Startup Founder Agreements

Posted on February 22, 2010 by Simeon Simeonov

I have been thinking a lot recently about how to apply agile development principles to investing and key aspects of startup development such as team building. That’s also the thread connecting my two recent posts on VentureHacks. Both stem from the agile principle of delaying decisions until the last responsible moment. The first post is about agile startup fundraising. The follow-on post is about agile startup team building. If you’ve read and liked these posts, let others know.

The same question came up a few times in different forms in the comments to the second post:

@Nivi

Simeon, can you tell us how you structure ownership and control so you can fire your co-founders if necessary?

This is a complex topic that has a business and legal side to it. I’m no lawyer, so I’ll look at things from a business perspective. I will mention legal terms and example language for illustration purposes only—for details, consult a lawyer. This isn’t just CYA. There are a lot of possibilities and variations that need to be thought through and for that you need legal and tax advice.

This post addresses the lifecycle of founder agreements and the key compensation and control parameters in them. A companion post suggests ten rules for building better founding teams.

Urban legends

Let’s start by dispelling some myths:

  • There is a standard founder agreement. Well, there is and there isn’t. Every major law firm and every VC firm tends to have some type of template. These templates can have meaningful variations, some of which are founder-friendly and some of which are not. Most partners, be they lawyers or VCs, tend to tweak the standard with their own language. Even if you are an experienced entrepreneur, you’ve probably only seen a few founder agreements in your life. Almost anyone can benefit from a great lawyer or an adviser who’s seen dozens of these from different law & VC firms.
  • All founders have the same agreement. Yes, it is convenient for all founder agreements to be based on the same template with the only difference being the number of shares. Don’t confuse a convenience with a requirement. In the last four companies I’ve co-founded, there were several founder agreement types. In two cases this was because of the special role I played as a part-time co-founder. In one case the CEO had a different vesting schedule because he had spent a lot more time than the rest of the founding team on the idea. In another case, for good reasons, four founders had three meaningfully different agreement types.
  • Founder status == founder agreement. Founding status can be bestowed on anyone. That’s a decision a founding team can make for many reasons. As long as the decision is public and definitive, from an external perspective there is no issue. This can be a convenient shortcut to separate someone’s status (founder) from their role (employee or contractor or advisor, etc.) and the legal documents specifying its rights & responsibilities.

Which founder agreement?

There are several critical points in a startup’s life when founder agreements are put together.

There tend to be verbal agreements between founders for a period of time before anything is put to paper. Lawyers tell me that in many cases verbal agreements are enforceable, especially if someone did work based on the verbal agreement. It helps to communicate and set expectations clearly. It also helps to have some discoverable record of the agreement. An email would do.

At some point pre-incorporation, the founding team may create a written agreement, often in the form of a letter. It outlines key points of agreement between founders around IP ownership, equity ownership, vesting, etc. The FastIgnite one is two pages. The goal of the letter is to be simple and readable so that everyone is comfortable and aligned on the main issues. Perhaps the most important paragraph is the pre-formation agreement. It requires the various parties to behave during incorporation in a way that effects the agreement. It can be something along the lines of:

Pre-Formation Agreement.  If the addressee of this letter consists of one or more individuals, rather than a business entity, the individual(s), by his (their) signature(s) below agree(s) that they will cause any business entity formed by them within 24 months of the date of this letter agreement to conduct business in the Field of Interest to enter into an agreement with me identical to this letter agreement, whereupon this agreement shall become void.  If such individuals do not form a business entity to conduct business in the Field of Interest, but instead sell or assign their developments and technology in the Field of Interest to an unrelated party, I shall be entitled to [this will vary based on the type of founder] of the net consideration received by reason of such sale or assignment.

Pre-incorporation, removing a founder is complicated primarily by the potential lack of clarity around his or her rights and obligations and hence the consequences of the removal. For example, without a clear vehicle (a company) to contribute intellectual property into, a founder who walks away may mean that the future company won’t own its own IP. This is typically not a problem, unless the company becomes very valuable and the founder who walked away decides that she is owed something.

During incorporation, the couple of pages of this letter will be turned into somewhere between 20 and 50 pages of mostly boilerplate legalese. The number of separate documents may vary but they fall into two categories:

  • Those related to equity, typically a restricted stock purchase agreement (RSPA) and associated escrow and other agreements.
  • Those related to other matters: IP assignment, invention disclosure, non-solicitation, non-competition, termination, etc.

At this point, there is a precise, well-defined legal framework for resolving conflicts that can’t be addressed through other means. However, founder agreements are not set in stone and it is common for them to be tweaked by a little or a lot during the first financing by professional investors. How to handle that or avoid it altogether is something I’ll do a post on if there is interest. [more details]

Founder roles, agreements and removal strategies

Different founders contribute different assets and capabilities and can play multiple roles. Their agreements tend to reflect this and, hence, the strategies for a founding team to remove these founders differ. Note that investors have additional tools at their disposal but that’s a separate topic.

  • Employee. Compensation is a combination of cash (post funding) and common equity that is subject to vesting if professional investors are involved. There is some up-front vesting acceleration. The common number is 25% but, depending on the length of time and contributed resources, it can be up to 50%. (See my post on the best vesting schedule.) The rest of the equity typically vests monthly with no cliff for 3-5 years. Founders have rights as shareholders. They have voting rights which may entitle them to force or veto certain key decisions, e.g., hiring or firing the CEO, selling the company, raising money, etc. You need to understand the voting thresholds for key decisions and think very hard about whether you want to allow any one founder to have too much control. If you are the lead founder, this may not be an issue but it should be an issue for the founding team as a whole. Another issue to watch out for is any significant vesting acceleration on termination without cause outside of a change of control (an exit). A little bit is OK. A lot is unreasonable. Yet another issue is the price at which the company can repurchase unvested shares. To make this cheap for the company, you want the price to be the par value of the shares.
  • Investor. Founders who also invest get additional equity in the company with no vesting. Some get common equity for their investment. Smarter founders structure things such that they get preferred equity together with other investors. The smartest founders who put money in their own businesses put it through a separate preferred class of stock before other investors come in. As preferred shareholders they will have additional rights. With the right legalese, even a small shareholding can exert a huge influence and make it near impossible to remove the founder. The only way to remove their equity holding in the cap table is by buying them out or through a recapitalization of the company. In this case you have to consider whether they are common or preferred holders and, in the latter case, their anti-dilution protection, pay-to-play provisions and willingness to participate in the recap financing. A much better approach is to restructure their holding during an investment, at the point of maximum leverage.
  • Advisor. The structure depends on the nature of the advisory work. Very early on, if the equity ownership is small, the advisor equity may have no vesting. An example would be when someone gives you an idea and you run with it without their involvement. Typically, advisors tend to have shorter vesting periods (one or two years). If you like them and they have been helpful, you sign them up for another term. Sometimes, the vesting is milestone-based (upon the close of a financing) or performance-based (signing up customers, doing deals, recruiting). Advisors tend to have 100% acceleration on change of control. Typical advisory agreements have simple termination clauses. As long as that’s the case, there should be no major issues in removing an advisor founder.
  • Service provider. Like the advisor role, a service provider can do many different things. The difference is that there is some type of cash component or cash equivalent value associated with the services. There are multiple ways to handle this before the company has cash. It can be deferred, with or without interest, to be paid after a financing or once revenues start coming in. Alternatively, it can accrue into equity at some pre-defined price-per-share, usually the next round’s, perhaps with a slight discount. For example, you hire a consultant for five months at $10K/mo and then you raise $500K on $1.5M pre. For her services, the consultant will own common stock equal to $50K/$2M or 2.5% of the fully-diluted capitalization of the company. If equity compensation and vesting are aligned with how value is delivered, terminating a service provider founder should be no problem.
  • Board member. Board members differ from other parties in that they are purposefully difficult to remove. Therefore, they tend to worry less about vesting schedules. Founder directors often get the same initial acceleration as employee founders. They get 100% acceleration on change of control. Independent of shareholder rights considerations, whether it is easy or difficult to remove a founder board member depends on the rules of board composition. Be wary of board seats by entitlement. Rather than giving board seats to individuals, give them to (groups of) classes of equity and check whether the voting process doesn’t automatically give any one founder the right to be the board member. If a board member founder is not entitled to a seat, then there are various other processes described in the bylaws which may affect his removal.
  • Executive board member. Typically, the agreement is a mash-up of a board member and a service provider agreement. The usual role that fits this is a founding executive chairperson. Initial vesting typically matches employee founders. Further vesting accelerators are common, e.g., on follow-on financings or the recruitment of a CEO. The removal strategies are the same as for a board member.

The same person can be in multiple roles and may even have multiple agreements. While there are no “best founder agreement structures,” just as there are no best vesting schedules, there are certain principles of approaching founder agreements that can be helpful in building stronger and more agile founding teams. Read the next post in the series for ideas on how to build stronger startup teams.

Let me know what you think in the comments or on Twitter @simeons.

Posted in startups, VC, Venture Capital | Tagged , , , , , , , | 76 Comments

What it takes to make the Web more personal

Posted on February 5, 2010 by Simeon Simeonov

Tom Pinckney has written a great post on GigaOm about the new kinds of processing companies have to do to create a highly personalized experience for users.

My comment is still in moderation, so in the spirit of the real-time Web, here it is:

Tom, great post. The problem is spot on. The solution makes one key assumption — that you can’t approach the problem with pre-computation.

That’s true for a service like Hunch which sees a tiny amount of data about me, especially when I first show up. Given how little you know about me, you have two choices: either you pre-compute info in an impossibly large space, which is impractical, just as you describe, or you do the type of real-time processing which is much more effective. So far so good.

But that’s not necessarily the best way to approach the problem from the standpoint of someone who had a lot of data about me, e.g., Google or Facebook or even Amazon. The set of Internet-connected humans is small from a computational standpoint and the meta-data trail we leave is growing at a much slower rate than compute/storage. Pre-computing starting with 100 dimensions doesn’t work. Pre-computing starting with a few billion humans works really well, if you have a lot of data on the humans.

This is one of the fundamental advantages Amazon, FB, GOOG and others have compared to point services such as Hunch. It’s not a fair fight. So you have to innovate like crazy to compensate. Rock on!

People who do data analysis and machine learning have learned one thing through experience (can someone claim it as their Law?): to solve a complex problem with little data you need fancy technology but you may be able to solve the same problem with much simpler technologies if you have a lot of data.

So, the big guys have a fundamental advantage. However, there are ways to even out the playing field. It starts with users owning their data and giving it to a trusted third party that can do the same type of pre-computation the big guys can do. Then you put the right access control mechanisms allowing users to share this info with third party services like Hunch.

Facebook already does something like this through F8. Facebook apps get access to a lot of valuable information not available through other means. But Facebook doesn’t share any really interesting pre-computed analytics, at least not right now. They are the smartest of the big guy bunch so far. With the exception of the the string of privacy faux pas, I’ve been consistently impressed with their strategy.

Posted in Facebook, startups, Web 2.0 | Tagged , , , , , , | 1 Comment

The best vesting schedule

Posted on February 2, 2010 by Simeon Simeonov

There is no such thing as the best or optimal vesting schedule in a startup. That doesn’t mean current vesting schedules are really good but it does mean that many of the so-called best alternatives are not much better.

No such thing as best

“Best” as a concept has natural appeal. It’s great to be best, to know you’ve done something in the best possible way, etc. It tickles our pride and makes is feel good about ourselves. In the process, we tend to forget that there are at least two ways to evaluate the quality of decisions: as determined by current information, given knowledge & experience, and as determined by hindsight.

Hindsight is the harshest and probably best judge. Even then, it’s hard to make accurate judgments since the decisions made earlier, especially if they were made years before, could have influenced outcomes and hence affect the accuracy of hindsight. Still, if we are to talk about “the best vesting schedule,” I can’t imagine anything better than a hindsight test. Did the vesting schedule in a startup help or hurt returns for various types of equity holders? Which is where we immediately get stuck on two issues about how we define “best”.

First is the notion of pareto optimality. A pareto optimal situation is one where we cannot make someone better off without making someone else worse off. Since vesting affects anyone who leaves before being fully vested negatively and everyone else on the cap table through the repurchase of unvested shares positively, almost any vesting schedule is pareto optimal. Therefore, we can’t talk about a best vesting schedule for everyone. We can only talk about a better vesting schedule for certain parties, which requires judgment as to some type of preference order. Do investors come before employees? Do execs come before individual contributors? Do founders count for more? Do you penalize people who’ve worked for years at the company and then leave and reward the ones who joined a year ago? I don’t know about you, but I don’t have set answers to these questions. A lot depends on culture and should be within the control of entrepreneurs, execs and investors. They can set it up however they think makes sense and then others can make decisions about whether to join as employees or investors later.

The second issue is simply that a company has to pick vesting schedules months and years before major events such as product launches and an eventual exit. We all know how uncertain things are with startups. To say that one can pick some type of “best” vesting schedule that positively impacts returns to more than one type of holder regardless of whether the company exits for $3M in 18mos when everyone on the founding team is still there or for $350M in five years after three different CEOs is, to say the least, improbable.

Standard vesting

Just to get our bearings, the so-called “standard” vesting schedules many companies use are along the lines of:

  • Founders: 25% up front and the rest monthly over 3-4 years.
  • Employees: 25% after one year and the rest monthly over 3-4 years.

An example alternative vesting schedule

A comment to my VentureHacks article on building agile founding teams asked about an alternative vesting schedule proposed by Basil Peters, a successful super-angel. Basil’s proposal has three key points, reproduced here:

  • 50% of the shares daily over a three year period; and
  • the other 50% when there is a sale of the Company.
  • All vesting for senior employees accelerates on a sale of the Company.

My summary analysis is that this is an interesting vesting approach that is more investor-friendly than founder- or employee-friendly and that is likely to work better in the case of companies that have small exits in short periods of time and may actually hurt returns in the case of larger companies. Point by point:

  • 50% daily vesting over three years
    • The 50% is related to the next bullet, I’ll address it there.
    • I don’t see a big difference between monthly & daily vesting. Daily is probably better. As rule, I like continuous functions–discontinuities and kinks sometimes influence decision-making in bad ways. That’s why I think quarterly vesting is a terrible idea–someone who’s ready to leave may stay on as dead weight for a couple more months to get that extra bit of vesting.
    • Three years for 50% is a bit long but that actually depends on the size of the initial grant (is it above or below market?), which is something the proposal doesn’t discuss.
    • No vesting cliff means there is a penalty to pay for people who don’t perform well or leave after a short period of time. I don’t have a problem with this–same argument as why I prefer daily or monthly vesting compared to vesting over longer periods of time. Perhaps it will make companies more careful about who they hire.
    • No founder acceleration is unfair to the effort founders have put in prior to funding the company. If founders have a choice, they may prefer to raise money from a different investor whose ideas about vesting do include acceleration. Therefore, this clause may actually hurt an investor’s deal flow / win rate and, therefore, returns in the long run.
  • 50% on exit
    • The argument here is that up to 50% of the value is generated close to the time of exit and by running a great M&A process. This may be true for exits that are near rounding errors on the acquirers’ P&Ls. It’s certainly not true for larger startups most of the time. Analysis by M&A powerhouses such as Updata and Jeffries/Broadview suggests there is such a thing as a “market rate” for exits and it’s hard to get far outside the valuation curve of the day. Yes, there is such a thing as a strategic premium and I do agree with Basil that very few companies know how to make trade-offs between investments that grow their strategic premium and investments that just grow the business. The bigger the company, the more inertia there is and the harder it is to make changes that quickly impact the strategic premium. M&A execution also matters but I haven’t seen any data that suggests that M&A execution, independent of the company’s state, can influence exits on a regular basis by that much. If anyone has that data, I’d love to see it.
    • Holding equity/option grant sizes constant, withholding 50% of vesting till exit seems grossly unfair to founders and employees. What if a company takes six years to exit? Why should an engineer who built + helped launch many versions of the early product and left after four years be penalized that the company hasn’t exited yet? Why should a founding CEO who hits her ceiling, brings on a successor CEO and leaves after three years be penalized for doing that?
    • There is an additional macro industry impact. A provision like this restricts labor mobility perhaps in a bigger way than non-competes. Vesting shouldn’t be a tool to force founders and employees to stay with a company. It should be a tool to connect their equity stake to their continued contribution in building the business.
  • Acceleration on exit
    • The way I read this, it implies full (100%) vesting on exit. This may be OK in the case of small companies that are being acquired for their technology as opposed to the ability of their teams to create additional value. If an acquirer doesn’t care about the incoming team in an M&A situation, there is little impact to the acceleration. If, on the other hand, the acquirer wants the team then full acceleration on vesting can depress exit values to an extent. The acquirer will need to create a retention package, say $5M, for the team since there will be nothing transferring over through the acquisition that has retaining value. That retention package increases the total cost of the acquisition by $5M. If the acquirer was willing to pay $100M at most in total, they’d only be willing to pay $95M of that directly to the company.

Let me know what you think in the comments or on Twitter @simeons.

Posted in startups, VC, Venture Capital | Tagged , , , , | 30 Comments

The entrepreneur’s dilemma

Posted on January 22, 2010 by Simeon Simeonov

“The entrepreneurs dilemma” is a term that @azeem came up with in reference to a post on how to raise money without lying to investors on VentureHacks. The point I wanted to make was that entrepreneurs often have to chose between being honest about the future and hearing “no” from investors more frequently and being overly-optimistic in their outlook. On the surface, it may seem that the latter is a net win but that’s not true. Over-promising and then under-delivering can have big negative consequences.

As with many blog posts, the comments are very interesting. Here are some highlights.

Antone Johnson

Excellent article. As a lawyer, there’s only so much wordsmithing I can do in the financing documents to protect founders from their own promises that reflect unrealistic assumptions. Of course most financing rounds never lead to litigation, but if things crash and burn, and finger-pointing and recriminations ensue, I’d rather not have excessively rosy five-year financial plans floating around as Exhibit A for the plaintiffs’ lawyers.

Denny K Miu

I think bootstrapping is very important for both entrepreneurs and for the VC’s. In my experience, the only way to have a meaningful conversation with VC’s is when we are already shipping products. I usually don’t even prepare a separate PowerPoint presentation. Instead I start the company by saying, “Let me show you how I convince customer ABC to buy our product”. Life is good after that.

GK The pertinence of forward looking sales projections depends on the stage of the business. If you raise capital from investors who pretend not to understand this, you will be setup for financial incongruity.

Consider 5 distinct business stages:
1. Incubation
2. Build Product
3. Early-Adopter Success
4. Repeatable Sales
5. Scale the business

In (1,2) sales projections are useless, the time to prepare them is wasted effort.
In (3) sales projections are presumptuous; you have yet to comprehend WHY and HOW the buyer will commit.
In (4) sales projections become essential to internal planning.

Raising capital between stages 3,4, a 1-year plan is valuable, surfacing the right questions/equations within the business, and with potential investors. A 3-5 year plan is chimerical until stage 5 and the shift preceding it.

Posted in startups, VC, Venture Capital | Tagged , , , , , , | 1 Comment

Three rules for buying your friend’s company

Posted on January 21, 2010 by Simeon Simeonov

Better Advertising bought Ghostery, an awesome Firefox add-on that David Cancel built. Read the Better Advertising take and David’s take.

Other than the fact that Ghostery is awesome and a perfect fit for the mission at @betterads, the reason I’m writing about this is that I’m co-founder of Better Advertising and David has been a friend for some years. So my company bought my friend’s company. Everything went well and here are three lessons I learned about buying a friend’s company:

  1. The right start. Many deals never get done because the initial approach sets the wrong tone or frames the discussion in an awkward or confrontational manner. If you know both side well, you can help establish the right, fair and balanced tone and positioning from the start because of both understanding and empathy.
  2. Deep alignment. This type of alignment makes the relationship strategic and sets a partner-like tone for any follow-on negotiations. This takes trust. Trust takes time. Time is always short. By understanding both businesses and by putting your credibility at stake, you can accelerate the trust-building process. Opportunistic/tactical deals often skirt by the trust-building process, which can have negative effects on the outcome as well as on the person who has a relationship with both sides.
  3. Minimize conflicts. If there is another way,  don’t be involved directly in the financial negotiations. Instead, use your understanding to put yourself in the shoes of both sides and, if asked, advise on how to reach a win-win outcome.

If you’ve acquired a friend’s company, I’d love to hear from you in the comments or on Twitter. I’m @simeons.

Posted in startups | Tagged , , , , , | 1 Comment

What constitutes a startup mistake?

Posted on January 5, 2010 by Simeon Simeonov

Through a tweet from David Skok, I was reminded of a Paul Graham essay on the 18 mistakes that kill startups. Here they are:

1. Single Founder
2. Bad Location
3. Marginal Niche
4. Derivative Idea
5. Obstinacy
6. Hiring Bad Programmers
7. Choosing the Wrong Platform
8. Slowness in Launching
9. Launching Too Early
10. Having No Specific User in Mind
11. Raising Too Little Money
12. Spending Too Much
13. Raising Too Much Money
14. Poor Investor Management
15. Sacrificing Users to (Supposed) Profit
16. Not Wanting to Get Your Hands Dirty
17. Fights Between Founders
18. A Half-Hearted Effort

I was looking at the list and decided to do some playing around with it. Here is the list of what I’d consider the no-brainers if you are trying to build a significant company:

2. Bad Location
3. Marginal Niche
4. Derivative Idea
6. Hiring Bad Programmers
7. Choosing the Wrong Platform
10. Having No Specific User in Mind
12. Spending Too Much
15. Sacrificing Users to (Supposed) Profit
14. Poor Investor Management
16. Not Wanting to Get Your Hands Dirty

A smart startup should have reasonable control over items on the list above. The rest of the “mistakes” may only be identified in retrospect. As such, I’m not sure I’d consider them true mistakes. To me a true startup mistake is when you make a bad decision given available information or when you don’t accurately understand you need more information. Often startups make decisions which look great given available information but turn out to have been poor decisions as new information becomes available. This is life. The best remedy is a capable and flexible team and even that is not a guarantee. Flexibility is key, though, as what constitutes a “great” team today may not be what is required of greatness in the months ahead.

Here are the rest of the items from Paul’s list, with my own groupings

1. Single Founder
17. Fights Between Founders

Yes, getting the founding teams right is hard. I agree there are issues with single founders and there are plenty of issues in quickly-assembled founding teams. No, co-founders who’ve known each other for a decade are not a recipe for success either. I’m not sure one can label the general challenges people have with founding team formation a mistake. How much of that is really in the control of the lead founder at the time of making a founding team formation decision?

8. Slowness in Launching
9. Launching Too Early

Again, sometimes it is easy to know when’s the right time to launch but often we can only make that decision in retrospect. Too many exogenous factors: competitor behaviors, industry dynamics, customer adoption rates, etc.

11. Raising Too Little Money
13. Raising Too Much Money

Another example of determination that’s typically made ex-post. Just think about all the startups that got caught by the crash in 2008 with too little cash on hand. Had there been no crash, they may have done just fine. Should they be blamed for not seeing the crash? In good times, some of the companies whose CEOs always want plenty of money in the bank are blamed for raising too much money. In 2008 they were geniuses.

5. Obstinacy

The obstinacy point is about the delicate balance between vision and irrational belief in the face of solid data. Typically, only the future tells whether the entrepreneur is right. Statistically speaking, the obstinate entrepreneurs who don’t accept market feedback fail a lot but sometimes they also succeed wildly because they, after a long time, end up at the right place at the right time. After reading a post from Fred Wilson a few weeks ago, I tweeted: “perseverance is a strategy for success but also for slow, expensive failure.”

18. A Half-Hearted Effort

The last point is one I cannot argue with from the standpoint of any single startup idea. However, from the standpoint of an entrepreneur who has the ability of working with more than one idea and with multiple ideas over time, I’m not sure that being 100% focused on one idea at a time leads to the best outcome. Locking oneself into a startup has a significant opportunity cost, especially if you really try hard over time to make it work. Given the low startup success rate, one can argue that it is more important to pick the right startup as opposed to try really hard to make the current startup work. That’s particularly important in the very early days.

Consider an extreme example. If you were considering starting a client-server company in 1993, should you be doubling down in 1994 or perhaps consider waiting and seeing about this Web thing?

Posted in startups | Tagged , , , , | 16 Comments

Better Advertising backs self-regulation

Posted on December 7, 2009 by Simeon Simeonov

Better Advertising has a new web site. Check it out.

Also, our corporate blog is up. The current post outlines the three pillars of behavioral targeting self-regulation:

  • Education, to empower consumers
  • Transparency, to make clear who is doing what to whom
  • Verification, to make sure everyone is doing what they said they were going to do

It’s pretty simple stuff , except that it needs to happen billions of times per day in a privacy-safe manner without slowing down browsing and ad serving.

It’s the kind of problem that brings together people who like tough nuts to track. The Better Advertising team brings a lot of experience to bear from About.com, AOL, Carat, DoubleClick, Etsy, Federal Trade Comission, Google, Isobar, Macromedia, Right Media, TACODA, ThomsonReuters, TrustE and Yahoo.

Posted in Advertising, FastIgnite, startups | Tagged , , , , , , | 2 Comments

Exploring privacy

Posted on December 5, 2009 by Simeon Simeonov

The title of this post is also the title of the first of three public roundtable discussions by the FTC focused on privacy online.

The Federal Trade Commission will host a series of day-long public roundtable discussions to explore the privacy challenges posed by the vast array of 21st century technology and business practices that collect and use consumer data. Such practices include social networking, cloud computing, online behavioral advertising, mobile marketing, and the collection and use of information by retailers, data brokers, third-party applications, and other diverse businesses. The goal of the roundtables is to determine how best to protect consumer privacy while supporting beneficial uses of the information and technological innovation.

The first roundtable is on Monday in DC. The Better Advertising team will be there.

We believe that it is an opportune time for the online advertising industry to work with privacy groups and regulators to improve the mechanisms for engaging consumers and doing so in  a transparent and trustworthy manner. It is our mission to facilitate this.

Dave Morgan knows this space well. He is CEO of Simulmedia and previously founded and ran TACODA (where I first met him) and Real Media. Dave has a piece in MediaPost that is a good ouline of some of the key issues. I recommend it.

Posted in Advertising | Tagged , , , , | Leave a comment

Competing for competition’s sake

Posted on November 28, 2009 by Simeon Simeonov

I don’t agree with Vivek Wadhwa that losing a business plan competition is better than winning it. However, I do think that business plan competitions force many teams to aim for the wrong target. Here is the comment I left on the TechCrunch post:

I’ve judged the MIT 100K for many years and am currently an EIR at the MIT E-Center. The biggest problem with business plan competitions is that they skew incentives. An entrepreneur’s incentive should be to build a winning business, not win a business competition. Conversely, good business plan competitions should aim to help build great companies.

The benefit of business plan competitions is that they pace a team and force it to deliver on a schedule. Many teams benefit from that process and from the feedback they receive along the way.

The biggest problem I’ve experienced as a judge is that there is no diligence process. Judges are supposed to pick winners based on the claims of the entrepreneurs alone (and a bit of face-to-face time). Without diligence, the teams have an incentive to exaggerate as there is no penalty for slight exaggeration. Judges can only react to gross exaggerations. Teams that are in touch with reality, customers and that understand the challenges involved in building successful businesses have a higher likelihood of being subtly penalized during judging when reviewed alongside folks more likely to over-promise. No, it’s not easy for judges to correct for this.

The solution is to introduce diligence as an integral part of business plan competitions. The suggestion I made to the 100K was to organize a diligence team that runs alongside teams participating in the competition. The goal of the diligence team is not to poke holes at the entrepreneurs’ dreams. It is to make the teams and the companies they want to build stronger and more likely to survive in the real world. And, yes, in the end, hopefully more deserving companies would win and there will be a higher correlation over time between companies that win and companies that succeed. Wouldn’t that be nice?

Alas, the student-organized MIT 100K competition is finding little interest inside the MIT and Sloan student bodies to participate in the diligence process.

In the end, it is the entrepreneurs that lose.

Posted in startups | Tagged , , , , , | 14 Comments

Better Advertising Launches

Posted on November 19, 2009 by Simeon Simeonov

Exciting day today. Better Advertising just came out of stealth. I’m acting CTO & co-founder, much in the way we started Plinky/Thing Labs last year. In fact, I got to know Better Advertising CEO Scott Meyer though the Plinky diligence process.

It’s been very rewarding to work with the founding team and our advisors, especially because the company’s mission is to improve the relationship between consumers and advertisers online.

Without going into too many details at this point, here is what the company is about:

Better Advertising is a platform that simplifies the compliance process for the FTC’s and IAB Coalition’s Self-Regulatory Principles for Online Behavioral Advertising. Our team consists of online advertising and privacy veterans and who have been working closely with many leading ad agencies, networks, marketers and trade associations to develop this platform. Better Advertising’s solution will increase consumer trust in online advertising, and allay regulatory and legislative concerns by helping the industry deliver the kind of accountability program that makes self-regulation a success. By providing a level of transparency that ensures both consumer privacy and ongoing brand protection for marketers, Better Advertising will foster the continued growth of the interactive advertising industry.

If you read this blog you are probably familiar with my views on targeted advertising. Better Advertising is not in the ad targeting space. Instead, it will facilitate visibility, transparently and accountability through the advertising ecosystem, allowing those players with respectable business practices to operate at scale.

Posted in Advertising, FastIgnite | Tagged , , , | 3 Comments