customer experience, so they had individuals getting in the middle of every transaction. Which meant that as the whole thing spiked, he scaled much, much, faster than them and ran away with the market. By not having the headcount, he was forced to build scalable processes from day one.

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  • Is there a specific valuation before which you don’t think a founder should ask for liquidity? Or alternatively, is a founder unwise for not diversifying before a certain point?

    The situation you don’t want to be in is one in which you took substantial liquidity but your investors lost all their money. Once you’re convinced— almost beyond a shadow of a doubt—that the value of your company is greater than the stack liquidation preferences of your company, then I think it’s legit to start asking for a secondary. You want to know that you’re generating enough revenue or cash flow, or that you’ve built something that’s getting acquisition offers at a price that exceeds the liquidation preference value of your company and will make the investors some money (and they want you to keep going). The most common way the secondary conversation starts internally is with an acquisition offer. The investors want you to turn down that acquisition offer, and you probably want to also—but you’re tempted. And a smart investor at that point will say, well, let’s let you take something off the table. That’s why secondaries probably shouldn’t happen for seed and A and B companies. But generally it’s C and up now where you’re starting to see it quite commonly. Even in B-round cases, you’ll see it if the company’s made substantial progress. Related to that, I think the single most important elephant in the room is that companies don’t need that much money anymore. It’s become a lot cheaper to build a company. All your software is open source. All your hardware is sitting at Amazon, in Amazon Web Services. All your marketing’s done on Google, Twitter, Facebook, Snapchat, App Store, contact lists. Even the people that you need—you need mostly engineers, and even half of them are outsourced. A lot of your customer service is happening through the community. So, companies just don’t need that much money. Slack is a great example right now. Slack is raising money, but I don’t even know what they’re doing with it—probably secondary. Stewart famously said in the last round that he had, what did he say? Fifty or something?

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  • Is the number of companies very high?

    There’s a lot more companies. We’re going after hugely winner-take-all markets. The new entrants keep coming up, the platforms keep shifting faster and faster, the half-life of the winners is shorter. It’s becoming a much more competitive atmosphere. A friend of mine described incubator graduates as the locust swarm of startups. And you just don’t know—with every graduating class, here’s another hundred locusts. And who knows which one is coming after you and what tack they’re taking? So every business is constantly under more and more sustained assault. As a founder, you get a couple of shots on goal in your life. And you might even only have one for that thing you’re really super passionate about. I think good VCs now realize that if they’re going to ask you to go for the billion-dollar exit, then they have to be willing to let you take some off the table along the way. So I think the secondary component is becoming more and more common, and it will become more and more liquid. Secondary markets are here to stay.

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  • How do you think about the secondary component of late-stage rounds? When should founders do it, should they not do it, how should they think about it, how should they think about other early investors relative to secondary? At what stage does it become okay?

    It’s becoming more and more common. As the markets become more liquid, the industry becomes more hit-driven. So the odds of your thing working out all the way get lower. The incentives of founders and investors are starting to diverge more and more. You can have a $100 million exit as a founder and you’re really happy, but your investors may not be, because their funds are getting larger and larger. The incentives are diverging more and more, so it makes more sense to do early founder liquidity. Maybe in 1999, if you started a venture-backed business, your odds of success were 1 in 10. Today they might be 1 in 50.

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  • What are some examples of temporary valuation?

    I believe that under California law, for example—this was true in 2003 when it was relevant for me—every series has to separately approve an M&A, even if it says that preferred as a class can do it. That’s one example. Another one is inspection rights. So when you have a shareholder on the books and you’re a Delaware company, they can demand your financials. Even a small shareholder can, which a lot of people don’t realize.

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  • Do they still get the liquidation preference, but not the protective provisions?

    Right, that’s all left with the earlier rounds. Then the next hack you can do—suppose you can’t even get that—is to give them the protective provisions, but only for non-arm’s-length transactions. That means transactions that are not happening at a distance with other people. So if I’m issuing myself more stock, sure, I need your approval. If I’m issuing stock to a friend of mine or if I’m selling the company to my brother, then I need your approval. But if it’s an arm’s-length, bona fide transaction, I do not need your approval. The next hack down from there is, okay, I need your approval, you have the veto, but the veto belongs to the preferred class as a whole. It doesn’t belong to each series individually. Because that way, if I can get the other investors to go along, then you have to go along. Presumably my earlier-stage investors are people that I trust more. I’ve worked with them longer, they’re friendlier, I chose them more carefully. They’re more understanding of how startups work. Whereas my later-stage investors are more likely to be people who just showed up yesterday into the business. So that’s the series of strategies that you would fall back on. Another thing that entrepreneurs obviously do is create founder shares, which have extra voting power. That works up to a point. There are rights that preferred shareholders have that you can’t take away from them legally, no matter what contract they sign, under Delaware law and California law. So you always have to be aware of that.

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  • So the argument is really to protect in a distribution, versus to protect against some future downside?

    Correct. That was the original theory behind liquidation preference. But as it’s gotten stacked on later and later, it’s become this giant freebie. And the easiest way to see that it doesn’t make sense for later-stage rounds is by seeing that it doesn’t exist in the public markets. The public markets are all common stock. Why? For exactly that reason—it doesn’t make sense anymore. If I have a $900 million company, and you come in and invest $100 million, well, presumably a $900 million company is really a $900 million company. I’m not going to turn around, shut the company down, and distribute the $100 million, because I’d be throwing away $900 million of real value. The preference is really, really important at the early stages. You’d be a fool to do a seed round buying common stock. But it makes no sense at the later stages. And at the public stages, it’s gone. If I had a high-growth, high-performance company with multiple bidders— and obviously these kinds of negotiations are only possible when there are multiple bidders—I would be selling common stock. Or, if that opportunity wasn’t available to me, I would be selling common plus liquidation preference. That’s it. I would be leaving out all the other junk.

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  • What would be the argument? A lot of times the investors are saying, “I really need the preference in order to protect my investment on the downside scenario.”

    The preference is there for a very specific reason: Imagine that my company was raising at a pre-money valuation of $9 million. And then you came in and you invested $1 million in the company, so the post-money valuation is $10 million. And now you own 10% of the company. Suppose I try to take the million dollars and say, “Hey, we’re just going to divvy up the million dollars to all the shareholders.” Well, if you didn’t have a preference, I would get $900,000, and you would get $100,000 back. Not what you expected.

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  • What are some of the key hacks for a late stage funding round?

    First I don’t think all companies need large rounds anymore. The internet makes it possible for many kinds of companies to be built a lot more cheaply. Obviously that’s not true when you’re doing hardware or when you have local expansion issues. But overall, I think you can build companies a lot more cheaply than people used to. But if you’re going to raise a late-stage round, what are the hacks? Frankly, late-stage rounds used to be done by venture capitalists. And now they’re done more and more by mutual funds, by other companies in the space, strategic players, even family offices often want to go direct. In those kinds of situations, I think companies can create custom bundles where they can keep control and can even sell common stock—which is the ultimate hack. They can make sure they don’t give up board seats, they don’t give up vetoes on M&A and option pool issuances and future fundraising. (On non-arm’slength transactions, or insider self-dealing, though, you always do want investors to have the veto.) We used to have a saying at Venture Hacks: “Valuation is temporary. Control is forever.” Whoever has control can effectively end up controlling your valuation later. Never give up control. And control is given up in subtle ways: A lot of term sheets will have so-called protective provisions that originally existed to protect the preferred shareholders, because they were minority shareholders. But effectively they give those shareholders control over the company. So, for example, if your preferred investor has the right to veto future fundraising, they effectively have a lock on your company. If you ever need more money, you have to get them to agree, which means they run the place. Same for expanding your option pool and issuing more shares to new employees, or to keep existing people. Same with M&A. That’s probably the big one, where the biggest fights happen. Sometimes the founders want to sell or don’t want to sell the company, and then the preferred shareholders try to control them for an opposite outcome. So, in my ideal world, if I had a hot, late-stage, high-growth company, I would essentially sell common stock.

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  • What are some of the key hacks for a late stage funding round?

    First I don’t think all companies need large rounds anymore. The internet makes it possible for many kinds of companies to be built a lot more cheaply. Obviously that’s not true when you’re doing hardware or when you have local expansion issues. But overall, I think you can build companies a lot more cheaply than people used to. But if you’re going to raise a late-stage round, what are the hacks? Frankly, late-stage rounds used to be done by venture capitalists. And now they’re done more and more by mutual funds, by other companies in the space, strategic players, even family offices often want to go direct. In those kinds of situations, I think companies can create custom bundles where they can keep control and can even sell common stock—which is the ultimate hack. They can make sure they don’t give up board seats, they don’t give up vetoes on M&A and option pool issuances and future fundraising. (On non-arm’slength transactions, or insider self-dealing, though, you always do want investors to have the veto.) We used to have a saying at Venture Hacks: “Valuation is temporary. Control is forever.” Whoever has control can effectively end up controlling your valuation later. Never give up control. And control is given up in subtle ways: A lot of term sheets will have so-called protective provisions that originally existed to protect the preferred shareholders, because they were minority shareholders. But effectively they give those shareholders control over the company. So, for example, if your preferred investor has the right to veto future fundraising, they effectively have a lock on your company. If you ever need more money, you have to get them to agree, which means they run the place. Same for expanding your option pool and issuing more shares to new employees, or to keep existing people. Same with M&A. That’s probably the big one, where the biggest fights happen. Sometimes the founders want to sell or don’t want to sell the company, and then the preferred shareholders try to control them for an opposite outcome.

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  • How did you find these guys you're working with now?

    Friends of friends, actually. What really made the difference was we were doing something that we thought was pretty good, which was we were spreading investment and investing around the country. That's really what Congress wants to hear right now, which is, "OK, you are helping companies in my jurisdiction get funded." When we went to Congress and we said, "This needs to exist," all the lobbyists can do is open the door for you. You still got to make the pitch. We basically showed them how, in every state, in almost every major city, we had a bunch of investors. We had a bunch of startups, who are willing to stand up for what we were doing. There was all this good karma that was paid back. I spent six months of my life just calling in favors left and right. It turns out there were a lot of them to call in. These were the kinds of things that we had to basically make sure were taken care of. The JOBS Act was the only bipartisan act passed by this Congress in the last four years. We got to go to the Rose Garden. Obama signed it. I have a copy sitting next to me, signed by him, which is great. It was really fun and really crazy. It's one of those things where you pull a hundred favors. I had Mitch Kapor call up Anna Eshoo, who is a Silicon Valley rep. I had Steve Case work with us to get a piece and his recommendation to the council and so on. You call in literally a hundred favors. Each one of them takes a toll on you. At the end of the day, a random five magically come together and make it happen. At the end, for a while, it looked like it was going to get shot down in the Senate. By the way, we had to put together this crazy thing. We had to satisfy the investment banks and the regulators and all the different constituencies. It ended up being a giant dog's breakfast of different bills combined together. Some genius, I don't know who, but I can almost imagine is sitting around, probably some Congressional staff, was like, "How are we going to get this thing to pass? It doesn't make any sense. Let's say it has something to do with jobs. Yes, jobs, jobs." What Congress person can vote against something called a "JOBS Act"? It was a miracle. It was literally a miracle.

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  • Tell us about your experience with the JOBS Act?

    We definitely were very involved in it. The securities laws were written in 1934, which is a long time ago. They probably referenced a telegraph in there somewhere. A lot of the stuff that goes on in incubator demo days and at these conferences is technically illegal. When someone stands up in demo days, some mentor, and says, "You should invest in this company," that's not completely kosher, or says, "Here's a standardized term sheet that we're using. This is the standard AngelPad or TechStars note," that is not legal. You're supposed to be a broker-dealer if you're doing those kinds of things. All of this is operating very much in the gray area of the securities laws. We bend over backwards to be securities laws-compliant. We have full legal opinion up and all that stuff. We never touch money. That's part of the reason. It's still pretty scary. There are a bunch of products we wanted to offer, like Docs, that we could not legally do. It was just illegal for us to offer without a Docs product being a broker-dealer. "Broker-dealer" means you have all these regulations and requirements that actually make it impossible to work with startups. We wanted to get the law changed. People told us it was impossible, which it actually is, basically impossible. We hired a bunch of gumshoe lobbyists, who are awesome. We paid them purely on a contingency victory fee. We just pulled out all the stops.

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  • What is the biggest pain point that entrepreneurs have right now?

    Talent is the biggest pain point at the moment. It actually makes it a lot harder because people can go start their own company. If you don't have product market fit, also in Andreessen's words, why should they come work for you? Why shouldn't they just start their own company or go into an incubator? Certainly, if they have a good idea, and they have the risk profile, and they feel like they're ready, that's your opportunity cost. The days when, for a product market fit, you'd raise a million bucks and you'd hire your first engineer, you'd give him a quarter point, those days are over. If you don't have product market fit, these people are just late founders. You have to treat them as such. It makes it a lot, lot harder to hire. It also means that the entire venture capital community has gone through a massive shift in the last three years, which I don't think most of them are aware of. Many of them are aware that things are changing, but I don't think they understand what a deep level they're changing at. To give you one example, Sand Hill Road became the center of the tech universe because that is the place you used to go to for your first check. It was the first credible money in, who took a board seat and had influence over the company. That position and power moved away from them. In 2007, they started moving toward the so-called super angels. Now, today, that first check privilege goes to the incubators. Most companies don't go around calling themselves a Sequoia company. Rather, they are YC-backed Dropbox, or they are TechStars-backed Torbit. They're marketing themselves in a different way, it's AngelPad-backed MoPub. These companies are taking their brand and their advice. Their first check, the first people who believe in them, are doing it with $25,000, $15,000, not with $3 million. That puts the venture capital industry in the further back section of the feeder chain, which is dangerous because the brands get built by establishing the early relationship with the entrepreneurs. To me, the distinction at the end of the day is not drawn between whether you have other people's money or not. It comes down to, are you willing to write a small check? Are you willing to decide quickly? Most importantly, are you willing to forgo the normal control terms that a VC would have put on you back in 2007? You say, "OK, I don't need a board seat. I'm in the service business. I'm going to help you. You tell me how I can help you." Proprietary deal flow is dead. There are hundreds maybe thousands of great angels who have started their own companies, exited them, are operators, and are very entrepreneur-friendly. You're just not going to reach them knocking on doors one by one. AngelList commoditized that. They opened that up. They allow you to create more of a market for your shares. It is not about deal flow anymore. A lot of the firms that are doing consumer investing are falling all over themselves, trying to figure out, "How do I differentiate myself? How do I get access into good companies?" That is the current name of the game. It's not about the deal flow anymore. It's like branding oil. Do you really care about Shell versus Chevron? It turns out you do. The reason you do is because the VC brand often reflects how nice they're going to be to you once they have control.

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  • Does that bother you when people with the wrong interest win in the Valley?

    Yeah, you can't let it because most of the times that you do good work, and you do good things, and you do it the right way, you will lose. Most of the time, you will do good things, and you will lose. That's just the nature of the beast. It's a very efficient market. There's a lot of luck. There's a lot of competition. The first time you do a company, it will probably fail. The second time you do it, you'll probably do it with the wrong people. The third time you do it, you'll probably get taken advantage of. You go through these learning curves. You only have to get it right once. That's the good news. The outcome is usually so good in a binary sense when you get it right. You just have to get it right once. The thing that actually disrupted the industry was not us. I give Y-Combinator, for example, a lot of credit for pioneering the new incubator, but it wasn't them, either. The thing that disrupted the industry was just the cost of building a business has collapsed. That has changed everything. Like I said, before we had our Sun servers and our Oracle databases, now you have AWS. You want to market, you want to acquire customers, you use Google. You want to do customer service, you go on Twitter. You want to market, you use Facebook. You want to host, it's on Heroku. You need some part-time labor, it's Elance or oDesk. You need your site cleaned up, that's Mechanical Turk. You want money, it's Kickstarter or AngelList, or there are angel investors. There's just so much embedded leverage in the system now that a single person with a lever can truly move the earth. It was impossible. The community, for example, likes to treat Instagram as an aberration. They like to say, "Oh, yeah, Instagram, don't worry about that. The rest of you are still going to need a hundred million bucks from us." I don't think that's true. We're going to see a lot more Instagrams. There was actually a specific point of disagreement I had with Mark Andreessen since you want me to be controversial. Marc's counterpoint to this would be that Instagram didn't monetize. They could have monetized fine with five people, five additional people. There's nothing about Instagram that needs 200 people. We're going to see more and more and more great businesses built that are essentially built entirely through leverage, that are communicating to the world through APIs and just have very, very, very little headcount. They just need very little capital. Because they need so little capital, everything changes. The entire ecosystem changes. The entire nature of the venture industry and the relationship with the entrepreneur changes.

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  • How frequently in the Valley do you think people with the wrong interest win?

    Probably more than half the time.

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  • What would you recommend of young entrepreneurs who are in the room raising money? If they have a hot company people want to get into, should they try to push it as far as they possibly can?

    No, because money has karma too. If you treat it badly it will treat you badly. The wheel always comes around I feel. You have to be balanced about it, but if you have a strong hand then you do deserve a strong outcome. Like a good rule of thumb in negotiations is, negotiate hard, get what you're fairly due, and in the end, give something back. Because you have to work together for the long term. I actually now firmly believe that everything you do in life, all the returns in life come from compound interest. If comes from the length and strength of your relationship. Look at the PayPal Mafia and how they just keep compounding into new companies that they do together. Similarly, in your marriage or relationship the longer you hold out, the better it gets, the more you survive. Warren Buffet is the richest guy on the planet, or legally richest guy on the planet, there is a lot of illegal wealth out there too, because he never spends a dollar. He just reinvests it, he just keeps compounding it, and he holds it. The same way, your best business relationships are going to be with the people that you end up working with for decades. That is true of your investors too. If you treat them well and always try and make them money, and if you don't make them money at least they don't feel like you overreached, you will keep that relationship for a long, long time. One of the things that I'm now very wary of is people who are over optimizing for the moment, because they're signaling they're not a long term player. If they're not a long term player you don't want to establish a relationship with them.

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  • What were some of the ways entrepreneurs are taken advantage of?

    There are quite a few of them. One is the different kinds of liquidation preference. Liquidation preferences, the investors get paid back before you can make any money as a common shareholder, but it was actually not uncommon for term sheets to have multiples, or cases where they would get paid back and they would get a piece of the upside. Anti-dilution, so how do you handle down rounds? Board control, who can fire you? What happens when you're investing? All those kinds of things. It was very common, and still happens unfortunately, where very often an entrepreneur will get pushed out of their own company, the investor will bring in someone who was like a friendly CEO. Next thing you know the company runs out of cash, the investors recap it, it's a down round, and then they end up owning all the equity. Today it's actually more likely that almost happening in the other direction. Where a lot of times founders have inordinate voting control. Or if you look at some of these notes that companies get their investors sign up to, when they come out of incubator some of these notes are pretty entrepreneur friendly, surprisingly so. Term sheets are supposed to be this black art. They're supposed to be incredibly complicated, no one on earth can figure them out. You need expensive lawyers to spend $20,000 per law firm, and they have to spend a month negotiating this document, this closing. Thousands of companies have done it, and hundreds do it every month, so how can it be something that has not been standardized by now? The good news is it started to get very standardized, so we took the series seed docs that Ted Wang had put together and that are used for a large chunk of financings today. It's a permanent shift and it's a good shift. When you buy shares in a company on a stock market you don't sweat the details about what the paper is underneath. You don't think about all the ways you can get taken advantage of. You shouldn't have that fear in the private markets either, neither side should, and it should be well established contracts, and norms, and a balanced contract law. I don't think any VC sits around smoking a cigar saying, "I got to go grab power in the ecosystem." I think it's just more about, we're negotiating a deal, contracts are negotiated for the worst case not for the best case, things could go wrong. If things go wrong, I trust me more than I trust you, so let me just make sure that we do it my way. I think it's that simple, and I think the entrepreneurs will do it back to the VCs if they have the opportunity. I don't think it's a fairness thing. I think at the end of the day it just boils down to, unfortunately, a power thing. Which is by the way what game theory teaches you, most of it boils down to power, there is no concept of fairness. You just have to make sure that you don't get taken advantage of. In a situation where you have some power you exercise it to get a fair outcome, or if you don't have power you're at least aware of it so you know what the consequences could be. I think there are definitely entrepreneurs who do push it too far. I actually think the rise of uncapped notes is one example of that. There is all these little twists and loopholes you got to watch out for. Which is another reason why it's good just to put these things online, standardize them, and then have one set of docs where you can say, I read this, I agree with this. Now I don't have to touch it again, I don't have to think about it again, and next time the docs show up I know it's the same docs. If there is a change you can call that out, but just make it very standardized.

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  • Are you surprised that people didn't start suing VCs left and right?

    It's a very difficult thing to do, and you have to be very certain. Let's just say it did lead to the birth of Venture Hacks, which is what lead to the birth of AngelList, because I sort of became the go-to guy in understanding how to negotiate a term sheet, because now I was very cognizant of what goes into a term sheet and why. Back then every term sheet used to be custom. They used to give a lot of power to the investors, whereas actually today, especially coming out of an incubator like these convertible notes and so on, give a lot of power to the entrepreneur. Entrepreneurs take that for granted, it didn't used to be the case. With Venture Hacks we really [dug into] the game theory of venture capital, and how to negotiate a term sheet. These days the terms sheets are still standardizing. They've gotten either more balanced or more entrepreneur friendly, but it's no longer an issue. Angels probably wouldn't be here today if it weren't for that history.

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  • You're not going to tell us anything about your ballsy suing investors move?

    I'm legally bound. I mean it's all in the public record so you can go look it up.

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  • It’s fashionable now to say that "Every business idea that came out in the 1990s was a totally viable idea, it was just done too early." Like WebVan and Instacart. Are you a believer in that?

    There's a lot of truth to that. For example, I did a business called Epinions, back in 1999, which did reasonably well. It went public as part of Shopping.com. It wasn't the gangbuster blowout that Yelp is. The reason it couldn't have been Yelp was because of the time, not enough local businesses were online. There was not enough density of users online that you could get them to review local businesses. All the pieces were not in place. It just was a lot harder to do something back then. To give you an idea, with Epinions, our first round raised eight million bucks. It took us six months to ship our website. We had to buy our servers. There were no data centers. Those were brand-new. We had to host our servers ourselves in our office. We had to get a T1 connection which is a very expensive Internet connection to host out to the Internet. We wrote our own deployment scripts. We had to buy Sun servers. We had to buy Oracle databases, no My SQL. There was no Git. There was none of that. Everything was hard and took a long time. Then the addressable user base was a hundredth of what it is today. Just because the network effect and a critical mass effect, a lot of businesses couldn't work. Even social networking is not a new idea. Before Facebook, of course, there was My Space, before that, there was Friendster. Before that, you go to Korea, and there were dozens of social networks there, including the very famous Cyworld that predated by years and years. You needed a high enough density of your friends on the Internet that when you sent out that almost retarded sounding, "I'm your friend. Are you my friend" email? Timing is very important.

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  • Is underwriting the right PO also a goal for you?

    Or we underwrite the right PO or whatever it is, but the set of actual things that are truly creative is very small. That is the ultimate goal. That's why people look up to Elon Musk and Steve Jobs and Mark Zuckerberg because they managed to create something brand-new, that did not exist before and spread it to the world in volume and get paid for it. It's a very, very, very hard thing. Almost all use is going to go to mobile devices, and tablets, and the like. There are large swaths of humanity who are growing up connected to the Internet but have never owned a desktop or a laptop computer, never will. Nor do they need to.

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  • When you say you're here to succeed, what do you mean by that? Is it about money? What is the goal for you?

    Money for a lot of people ends up being their score card. I was at an event before speaking at Berkeley, and there were about 300 people in the room. A lot of them were mentors, and entrepreneurs, and investors, and some very successful people. I said, "How many of you in this room have started a company?" A lot of hands go up. Then, "How many of you have sold a company?" Some of the hands go down. "How many of you have sold it, and it was a profitable outcome you made some money?" Some more hands go down. "How many of you built a product that was unique and new? You weren't just doing a variation of what already existed, but it was genuinely new?" More hands go down. "How many of you managed to actually sell that product to customers, to end users, and get them to pay for it?" More hands go down. "In volume?" Nobody. The reality is that the history of Silicon Valley is maybe every decade 20 or 30 new great products get created, and the rest of us ride off their coat tails. Including me for most of my career. We get lucky and we sell our companies to them, or we get unlucky and we don't.

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  • How do you feel about that whole, where luck ends and begins, and where skill ends and begins?

    Success doesn't bring that much angst. That sounds like something successful people say to make it sound like their lives are hard. They need to be slapped upside the head. That's just idiotic. There is no question that you are better off than you were before you sold the company for a zillion dollars. I reject those viewpoints that fly in the face of common sense. We are here to succeed, and if you succeed, you've won, and it's great, and you should enjoy it. If it makes you more miserable then there is something deeply, deeply wrong with you.

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  • What’s the story about how you got here?

    It’s not terribly interesting… I came out and just got into it, and the Silicon Valley scene was amazing, never looked back. I'm surrounded by great people, great tech. Did a bunch of companies and efforts along the way, some successful, some failed. I've failed more than I've succeeded. Everyone's journey is unique and interesting, and there is a lot of luck involved too. Some people win and they get to sit up on the stage and talk about how they're photo uploading app got sold for a billion dollars and yours went out of business. [Instagram] did an amazing job and [Kevin Systrom] did incredibly hard things. Not to take away anything from him, but there were a dozen guys who came before him who did incredibly hard things in the same space whose timing was just pre-iPhone, and there are a dozen people who will come later and do innovations, because they're post Instagram they don't get that same outcome. Timing matters an enormous amount. Who you work with...If you were PayPal in the early days and ended up in the PayPal Mafia you did incredibly well. There is a lot of luck involved in the whole system.

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  • Are there people on Facebook's board who don't really use Facebook?

    Yeah, I am not going to name them. Generally, a tech VC firm that have one or two people on AngelList. We'll usually have a good relationship with those people. It's an open book. We're not trying to hold anything back for ourselves. My dream is, someday I'll delete my admin account on AngelList. Generally, most VCs have a positive relationship. I think there's definitely ones who used to be the king of the hill and their little niche, or their little town, or their little venue. By commoditizing and opening up the deal flow and visibility and making more transparent, they've lost some of their information advantage. The Internet hates middlemen who rely on proprietary access information to make a living. To the extent that they were relying on information advantage, that's gone away.

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  • Does every VC firm have a tech savvy partner?

    You'd certainly be surprised. There are definitely VCs who are not comfortable using LinkedIn, or Twitter and so on.

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  • How many VCs actually are really nice to you, but the second you leave the room are like, "Argh!" There's a lot angst about Angel List’s impact on the industry?

    I figured you would give me at least two soft balls before we launched right into it. It's funny. Generally, I would say most VCs who are on AngelList...almost every VC firm has a partner who is tech savvy or an associate or two who are tech savvy.

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  • What are the characteristics of companies that do not achieve success on AngelList?

    It doesn’t work for the vast majority of folks. The vast majority of companies are either not financeable or not financeable on AngelList. There is a whole set of companies that are not financeable by the venture community; service businesses, markets that are heavily played out, if you are fighting a war that has already been won…you better have some really core differentiation and traction. (Other disqualifiers include) not enough technical people on the team…if you are completely out of market…pre-launch companies tend to not do well…teams that have no credibility. The companies that fail to raise funding are the ones who use too many words and too few actions. Your biography is a record of your past actions. Your execution on your current business is a record of your current actions. Talking about what you are going to do in the future is almost pointless. Talking about what you can become is almost pointless. People want evidence. There is a lot of talk out there.

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  • Has your position evolved with the advent of AngelList making it easier for out-of-market companies to find smart capital and the emergence of regional incubators or do you still think location in SV is imperative for a consumer Internet startup?

    It (my thinking) has changed. It hasn’t changed as fast as I would like it to. I would love it if great companies could stay where they are meant to be, raise financing, execute and do well. There are two very good reasons to still have a presence in Silicon Valley. One of those is the critical mass of early-stage investors. It is harder to raise money in other areas, you have to show more traction. The second reason is the incredible critical mass of business development, partners…the ecosystem. It has gotten extremely difficult to recruit in Silicon Valley. I advocate a two-tier structure. Take one or two Founders or core management team members and make sure they either live in Silicon Valley or spend a lot of time in Silicon Valley so they can build the investor and business development relationships they will need, but keep the bulk of the company in the home town where you can actually recruit people and scale without distractions. One mistake I made early on is I thought, ‘capital is fungible, look at the foreign exchange markets.’ Capital is very mobile, but capitalists are not. The home grown capitalists have to come up. One of the reasons Estonia is such a hot bed of activity for early stage startups because you have a lot of ex-Skype employees who are fairly wealthy and know how to build great products. Look what Groupon is going to do for Chicago. There’s going to be more and more of these early stage networks forming. Silicon Valley will not be weaker, but the rest of the world will be stronger.

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  • If you were writing your book Pitching Hacks today, how would your advice differ?

    The whole environment has changed. You can cast a much wider net, the nature of the pitch can be a lot simpler, you can get funded with just an executive summary and a good conversation…without having to put together a business plan or even a deck. The whole thing in some ways is obsolete because the environment has changed. In other ways it is not because human psychology has not changed. That is the great constant.

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  • Venture Hacks and AngelList are both great assets for the startup community. Other than giving back to the ecosystem, do you have plans to monetize your efforts beyond selling books?

    The most important thing for an investor… is access to deals. When great companies really hit, all the investors want in and there isn’t enough room. One of the things AngelList helps us do is raise our brand, have a pre-existing relationship with many, many entrepreneurs and give us access into great deals. We are not concerned in the short-term with making money. This is a ten year project…, we’re one and a half-years in and we have a long way to go. Long-term, we may start investing in some of these companies as they go through. We are not taking the incubator approach…we would invest on the same terms alongside the other investors and we would make sure to be a very, very small piece of the round and not to crowd out anybody.

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  • Rincon Venture Partners recently invested in The Resumator, which we identified via AngelList. It is unlikely we otherwise would have become aware of The Resumator, as they are based in Pittsburgh. Are you finding that AngelList is an effective forum for startups located outside of traditional startup hotbeds or was our experience an anomaly?

    It’s actually quite common. The core business we have built on is taking out-of-market startups and introducing them to investors. Late last year, there were more high-quality, seed-stage startups in New York than there was an Angel community to support them.

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  • Why does the startup world need AngelList and Venture Hacks?

    As of the last the 9 to 12-months, AngelList is actually my fulltime endeavor. Venture Hacks is educating entrepreneurs on the game theory of how to raise venture capital. AngelList is the productization of that. These days, thanks to code and community, we can productize almost any process done by humans. We are productizing the raising of capital for startups.

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  • What about handling a very difficult situation? Do you have any hacks that help you deal with them?

    There is no end point to self-awareness and self-discovery. I think it's a lifelong process that you hopefully keep getting better and better at. There is no one meaningful answer and no one is going to fully solve it, unless you're one of these enlightened characters. Maybe some of us will get there, but I'm not likely to, given how involved I am in the rat race. Best case is that I'm a rat that might be able to look up at the clouds once in awhile. I think just being aware that you're a rat in a race is about as far as most of us are going to get.

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  • What does acceptance look like to you?

    It's to be okay whatever the outcome is; to be balanced and centred about it; to step back and to see the grander scheme of things. We don't always get what we want, but sometimes what is happening is for the best. The sooner you can accept it as a reality, the sooner you can adapt to it. Achieving acceptance is very difficult. I have a couple of hacks that I try, but I wouldn't say they are totally successful. One hack I try is stepping back and looking at previous bits of suffering I've had in my life. I write them down. 'Last time you broke up with somebody, last time you had a business failure, last time you had a health issue, what happened?' I can trace out the growth and improvement that came from that years later. I have another hack that I use for minor annoyances. When they happen, there's a part of me that will instantly react negatively. But I've learnt to mentally ask myself what is the positive of this situation? 'Okay, I'll be late for that meeting. But what is the benefit to me? I get to relax and watch the birds for a moment. I'll also spend less time in that boring meeting.' There's almost always something positive. Even if you can't come up with something positive, you can say, 'Well, the Universe is going to teach me something now. Now I get to listen and learn.' To give you the simplest example: I was at an event and afterwards someone flooded my inbox with a whole bunch of photos they took. There was a tiny instant judgment saying, 'Come on, couldn't you have just selected a few of the best? Who sends a hundred photos?' But then immediately I asked myself, 'What is the positive?' The positive is that I get to pick my five favourite photos. I get to use my judgment. I get selection and variety. Over the last year, by practicing this hack enough, I've managed to go from taking a couple of seconds to think of a response to now my brain does it almost instantaneously. That's a habit you can train yourself to do.

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  • So having practice of meditation can help you accept suffering whether it's a thought or an emotion?

    Yeah. But it's amazing how little it helps [laughs]. You can be a long term meditator, but if someone says the wrong thing in the wrong way, you go back to your ego-driven self. It's almost like you're lifting one pound weights, but then somebody drops a huge barbell with a stack of plates on your head. It's absolutely better than doing nothing. But when the actual moment of mental or emotional suffering arrives, it's still never easy.

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  • What is suffering to you?

    Actual real suffering is very rare. I would characterize real suffering as being experienced in the body, when you're sick or you're starving. However, most suffering is mentally created. It's our thoughts and emotions. One overly technical definition of emotions is that you can think of them as the net present value of the future impact of the present moment as calculated by your genes. Whereas I think of thoughts as the net present value as calculated by your mind, your memes. Usually when we suffer, we suffer twice. Once through our emotions and once through our thoughts. So for example, when your loved one passes away, you suffer mentally because you think of all the great times you had and the great times you were going to have. But then you also suffer emotionally because of your genes. It's very hard to keep that in mind when it's actually happening. That's where things like meditation and just getting older and wiser help you to distinguish between real suffering and mind and emotion made suffering.

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  • Dr. Monica Ardelt, a psychology researcher who studies wisdom, said that the more negative experiences you have in life, the more opportunity you have to develop the skill of acceptance. Do you agree with this?

    I think she is right. Some of it comes from acceptance, but some of it comes from change. Our egos get constructed in our formative years, our first two decades. They get constructed by our environment, our parents, society. And then we spend the rest of our life trying to make our ego happy. So anything new that comes our way we interpret through our ego. How do I change the external world to make it more how I would like it to be? There are two attractive things about suffering in the long term. One is that it can make you accept the world the way it is. The other thing is that it can make your ego change in an extremely hard way. So maybe you're a competitive athlete and you get injured badly like Bruce Lee. Maybe you have to accept that being an athlete is not your entire identity and that you can forge a new identity as a philosopher.

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  • Do you think that it's ironic because we want to give everything to our children. But sometimes hardships can help you grow as a human being?

    Yeah, it's a tough. Giving your kids everything prevents them from finding themselves. I refer to your incredible Steve Maxwell interview. He said something along the lines that sometimes what you think is helping somebody is actually preventing them from learning their own life lesson. I can trace back all the truly great things that I am thankful for in my life to some incredible hardship. Only through suffering do you have change and self-improvement. Maybe it's just me, but only through suffering do I make big changes. I think without suffering there isn't much progress because there isn't an impetus for change.

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  • Can you talk a bit about how you grew up? What impact did your mom have on your success?

    I actually don't talk about my childhood much because it wasn't that great. I grew up in a single parent household with my mom working, going to school, and raising my brother and I as latchkey kids. We were very self-sufficient from a very early age. There was a lot of hardship, but everyone goes through hardship. But it did help me in a number of ways. We moved to the US when we were very young. I didn't have many friends, so I wasn't very confident. I spent a lot of time reading. My only real friends were books. Books make for great friends because the best thinkers of the last few thousand years tell you their nuggets of wisdom. My mother uniquely provided, against the background of hardship, unconditional and unfailing love. If you have nothing in your life, but you have at least one person that loves you unconditionally, it'll do wonders for your self-esteem. As I get older, I look for that same expression of love in other people, and I express it with my family and friends. Now I'm very happily married to an incredibly amazing woman. She's just the love of my life. I fell in love almost upon meeting her because she had that same ability to provide love that my mother did, not necessarily towards me, but towards her loved ones. Everyone that ends up becoming an extreme winner in society starts off as a loser. If you're a popular kid, good looking, and have money, then you're just going to party and date a lot. Why would you stay inside and do pushups or read books? Make incredible art? To create anything great takes some suffering. And a bad hand early in life can turn out to be a good hand later on.

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  • How did you first hear about Killing Buddha?

    You reached out to me first. So I went to your site to check you out, and I ended up reading the Steve Maxwell interview top to bottom multiple times. It's one of my all time favourite things anywhere. I was so turned on to it that I then went to Steve's site, and I literally read every thing he's ever written. What was shocking was how little of it was about his philosophy. His life philosophy was fascinating. I couldn't get enough of it. I thought to myself, 'This guy is doing something really unique. He's taking people and he's approaching a different side of them.' That was very impressive.

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  • Do you believe that having the option to not work with someone is something you should start negotiating from your very first round?

    Experienced entrepreneurs will. Otherwise it’s marriage with no possibility of divorce. The way my company is structured is that everyone can be removed, including me. Then it is actually a very consistent moral argument that I can make, which is saying, “Hey guys, you can remove me as well if I’m out of line.” Nobody is safe, and that forces everybody to behave.

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  • Does changing of partners in business depend on firm structure?

    Yeah, I’ve seen that situation actually kill companies. My solution to most board problems is going to be highly unacceptable to the venture community, but we don’t give out permanent board seats. We would never ever give out a board seat that we could not remove. And in AngelList and my company, that’s what I’ve done. The only board seats I’ve given out are ones that can be removed; there’s no such thing as a permanent board seat.

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  • If you want to ask for a different partner, you have to go to the person running the firm. You can’t go to another junior partner. You have to go to the very top. Is that so?

    That’s right.

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  • Is there anything you can do with the VC firm itself? Can you go to the firm and complain? Can you ask for a different partner?

    That’s a last resort. That’s going nuclear. It only works if the person who is being difficult is a very junior person and you’re willing to take the gamble that they’ve been exposed internally. But that can backfire on you just as much as not. It’s almost like going to a husband and saying you don’t like his wife or going to a wife and saying you don’t like her husband. VC partners are married to each other in these very complex, decade-long or multi-decade-long arrangements. So I would not attempt that maneuver unless there’s someone on your board who’s willing to do it on your behalf, who says, “Oh yeah, I know so-and-so who runs the firm and I have a good relationship and I can give him that feedback.”

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  • How do you get rid of somebody who is starting to be destructive at the board level? What should you do then?

    Terrible situation. It’s very, very hard to navigate. Usually you end up buying them out for more than they’re worth, which sucks. And usually your other board members really help you on this; this is where the other board members earn their keep. Generally the most senior person on your board, someone who is good to work with, will hopefully help you with that.

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  • Have you seen any circumstances where people have used a chair for that function of coordinating with the rest of the board members? Or does that happen more with public companies?

    Yeah, that’s more of a public thing. Generally—I’m thinking of the founder-CEO model, which is the most successful model in Silicon Valley—if there’s going to be a chair it may be the other founder or a departed founder or a retired founder. But it’s sort of odd to have a chair who’s not also a founder.

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  • Is it so that a lot of early-stage investors, if the company is doing really well, they want to maintain association with the company, both for their personal brand and as a vehicle to buy other things in their portfolio that aren’t working as well?

    That’s right. It’s a credit thing, so that always does make it tough. It’s sad, but I see too many late-stage entrepreneurs spending literally half their time just doing board management. The other thing you can do is space the board meetings out further. So maybe have a board meeting every three months, and then do an update call every month. And keep that call short. I’m a bit of a jerk with my companies, when I’m the entrepreneur, in that I set the expectation very, very early on that I’m not going to do a fancy PowerPoint deck. I’m going to have a sheet of paper with the big points on it and the big numbers on it, and then we’re going to get together and have a conversation. It’s very important as a founder-CEO that you manage your board. Because if you don’t, then whoever the next most aggressive board member is will step in and fill that vacuum. You don’t want to be in that position where you’re always responding to them or answering their questions. You want to guide the board and guide the company.

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  • How do you do step out of the board for people who are traditional series A, B, C investors?

    Well, the smart ones—I’ve seen Fred Wilson do it—will actually step out when the company is getting closer and closer to going public. You can also try to just negotiate it early on. And you can do it in the new rounds. Let’s say that you’re raising $50 million in a hot growth round. You could go to your series A person and say, “Hey, this is your opportunity to get off the board and recover your time. We’ll leave you with the protective provisions that you negotiated, so you’re not going to lose anything. And I’ll keep you on the mailing list and I’ll send you the board decks, so you get the updates remotely. But you don’t have to sit on that conference call every month. You don’t have to do the board meetings.

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  • On the board side, is the idea to only raise from people who won’t take a board seat? And how do you think about also getting rid of earlier board members as part of late-stage financing?

    Companies are this weird thing. The whole point of a company is to try to be efficient and get stuff done. And when you go through human history, you find that when you want to prevent an entity from having too much power, you defuse that power by having committees or groups. Go back to the Romans; they had the Senate, and all the senators had to agree. But when the Romans went to war, when they wanted to be efficient, they elected a dictator. And that dictator then took charge of everything and went off and fought the war—and usually ended taking over all of Rome afterward, so it kind of backfired. But the Romans were aware of that model, and the trade-offs. In companies, you have a dictator at the top, a CEO, or the founders. Then all of a sudden it turns back into a butterfly network, and now you report to a board, a bunch of people. And inherently, the founder-dictators tend to be very risk-prone. They have a lot of vision, they have a lot of drive, they know where they want to take the thing. They like to make risky moves and bets and pivots and turns. But boards don’t like that. Boards don’t like to be dragged along. It’s a group of people. It’s groupthink, it’s committee-think. No committee ever built anything great. So related to that, no board ever built anything great. Boards can be helpful; they can be sounding boards. But you do not want the board to be running the company. And the larger the board, the more you’re going to find yourself spending time just keeping them up-to-date and in sync. I know there’s this belief that venture capitalists can add a lot of value on the board. And they can—under very specific circumstances and situations. They’re experts at financing, they’re experts at knowing the external market, they might have deep domain expertise in one particular thing that you might encounter. But by and large, your average VC board member is on ten boards, so they’re taking ten different board meetings every month or two. On top of that, they’re spending half their time looking at new companies. They’re also managing their investors and LPs. And, let’s face it, anyone who’s been in the venture business knows it’s not really a full-time job. Maybe for the best VCs it is, but your average VC does not work the hours that your average entrepreneur does. Your average VC is a retired entrepreneur; your average entrepreneur is not a retired VC. So they just don’t have that much time. You’re spending most of your time keeping them up to speed, and then you’re hoping to get some value and wisdom out of their expertise and years and years of learning. You don’t want your board to be too large. The larger your board, the less it is going to get done. Every experienced board member will tell you that they favor private company boards of five or six people or less.

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