Early stage investment tradeoffs

I was asked recently by one of the companies I’m working with that is post-prototype, but pre-revenue:

How can I make this deal sweet enough for early stage investors without jeapordising future investment or diluting founders further?

That is the dilemma.

As a founder, you need to get cash into the company to grow, often just to survive, and you aspire to create massive value for yourself and investors.  You don’t want to be diluted, and you know that later investors will want to see the founders sufficiently motivated.  But at the same time, you need to make the deal really attractive to investors now if you’re going to get them to invest in your company so that you can survive and thrive.

What to do?

Convertible notes are one method, but they are no means a panacea.  Convertible notes let you avoid the question of valuation (and dilution) until the next round, when ideally you’ve reached a much higher valuation. Some investors don’t like them at all, considering them a way of putting off the hard question of valuation, and avoiding showing progress through a series of successive equity rounds at steadily increasing prices.  Most convertible notes come with general security agreements, meaning if you can’t close the next round on acceptable terms, your noteholder might be in a position to bankrupt your company and you could walk away with nothing at all. This rarely happens though, as it’s a “mutually assured destruction” scenario, and your investor would likely walk away with nothing as well.

My wise friend Simon Swallow summed up the issue this way:

[Founders] have to work out their prepared trade-off for speed versus probability of success versus value versus share.

So are they better to bootstrap it and take longer to get to the end point and not dilute as much, or raise money to give them a greater chance of success happening sooner but be prepared to give away a portion of the company?

Companies have momentum and if you generate strong positive momentum then people get on board, but if you don’t, the company sits on the shelf and passes its expiry date eventually.

And finally if you want to get you have to give.

If you’re going to get diluted, you want to ensure that the dilution hit you’re taking results in the percentage you still own experiencing a much great value uplift than had you bootstrapped.

Andy Lark once expressed this one year at Morgo as, “what would you prefer – a small piece of a portion of the hind leg of a cattlebeast, OR THE ENTIRE ANT?”  If you’re seeking investment, make sure you’re selling a cattlebeast and not an ant.

A friend who is a startup CEO and founder adds (slightly paraphrased):

There is another tradeoff – remaining in NZ, or raising overseas where investment terms are generally more favourable.

I suspect that many deals are not optimal in that founders leave money and terms on the table, because they are less experienced at negotiating than the investors on the other side.  If that’s the case, get someone with the necessary experience on your side, and ensure that their goals are aligned to yours.

Back to the original question: for very early stage companies, how do you balance dilution, current terms, and future rounds?  My simple prescription is to figure out how much money you really need to (a) enable rapid growth that you can commit to now and track, showing a path to monetisation, and (b) avoid spending all of your time and energy on raising money for the next 18 months.  Then execute and achieve those goals.  And as a general rule, if you get an investment offer on terms you can live with, take it.

Sounds easy, eh.

InternetNZ Council Candidate Statement 2017

Hello, my name is Dave Moskovitz. I was member number two of the Internet Society of New Zealand (as it was called then) in 1995. I have been on the InternetNZ Council since 2010, and I am asking you to re-elect me for one final term so that I can focus my efforts to bring operational efficiency to our organisation.

TL;DR: I’m an experienced Internet technologist, company director, and innovator. InternetNZ does great work, but has become top-heavy. The time has come to consolidate our gains, and focus on operational efficiency. Rather than growing ourselves, we should put our resources into better supporting other organisations that do good work that is aligned to our objects.

You can find out about my professional background on my blog or LinkedIn profile. Briefly, I’m a software developer by trade, more recently a serial entrepreneur, startup investor, and company director, and passionate about growing the New Zealand digital economy through new companies doing cool stuff on a global stage using the Internet. You might be interested in watching my TEDx Wellington talk on The Four Superpowers of the Internet.

When I entered Council in 2010, InternetNZ was a vastly different organisation, and Council was a very different place too. During my tenure, we’ve seen:

  • The diversification of Council from an all-white-male group to a body that contains a significant number of women as well as Māori representation. Most meetings now have roughly equal numbers of women and men attending.
  • Council lifting its game from being fractious to working well together, respectfully debating the issues to achieve the best outcome for wider society.
  • The professionalisation of staff where InternetNZ is now seen as an important contributor to Internet policy development, and a worthy steward of the dot-nz domain space, as recognised by Government through a Memorandum of Understanding. Our focus areas – Access to the Internet, Trust on the Internet, and Creative Potential – are exactly the areas where InternetNZ can have the most impact. We continue to run a world-class domain name registry with open, transparent, robust policy.
  • The introduction of a formal grants programme and strategic partnership programme whereby we distribute significant funding to other organisations aligned with our objects. We’ve funded a wide variety of important work including such varied initiatives such as relatively early research into SDN, the Christchurch rebuild, the 2020 Trust, and Creative Commons Aotearoa/NZ. Through sponsorships, we’ve also supported Kiwicon, GovHack, Rails Girls, and many more.
  • Key issues supported by our society, such as the rewrite of Section 92a of the Copyright Act to prevent rights holders from wantonly prosecuting alleged infringers, and the nationwide rollout of Ultra Fast Broadband. We also fought against the TPPA, and managed to mitigate some of its worst components, pushed for the establishment of a CERT and rallied against the Vodafone-Sky merger. We’ve also exhibited great leadership in the areas of encryption, copper pricing, and contributed to the Digital Future Manifesto.
  • Much better engagement with our membership and the wider public through events such as NetHui, public speaker series, publications such as dotNews, and stories in the mainstream media.

In many ways, the organisation is on the right track. But things are not nearly as good as they could be. As three organisations (InternetNZ, Domain Name Commission Limited, and NZRS Limited) we lack alignment and could work much more effectively. There has been more than one occasion in the last few years where one of our constituent organisations has “lawyered up” against another. This is not acceptable, and a waste of resources and goodwill. There is unnecessary duplication of effort between the organisations, and no great incentives to coordinate. As a group we’ve sent nine people to an ICANN meeting – without a single structure, there is no way to keep costs like this under control. There are eighteen governors, three CE’s and three deputy CE’s (or equivalent) – that’s crazy for a group of 30-40 people. Our resources are unnecessarily siloed, and we obtain a poor return on investment from them.

I was on the Council’s Organisational Review Committee which recommended that the three organisations be combined into one. It’s worth noting that I am also Council’s nominated director on the board of the Domain Name Commission. This board would be disestablished should the recommendation be carried through, so you could call me a turkey voting for an early Christmas. I also believe that the size of Council should also be significantly reduced.

On the subject of the Domain Name Commission, we could have done a better job in the recent WHOIS consultation. I accept my portion of responsibility for the organisation’s initial poor consideration of vulnerable people affected by the lack of a robust privacy option. However I am satisfied with where the policy landed – we continued to consult, listened, and ultimately ended up with a good result.

I have been a hardworking Councillor, and have a member of the time-consuming but important Grants Committee, and I believe I’ve only missed two Council meetings during my tenure. On Council, I have by far the most experience in governance, and am one of four Councillors with in-depth experience in writing software that implements the protocols that are the core business of our organisation.

Should I be re-elected, my focus will be on Operational Efficiency: turning the InternetNZ group into a high functioning, efficient, authoritative, well-oiled machine that continues to provide world class policy advice, registry services, and works hard for the Local Internet Community as required by RFC1591. Rather than continuing to grow as an organisation, I would rather see InternetNZ deploy its resources in better supporting allied organisations through more grants, sponsorships, and strategic partnerships. Rather than trying to do more ourselves, I believe we will be better off enabling others to do great things with the Internet in their respective spheres of interest.

If you would like to discuss anything with me, I am always available on my email dave@mosk.nz or my mobile +64 27 220 2202.