Jeff Bussgang did a guest post on PEHub on the topic of how entrepreneurs should look at and compare competing term sheets.

Jeff correctly points out that the pre-money valuation of the company is not what entrepreneurs should focus on exclusively because the pre-money includes an option pool, which is under board control. Instead, he suggests that entrepreneurs should look at “the promote” which is the ownership of the founders * the post money as an indication of how good a deal they got. In his example he compares a 6 on 7 offer with a 20% pool with a 6 on 9 offer with a 30% pool. The promote in the first case is $4.4M (34% of 13M post) and in the second it is $4.5M (30% of $15M post).

This all makes sense–focusing on ownership as opposed to pre-money valuation is important but I disagree that “the promote” is the key financial metric to focus on when comparing term sheets. The main reason for this is the obvoious but often forgotten point that nobody makes money on a financing (in early stage financings it is extremely rare for founders to be able to take some cash out). Therefore, what really matters is the value of the stake that founders are going to have at exit.

Typically, if things go OK, that’s ownership-at-exit * exit-value. Exit value depends on too many things to be predictable. However, the ownership at exit can be predicted to an extent. In a typical technology startup, on average, founders will experience 45-65% dilution before exit. That’s quite a range. Here are some rules of thumb related to financings for how to end up on the lower end of the dilution scale:

• Have large option pools–they protect everyone from dilution. If you take a term sheet with an artificially small option pool, it will have to be increased in the future and your ownership will be diluted. To take Jeff’s specific example, the second deal 6 on 9 with 30% pool is noticeably better than the 6 on 7 deal with the 20% pool even though the promotes are nearly identical because the extra 10% in the pool are insurance against another 10% dilution. In short, don’t get into deals because you feel you’ll own more of the company only to find out that you get further diluted in the future through option pool increases.
• Raise more capital and don’t spend it faster. In well-managed companies, there is a correlation between the amount of capital that is raised and the amount of progress that’s made, which, hopefully, results in an increase in pre-money valuation for the next financing round and hence less founder dilution. Even if they put just a little bit of money into your company, VCs will own rights that essentially give them substantial control over future financings. Don’t accept a deal just because you’ll own a lot after this round. You have to think about follow-on financings also.
• Pick the VCs carefully. Some firms and partners have much better brands and, other things being equal, are more likely to help you get great terms on a follow-on financing. However, there are circumstances where the VCs on your board don’t really have a great incentive to help you get a great price. The reasons are too complex to summarize here.

I advise every founder and startup CEO to have a good spreadsheet showing how every major shareholder is impacted in various financing and exit scenarios. When you put things down to numbers, it becomes much easier to understand why it is rational for certain parties to behave in certain ways.

As for comparing across competing term sheets, there is no single financial metric to focus on. You have to think about the overall financing model for getting to exit.

Now is the time to get in on the new thing from Thing Labs (makers of Plinky). It’s called Brizzly and it’s a new, cool and very simple way to experience the social Web. See a screenshot + demo.

Interesting report by folks that mined the Twitter stream.

The section on publishing tools is particularly interesting. Less than half of all tweets are made through Twitter’s web interface and I bet this includes some posts made through the API. Apprently, users much prefer to use desktop or mobile applications to post to Twitter.

Strategically, Twitter will be stronger with a Web front end that people actually want to see. Twitter’s greatest strength is its greatest weakness. The most-recent-first, single column layout is very simple and easy to consume. It’s perfect for beginners. The more people you follow and the more you search, though, the more the default Twitter interface’s simplicity starts failing. For example, I follow less than 50 people but some of them tweet many times per day (a few are businesses). It is very easy to lose tweets I’d have otherwise found worth reading and I often find myself wishing for more and better organization of tweets. That’s especially true when consuming Twitter through a mobile device as I usually do–catching up with what’s happening in-between other parts of my life.

A couple of questions I’d love answers to from Sysomos or anyone else who has the data:

1. What percentage of the 45.7% of tweets contributed through “the Web channel” came through the API w/o an identified client?
2. What’s the distribution of consumption tools (since reading is much bigger than writing)? (An interesting su-question is how does one measure consumption…)

I’m enjoying Net access on a Virgin flight to SF on FastIgnite and other business. While prepping for meetings with Thing Labs, Facebook and Mozilla I came across this Wired article on the mounting Facebook – Google rivalry. It’s a well-written piece that covers  the historical context of the rivalry and speculates about Facebook’s plan for online domination:

1. Get scale in usage and aggregated data
2. Redefine search via the social graph
3. Colonize the Web through Facebook Connect and OpenStream
4. Sell targeted ads everywhere

It is clear that the two companies are on a collision course and will both look for help and leverage in the upcoming battle. Beyond the well-identified brand advertising + search + communication tools + social graph battle lines there are two that merit a bit more analysis and some wild guesses:

• The real-time Web is becoming more important. That’s why both went after Twitter and, of course, why Twitter rebuffed both. (Nothing like a horsy race, especially when you don’t need to exit. Yes, Twitter knows they have to manage hosting/traffic costs.) Now both FB and Google are busy adding capabilities around real-time content contribution/sharing/search.
• More general search. If FB is to redefine search, it needs to be able to handle a reasonably set of search queries. Google’s core technology and reach have an overwhelming advantage here. FB has great data but even at their scale it is very difficult to create a great user experience for search. People come to a search box with diverse intent. Therefore, intent discovery is one of the most important and hardest problems for a search engine to solve. Through its richer UI and tracking capabilities FB has an advantage is discovering intent. However, if the intent and/or the search query cannot be satisfied easily within the agregated dataset of friend activity there is a problem. Also there is the expert gap–my friends may not be the experts. Wild guess: Facebook may partner with Microsoft, which is eager to give Bing more momentum, or another search player to create a more compelling search experience within FB.  Or they may really redefine search to establish a clear psychological contract with users about what FB search is all about. Either way, it will be interesting to watch.
• Desktop access. I was excited when Facebook acquired ParaKey. It was a brillian strategic move, Facebook’s Secret Plan v2.0. Desktop data and flexible offline access to online services is very important. Google clearly has the leadership now with Google Gears and Chrome. Google Apps help indirectly by moving the data to the cloud. I am disappointed that for two years we haven’t seen anything come out the Parakeyacquision. Blake Ross and Joe Hewitt are still at FB. Joe is doing some very cool work on the iPhone app and something secret (hopefully desktop-related). Blake’s been so busy he stopped paying his hosting fees.

Ultimately, the Net doesn’t want to be owned by anybody. We are witnessing the wearing off of Google’s goodwill as their hold on non-brand advertising solidifies. The same is likely to happen with Facebook if they aggregate tons more user data and continue to make it difficult to export/share/operate.

So, who’s going to balance out the power of Facebook and Google? One obvious answer is Microsoft. As the underdog in the online space, the company will be willing to play by new rules. When threatened MS rallies and responds well. Well, at least they did. A lot of people have left. Next is perhaps an unlikely candidate–the Mozilla Foundation. With its significant browser share Mozilla has a huge role to play in the evolution of data ownership, privacy and advertising. In fact, this will be the topic of my conversation with CEO John Lilly tomorrow. Apple has a role to play.

About to land. Enough for now.

Just about a year ago Jason Shellen and I started Plinky. A lot happens in a year. Jason and team built a very cool product that eliminated much of the pain associated with staring at the blank text box of your blog editor wondering “What am I going to write about?” Plinky is doing well but the mission of the company has expanded into helping people participate more easily in the conversation Web, which is, well, the fabric of conversations on the social Web. So, yes, it means we are doing something that now also puts Twitter in the picture.

The new name is Thing Labs. What else is new? New address in San Francisco and the addition of Chris Wetherell (co-founder of Google Reader with Jason) and the tech he’s been quietly building. Lots going on. Follow the company on Twitter to stay in the loop.

The initial web site for the latest startup I’m working with through FastIgnite is finally up.

Tollbit is a cloud virtualization company with the lofty goal to do for cloud computing what virtualization did for data centers. Wish us luck and stay tuned by following @Tollbit.

It’s New England Innovation Month. Lots of activities. I’ll be at the MTLC unConference this Friday and at the MITX Awards for sure. See you there.

Eve Ensler (of Vagina Monologues and VDay) had a moving conversation with Kara Swisher at D7. The topic was the violence against women in the Congo and the corporate social responsibility required to create rape-free products. Go to VDAY.org. Read about it.

I’m in Carsbad for the D7 conference. Shoot me a note / DM (@simeons) if you are close by. Event is shaping up nicely. Carol Bartz is on stage now fencing politely with Kara.

Last night I had a good chat with @biz about what it means to add features to products. Will blog it if I find the time.

Got my table at the TechStars digs this afternoon. Guess I’m the first mentor to claim a spot. Place has the right vibe–kudos to Shawn Broderick.