Category Archives: Venture Files

I Love Social Networking, But . . .

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make-haiku.jpgAs the song goes, it don’t pay my bills. So I signed on with a startup that does. Hopefully, I can do both (time permitting). But talk about two different worlds . . . Hardware, not software. Distinctly un-social (for now). Government, not commercial. Business, not consumer. And funded, not — well, self-funded.

I’m working in semiconductors again (you may recall I cut my teeth there)– and very next-generation. And managing programs for a company working (for now) on government contracts may not sound sexy. . . but the work we’re doing is awesome in every sense. Eons away from the silicon chips found in laptops and phones, what we build is for big power switching. We’re talking big.

And did I mention that it’s well funded? Primarily through SBIR grants, a thought-provoking (read: nondilutive) alternative to VC funding — even in good times — if you’ve got some unique IP.

In times like these, it seems like a godsend.

But my reorientation was (still is, in fact) intense. It’s the main reason for my blogging hiatus. Coming up to speed on nearly a dozen programs. Managing them using MSFT Project . . . which threw me back onto Windows XP . . . on a Lenovo laptop . . . and got my introduction to (drum roll): Sharepoint! We social-network app developers spend most of our time trying to make our interfaces intuitive and user friendly — it’s about love, not money — and a company with more money than Croesus creates the most convoluted, nonintuitive and just plane murky interface. Did they put a sadist in charge of navigation?

Still, I believe it will all be worthwhile. Why? Because we’re working on something that will be a game changer. In a non-technical word, we’re building — inventing — devices that will be the key enablers of alternative energy systems. Large scale adaptation of wind, solar, and energy storage systems — and their efficient connection to the grid — will absolutely require the kind of super semiconductor devices we’re producing.

That makes me feel good.

Okay, a paycheck makes me feel good, too. But I’m really trying to be deeper here. It goes back to when I saw Tim O’Reilly’s keynote. Not the one at Web 2.0 Expo in San Francisco in April. That was all good times. But Tim’s tune changed after that. By Web 2.0 Expo New York in September, O’Reilly was downright somber (and news hadn’t even broken about the financial meltdown). Global warming. The U.S. losing its edge in science and technology. A growing income gap. “And what are the best and the brightest working on?” he asked, displaying slides of SuperPoke on Facebook, and the iPhone application iBeer. “Do you see a problem here?”ibeer1

I did. In fact, it been brewing (sorry) in me for a while.

I consoled myself saying sure, the best and the brightest should be working on world-changing things . . . good thing I’m not one of them.

Then, eerily, I was sitting in church, and heard it again. (A calling?) Not to get all ‘religious’here . . . but for someone who doesn’t, ahem, make it every week, last Sunday I was there to hear the Parable of the Talents. (I learned, too, that talent originally referred to a unit of weight of silver — value, as in money, like fractions of shekels). But the message was clear: it’s a sin not to use your God-given gifts.

I’ll be doing that. But I’ll still be applying some other skills to make the world a better (funner?) place with CHALLENJ. Just in my off hours.

Creative Ideas for Capital

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stupomitron helmet2.jpgA great side-effect of entrepreneurs’optimism in tough times is creativity. At our OpenCoffeeDC last week, discussions got lively when talk turned to bootstrapping — not just self-funding, but all sorts of alternatives for producing live-giving capital and conserving what you do have. Time to put on your thinking caps.

Have you gone through the check list of capital sources? Here are several (offroad from the traditional angel and VC route) that popped up in our discussions, plus a few others.

1. Sales! Duh. Number one will always be revenue. It was just February when Wired magazine chief editor Chris Anderson dubbed this the era of ‘Free.’(Yeah. A lot of good that’s doing us now.) But don’t blame him — he’s just the messenger. Consumer expectations have been set at $0.00 by big dogs like Google, Craigslist, and Yahoo, leaving everyone to figure out creative ways of making money in the new ecosystem. Wired elaborated with a wiki for Making Money Around Free Content that provides some novel notions for doing so. It’s even been suggested (heaven forfend!) that Facebook start charging — something, anyway, for a premium services (the freemium model) of some sort. Careful thought needs to be given to just what it is that paying customers get, above the non-paying. Look into currently working models (Flickr vs. FlickrPro, Mozy free online backups vs. MozyUnlimited and MozyPro, etc.)

2. Corporate Investment Corporate customers and prospective partners can be turned into investors. In pre-Web 2.0 era, it happened all the time — usually to ensure that the product or service would prevail, the corporation made an investment. The terms were often good, with one twist: if the startup were to fail, the corporate investor got rights to IP. So it was interesting to see Martha Stewart Omnimedia lead a $2.85M investment in Evite-clone Pingg. We’ll probably see many more of these in the coming months.

3. Consulting/Contracting Doing work for hire can be extremely morale-robbing for a startup that had its heart set on making a living with a new web application — but many startups have turned pragmatic. The duality approach is simply more conservative . . . but when external funding is in a state of flux (like now), it may be key to survival. What makes it hard is the emotional and cultural schizophrenia (maintaining a solid reputation in contracting, vs. the live-or-die passion for a product and the customers who count on it are two different head sets), but some organizations appear to be making it work (Intridea, SetConsulting), while other have made the full-scale transition from services to products (37 Signals).

4. CIT GAP Fund Not to be overlooked, Virginia’s Center for Innovative Technology (CIT) provides (through its GAP program) loans of up to $100k in the form of an interest-bearing promissory note that converts to preferred stock in a forthcoming round of fundraising. It’s a great, low-pain process that helped mobile-gaming platform Mpowerplayer and a dozen other Virginia-based startups. (Disclosure: I’m a shareholder in Mpowerplayer.)

5. Venture Loans Used to be, firms abounded that provided venture lending — growth capital and equipment financing to startups that had already secured equity investment from top-tier VCs. It was still a But these firms — which were a notch less risk-averse than banks, and usually in solid association with VCs (they only made loans to startups that already boasted top-tier VC investors). But a few entrepreneurs have recently mentioned offers of ‘loans from VCs’as a recent funding alternative. The exact nature of these isn’t clear — did they mean convertibles, which pop up whenever valuations get shaken up (like now)? But one thing to keep in mind: promissory notes and loans of any kind need to be repaid, even if the business fails. Moreover, they often have covenants that allow them to be called ahead of schedule. And finally, you may be asked to personally guarantee them. (Did you really want to lose your house?). I say, steer clear of them.

6. Bank Financing Banks, wha? Not often on entrepreneurs’radar, but if you’ve got any stream of revenue underway, financing receivables can be a relatively straightforward process for smoothing cash flow. In fact, whether you have receivables or not, or venture-capital funding or not, banking relationships should be struck up sooner rather than later. Credit lines can buffer slow-paying customers — this economy is certain to increase receivables aging — but everything you’ve heard about credit lines tightening is true. Even established businesses are seeing them dry up.

7. Factoring At one of my service companies, we relied on factoring to keep cash flowing. (Truth be told, we would have missed several payrolls without it.) Factoring firms — which purchase your invoices and collect on them, advance you some portion (up to 90%) of the invoice, depending on the caliber of the customer, and charge a fee (usually 1% – 3%) — can pull revenue that might normally arrive in 30 to 60 days ARO into a week or less. And, unlike banks, the only due diligence is verification of product acceptance; I bet they’re seeing a pick up in activity lately. Of course, you have to be comfortable with you customers knowing that you’re resorting to factoring (not exactly a sign of stability) . . . so better pick only those you have a close relationship with.

8. SBIRs Not too likely a candidate for social-networking startups, but a wide range of technology companies have taken advantage of Small Business Innovation Research (SBIR)and other grants. The Small Business Administration (SBA) Office of Technology administers the SBIR program, as well as the Small Business Technology Transfer (STTR) program. All told, 11 federal departments participate in the SBIR program and five departments participate in the STTR program, together awarding more than $2B annually to small high-tech businesses. Unfortunately, these things take time . . . sometimes more than a year.


Last bits of advice:

- Hoard cash — but don’t tie it up; in other words, even if you’ve raised capital, acquire PCs on credit (don’t lease them, if the lease lines need to be secured). And never secure borrowings with cash.

- Barter when you can — services of any sort.

- Co-habitate — during the last downturn, we opened up our oversized space to another company. If you’re looking for space, post on Craigslist and message boards to co-habitate — you may be surprised at the response.

- Crowdsource design work (logos, literature) you may need. Consider GeniusRocket, or Crowdspring, which Frank Gruber recently used to update his logo. Or do the logo your own damn self, until you can afford a professional.

- Pay with stock/stock options, rather than cash. Or a mix of the two. Worth a shot.

- Negotiate everything.

Damn the Economy — Full Speed Ahead!

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damn torpedoes2.jpgRandom-sampling the mix of entrepreneurs who made it to OpenCoffeeDC earlier this week, the wretched economy has deterred um, let’s see — no one. Gotta love that entrepreneurial spirit!

Optimism still reigns — rains, even. Everyone in the group echoed anti-parallels to the dot.com crash (“Back then, ‘Internet’was a bad word and investors ran from technology; today, it’s the financial markets,” and ““negligible costs of getting started”) — even attending VC Jonathan Aberman waxed enthusiastic: “People will invest in things they understand,” he noted, referring to the backlash from Wall Street’s love affair with exotic but obtuse instruments, “and for many, high tech equates to high growth.” (I took comfort in the notion that there’s something out there more obtuse than technology.)

Still, Aberman had a strongly worded caution for the near term: “Don’t look for money now.”

Gakk!

Not that the entrepreneurs were oblivious to the issues and challenges ahead. Nobody disagreed with LaunchBox Digital co-founder Sean Greene’s assessment that “Most angels have watched 40% of their net worth disappear” along with the Market. Money remains the biggest issue.

And many times during the discussions, the word ‘runway‘ came up — a term I guarantee few people uttered outside of airports a month or two ago.

(btw, a runway analysis is a good exercise for every startup. As is acclimating to the idea that whatever your relevant variables were two months ago — demand, market adoption, advertising CPMs, time to raise capital, valuation, etc. — everything’s changed. There may be a few pluses — cheaper rent, cheaper talent — but for the most part, things have gone in the wrong direction.)

Back to happy thoughts.

I was genuinely pleased to see the diverse mix of companies and stages around the table. We even had a non-software start-up (!) — The Dupont Collection bed & breakfasts. (Heck, I didn’t even know there were bed & breakfasts in DC. They look inviting . . . and reasonable!) I couldn’t have mixed it up any better if I planned it. Here’s a sampling of companies and their outlooks:

DubMeNow — (Beta.) As told by Director of Business Development Chris Hopkinson, DubMeNow, which aims to rid the world of business cards through enabling mobile devices, was sitting comfortably with over a million angel dollars raised . . . though it will continue to pursue VC funding to accelerate expansion to additional mobile platforms.

Funds sought: $1M. Runway: 12 months

YourMusicOn.fm — (Pre-launch.) Daniele Calabrese is in the formative stages with a one-stop-shop for digital delivery of music and content.

Funds sought: $500k. Runway: Self-funded, working towards a target of August 2009 beta.

SocialMinder — (Alpha.) John Adler founded and funded this ‘keep-in-touch’minder (currently works with LinkedIn) that analyzes the ‘health’of your relationships and flags those that need strengthening.

Funds sought: $1M. Runway: Through the end of ’09.

The great thing about OpenCoffees and similar meetups is the collaborative atmosphere. As an entrepreneur who’s weathered startups through several recessions — (“No, son — I don’t recall the Crash of ’29″), I can say I’ve never seen anything quite like it. Even the dot.com days were far more competitive and snarkier. (I think it’s because it was all about ‘eyeballs,’and you never wanted the other guy to get any of yours.)

Maybe it’s just human nature to huddle together during tough times. Well, there are lots of ways to do it. Join Amplifier Networks’DC Tech Corridor social network, for one.

And for Pete’s sake, get out of the house now and then (like going to OpenCoffees). Rounding out our group was Chloe Feinberg, a supporter of Jelly in DC. For those not aware, Jelly is a ‘floating crap game’workspace for technical/social media types looking to do casual co-working, usually in corners of various wi-fi connected coffee shops and eateries. Anyone interested, the next assemblage is at Busboys & Poets Monday 11/3, from 10am to 4pm.

Sign up — networking with warm bodies can be a nice alternative to Facebook for braving a nuclear winter.

Not All Team Players Pulling Their Weight?

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pulling their weight.jpgAre all your team members equally pulling their weight? It comes up all the time — I’ve had the issue myself — and it was common enough for a few startup CEOs to throw together an ad hoc session at BarCampDC2 last weekend. Of course, it never starts out that way — but then, the road to hell is paved with good intentions. How to make sure things stay balanced, and equitable?

Things change along the way, some in our control, some not. But the best way to ensure that things won’t go well is to start off unfairly. And it starts at the top –Venture Hacks contributors noted in their Quick and Dirty Guide to Starting Up, ‘Co-founders are the biggest failure mode for startups.’ Presuming you’ve gotten past that, have a good, complementary founding team, what’s the right ‘comp plan’for the first few people you add?

It depends.

Paying them, as it turns out, is really the only true mode of control. If their only compensation is stock (or stock options), you might as well resign yourself to the fact that whoever is paying them — their day job, or contracting work — is their master. (If they’re married, I’m pretty sure that’s what their spouse would say.)

So how do you get them to do your bidding?

That’s the problem. The startup is your dream, not theirs. (If it were, they’d be founders, too.) Do you find that talk about how rich everyone will become just doesn’t seem to resonate? Uh-huh.

Here are some observations and suggestions:

1. Start off fair. At least then, you’ve got a fighting chance. To me, this means, err on the generous side with stock. (Since it will vest, if things don’t work out exactly as planned, the downside isn’t horrible.) Discussions go on all day long at Hacker News about the topic, but until cash compensation comes into the picture, the first few team members (after founders) are ‘near-founders,’and need to receive upwards of 10% ownership. (If there are two founders, consider 33% each for the two founders, then 33% for the ‘near-founders’as a group. For some of you — especially first-time founders — this will be blasphemy. “My idea, my company, my 100% commitment, blah, blah, blah.” Remember these words, wee hopper:

Optimize for success, not ownership.

2. Strive for transparency. At the CEO [gripe] session at BarCamp, one of the conversations that transpired surrounded the amount of money that some startup CEOs are able to walk away with as part of an acquisition. Resentment for founders being enriched is not uncommon — and often unpreventable. But I’ve found that employees are far less upset if relative ownership is explained early on — the earlier the better. Exact numbers aren’t needed. But the relative stakes of founders, officers, and everyone down to the admins (I believe all employees should be stockholders) should be something that’s talked about (unless you really haven’t been equitable). I have always taken the time to sit down with each new employee and walk through a reasonable scenario, which goes something like: “If we execute, then in three to five years we could be acquired for $100M (hey, dream big!), at which time your 50,000 shares would be worth around $250,000 . . . and that’s just for this first grant; you should expect to get additional grants.” (Now see #3.)

3. Remember what the motivators are. Among the things I found when I moved to the area from the West Coast, equity was often nowhere to be found (except with the founders). Most notable to me was Mario Morino himself, advocate of entrepreneurship, founder of the Potomac Knowledgeway, and great giver-back to the community. Don’t get me wrong, his philanthropy has been exceptional, and he’s been a role model for many in the area. I was just surprised to learn that employees of Legent Corporation, which he created in the late ’80s by merging his firm with another then sold to Computer Associates (now CA) in 1995 for nearly $2B, never received options. I remember hearing from former employees, “It wasn’t unusual for the area. It’s fine. Mario paid really well, and had great benefits.”

M’kay. Again, money talks. Especially these days. Still, I was surprised to learn from the CEO of a local startup that’s able to pay all his employees that he doesn’t give stock either. “They don’t seem interested in it.” (I think they might regret that, if the company were acquired.)

To me, although the main thing is that people feel they’re treated fairly, ownership in the company is still important. If you’re successful, the day will come when they’ll realize the value of their stock . . . and what you did for them. (Still, see #4.)

4. DC ain’t Silicon Valley. Unfortunately, the cultural differences are working against us. Folks here are just more conservative. As Scott Rothrock, CTO at The HealthCentral Network pointed out to me in the course of trying (vainly) to recruit a programmer from a big company: “People here seem desperately afraid of joining a startup that might fail; in SF, they wear their failures as a badge of honor.” And the irony is, THCN is probably the most solidly-backed ‘startup’in the area.

5. Programmers and Engineers have a particular motivation. Never underestimate the attraction of working on cool things with cool people. I found out a long time ago that no amount of options will get technical people as excited as working on the bleeding edge. The fact is, the kind of people you want in your startup would never work at Initech in a 9-5 job (unless it was to support their off-hours startup dream). Any programmer worth his/her salt knows that you can lose your ‘chops’— get stale — quickly if you’re not pushing yourself to learn and grow. Location-aware mobile applications? 3D gaming? Where do I sign up? And, they want to work alongside people who are smarter than them. If your venture doesn’t have some kind of sizzle, some real technical challenges, maybe offshore is a better way to get it built.

6. Hold regular meetings and reviews. In any event, never forget that things need to be monitored — regularly. You’ve gotten your team, they’re pretty pumped up, and off and running. Initial progress looks great. But over time, enthusiasm wanes, knotty problems come up, and all you need are a few demotivators — changing features, which means re-work, is a killer — and pretty soon productivity is way down. While you can’t avoid all the pitfalls, regular meetings (as in, every other Monday, if not weekly) can help keep things on track . . . and will also provide insight into who’s still emotionally engaged. That guy who’s missed the last two meetings — not engaged.

7. Hold 1:1s with your team. Distinctly different from group meetings. You need to know each person’s perspective and situation — especially if you’re not paying them. There may be personal issues that they wouldn’t bring up in a group. The point is, if you start holding regular 1:1 meetings, you find out about things before they implode. If you haven’t done it yet, start now. Maybe employee #3 and #5 just can’t work together. Chemistry, or something. You’re the CEO, and you’ll have to do something about it. But first, you need to find out about it, and find out early. Otherwise, you’ll find yourself changing jockeys two weeks before launch.

8. Celebrate — even little successes. Finally, more than one attendee at the BarCamp session made the point: even minor motivators (pizza and beer, a movie premiere, shirts/hats) can make a difference. They work a heck of a lot better than punitive measures (“Your stock option will be decreased by 100 shares for every day past the deadline”).

And for God’s sake, throw a party at launch!

Editorial Update: Specifics regarding a conversation at BarCamp DC were removed as potentially inaccurate and detrimental.

Monetize . . . or Die?

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What we say to dogs.jpgA few months ago, my pitch to Virginia’s Center for Innovative Technology (CIT) for their GAP funding program was turned down. I actually thought I had a fighting chance, having worked with the good folks there before and produced a plan that set the stage for their first $100k GAP disbursement. But my app-in-progress CHALLENJ was turned down, for, among other things, “We are unsure about your ability to monetize the site.” Gee, I thought — I had scoped out several alternatives . . . one of them should surely yield.

What I said was, “The revenue is, of course, dependent on my ability to acquire millions of users.” And what they heard was “I don’t really care about revenue.” Like the classic cartoon, listening, understanding — and in the case of investors, believing — are often completely different things.

I had built a financial model — I love building models — that suggested revenue somewhere between $10M and $20M was achievable in Year 3. (Maybe I should have given them an interactive model or web toolkit, that would let them dial in their own scenario.)

But truth be told, my focus was primarily on getting users. I was willing to bet on our ability to do so, and that’s fine for founders . . . but for CIT (and others), the risk was too high — certainly to place a $100,000 bet.

(Incidentally, I still recommend applying for GAP funding — it’s a relatively easy application, and structured as a convertible note, avoids issues surrounding valuation, which can be very touchy these days.)

The conclusion I soon reached — months before the economy flip-flopped — was to build and launch before resuming the quest for investment. (Now pretty much a fait accompli for any web start-up.)

Launchbox Digital co-founder (and most recently, Thummit co-founder) Sean Greene suggested an alternative at BarCampDC2 last week: sustainability with small numbers: “VCs need things to be big — you don’t. You might be perfectly happy with 10,000 paying customers. And if so, you don’t need a VC.”

Point well taken. For that matter, maybe you don’t even need angel financing.

In a recent BusinessWeek story, New York Angels chairman David Rose — and several others — remarked they’d like to see self-sufficiency on the initial investment. Jeez Louise, how many businesses can get to self-sufficiency on a couple hundred thousand bucks?

Maybe it’s my upbringing. My first venture-funded company was in the computer-chip business. Talk about a leap-of-faith investment — money comes in, and a year or two later, you hope to have a working product, a receptive customer base, and good market conditions. In that world, there are only two qualifications for investment: 1) the pedigree of the team; and 2) the gut of the VC.

Google was a gut investment; the founders were super-smart, but still in school. Twitter had a mix of both — the founders had proven their smarts and ability to execute with Blogger, which was acquired by Google in 2003; but well before the meme had proven itself with the masses (some say it has yet a ways to go) a few VCs — notably Union Square Ventures‘ Fred Wilson and Spark Capital‘s Bijan Sabet, were also trusting their instincts that Twitter was not destined to be another PointCast. They believed instead they were on the very brink of a phenomenon . . . even without a revenue model.

Recently, a bit of tempest in a teapot brewed around a comment USV’s Wilson made about Twitter, as reported in a Wired blog:

“œIt’s like the stupidest question in the world: How’s Twitter going to make money?,” said Union Square Ventures’Fred Wilson, another investor. “It’s like ‘How was Google going to make money?’

Wilson subsequently apologized for being snippy, but I knew what he meant. Throughout my startup career, I rarely worried about revenue models — the hardware companies of course made products to be sold, so the only concern there was could we sell thingies for more than it cost us to build them. But even in the software and Internet companies, there was a general belief in the notion that if we produce something people use, we’ll figure out a way to make money.

It may all be moot, because most of you are probably thinking more about sustainable revenue models than ever before.

Call me crazy . . . but I’m still a fan of go big, or go home.

In any case, we believe in our ideas, exuberant (if not irrational) as ever. And we remind ourselves that, as David Hornik, of August Capital has said: “One VC’s next Google is another’s wasted hour.”

Which is why I continue talking to VCs. And in fulfilling my personal mission to improve the VC-entrepreneur dialog, I’ve organized my first OpenCoffee, where we’ll have two local VCs in attendance. Join us, if you can, for some stimulating discussion!

Startup Layoffs, Pt. 2 — Two Perspectives

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apocalypto head chop.jpgThere are two sides to every story, and two unenviable roles to a firing. While I don’t expect newly aroused sympathies to change anything, awareness of each other’s perspective can help make the process a little less painful. That is, if you believe yanking off a band-aid is less painful than pulling it off slowly . . .

Cutting expenses is one thing — delaying purchases, ditching the PR agency (God, they hate being the first to go), abolishing free soft drinks (really?). But cutting people is, well, personal. Leader truly get their mettle tested in the process. But since it’s not something managers do that often, I guess it shouldn’t be surprising how badly most of them handle it. Email? Over the weekend? Like the pink-slips of old, big-company cowardly. Bad form.

Notes for the ‘choppers’

All you managers under pressure –though I don’t expect arrogant CEOs to read this, much less heed the points — it’s time to act, or be acted upon. Look on the bright side: a headcount reduction gives you the opportunity to reshape the organization. Let’s face it, not everyone you hired ended up exceeding expectations. Even if the hiring process included a probationary period (it always should) to admit a mistake was made, during a RIF you get to lop off anyone close to the line.

Encourage yourselves with the conviction that the organization will be better, leaner, and more dedicated than ever before. Just remember that the folks you want to stick around will judge very carefully how you handle the process.

Some observations and considerations (nothing comprehensive) for you unenviable leaders:

1. Once the decision is made, move swiftly.

Bring all your appropriate managers into the process — they’ll surely have something to contribute. Then meet with them 1:1, provide them a directive (e.g., 20% cut), and let them own the decision for their people. Complete this process all on one night, off site — no closed doors, which only feed the rumor mill.

2. HR (if you have one) may or may not know best, but should be completely involved.
The HR managers that I hired for recruiting skills turned out not always to be the best HR administrators; nonetheless, they are employee advocates, and should be your sounding board. If you’re big enough to have hired an experienced HR person, they will have the forms and know the laws. On the other hand, if you’re a startup taking 20 people going down to 15, you probably won’t (shouldn’t) have an HR person. I’ve used PEOs (Professional Employer Organizations) such as TriNet (which make business sense up to a couple dozen employees, beyond which the fees dictate you wean yourself of them), and when we went through our Bubble 1.0 layoff (40%), they knew their stuff — had done quite a few, in fact. Helped us think of everything.

3. All the packages and details for outgoing employees should be complete before the button is pushed.
Prewire everything. Most of all, your IT guy/gal (if they’re on the hit list, you’d better solve that problem first). All the letters (I’ve found that including recommendation letters in the package buys a lot with people), instructions (such as the consequences of their stock options), copies of the Confidentiality Agreement that they signed at hiring, etc., should be bundled together. I’ve learned to lean towards trusting people to behave (although it hasn’t worked out 100% of the time), so I wouldn’t immediately cut off email, or block access to their computer. Big companies will always do this; if you’ve managed your startup well, with full transparency, there shouldn’t be a need. Sales and marketing people will often want to send out an email blast to customers and contacts; let them. Blocking them will only result in them doing it from their personal email. But passwords to Salesforce.com, VPNs, etc. need to be covered. Provide your managers with a comprehensive checklist for each employee.

Sequoia's solution.jpg4. Execute as simultaneously as possible — and with military precision.
This was impossible during my first big layoff, when we went from 175 to 125 (not to mention things were so out of hand, my finance director — who obviously did not expect to be terminated — ran around the building, screaming epithets, while I chased after him . . . swear to God), but for most situations it can be done, late afternoon, at most in two or three passes per manager. Have two people in the room, if you can. Everyone’s rehearsed, the package is delivered, and the whole thing takes two minutes. Remote workers will have to be done by phone (not email). Don’t expect anyone to sign anything on the spot — just collect keys, passes, etc., and don’t shame them by making them clean out their desks in front of others. Let them come back. Treat them with dignity.

5. Don’t drop another shoe
Make your cut deep enough to last. And when it’s done, gather everyone together and have a state-of-the-company address. Tell everyone what the runway looks like from here. Make them comfortable that you won’t be nicking away at things over the next few months, which only leaves everyone paranoid.

I expect there are more and more of you out there coming up on a crappy experience like this. (For more good reading on the topic, go here.) But there’s a happy ending. When it’s over, you’ve done your job (as described by Sequoia, at right), and you’ve done the very best you can for the outgoing — and bonded with the keepers — you not only attain a pride of passage, but things get better very quickly.

Notes for the ‘choppees’

Now, let’s take the other perspective. Some of you are going to be on the receiving end. And most of you — who thought everything was cool a couple of weeks ago — will be stunned to hear it. (Things probably were cool.) But the pressure from investors, coupled with genuine fear about the marketplace, has instilled a new mindset in your leaders: survival.

Some observations and considerations (nothing comprehensive . . . and this is not to be construed as legal or even professional advice) for you who are about to find the axe befall you:

1. Don’t flip out
Yeah, never thought you’d be on the list. Neither did I. But the highly charged moment of termination, when your stomach is knotted and blood is rushing to your head, is not the time to seek answers (much less revenge). Cooperate. No, I wouldn’t sign anything — there’s no reason why you shouldn’t have a day or two to read everything. Just know that, in the end, the company has the leverage — in your paycheck, severance, stock, and references/recommendations. If you really feel you’ve been wronged, get a lawyer.

2. Don’t expect much
Leaving the corporate world for the startup world, you said goodbye to lots of resources and perks. When I was fired from my corporate job (by a back-stabbing son-of-a-bitch bastard who needed my P&L because his was dying and oh, yeah, I didn’t see that one coming), I got nine months’severance, outplacement services, and a glowing recommendation letter. When the VCs pulled the plug on a startup I joined as Senior Vice President of Marketing, I got two week’s pay. (I appealed to the CEO — who was obviously on the way out himself — and they upped it to three weeks.) In startups, you hope for two-weeks pay. (It’s all about conserving cash, remember?)

3. Center yourself
Go for a run, or take it out in the gym. There’s anger that needs to be processed, and you need to move past that to get to the next stage: excitement about what you’re going to do next. What make things especially hard for people in startups is that your world is pretty much tied up in your work. Sure, you have loved ones, but on an hours-per-day basis, when the company you worked for — the thing you were so passionate about being part of and helping build — suddenly goes away, that’s a big hole in your life. Take advantage of it. Indulge your family or loved one with some time. Plot your next moves. Maybe, start something yourself.

4. Move on quickly
You know what they say about a broken heart — nothing cures it like something sweet and new coming along. The sooner you get on with your life, the better. Spend as little time looking back as your mind will allow. The remarkable thing is, nine out of 10 times, people say (maybe not Stuart Sutcliffe) that life got better after leaving the organization. Whether or not you subscribe to the ‘everything happens for a reason’theory, everyone I’ve crossed paths with who’s been through the shock of getting fired — even at my hand — ended up with no regrets.

There’s a lot of nuances I’m skipping over, some are location-specific, some company-specific.
Whereas California has nixed non-competes, they’re alive and well on the East Coast . . . and they suck. Companies may hold stock grants and severances (by law, they can’t withhold back pay owed) hostage to get non-competes signed, and they’re usually at least a year, sometimes longer. Ridiculous.

Then there’s your vested stock options. These conditions can be all over the map — now might be a good time to reread your Stock Plan and Stock Option Agreement. Is the company entitled to repurchase your vested shares? (I hope not). At what price? If not, you may have only 30 days to purchase them yourself. But again, at what price? The recent Fair Market Value may not reflect the economic crash . . . and you might find yourself having to write a check for several hundred (or thousand) dollars, or forfeit the ownership.

Just a heads up. But hey, things could be fine. Just because a half-dozen startups have already had major layoffs, doesn’t mean yours is about to . . .

Forewarned is forearmed.