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Of Broken Cap Tables And Meta Startups

You’ve got an idea.  Now what?  It takes a lot of time to learn the difference between what’s indispensable and what’s not. Enter the meta-startup: startups designed to help other startups.

About a year and half ago when I first had to (or was forced to) directly manage a cap table, I noticed the same thing that Henry Ward from eSharesInc mentions in his popular post about Broken Cap Tables. Back then, I wrote a post explaining cap tables in 2013  in an effort to help other entrepreneurs get started with the right kind of structure. The only things I found were really technical explanations of what it means to have a cap table and very primitive examples of how to do it using Excel.

Before my personal experience with cap tables, I had no idea how difficult it could be to manage a cap table on a spreadsheet and I wondered why anyone would manage it that way. Moreover, I really didn’t want to do manage something that important on a spreadsheet –– for me, the issues were obvious. If my company was to succeed I needed an easy way to keep things automatically updated and easily sharable. A spreadsheet is the furthest from that. Also, who really wants to spend so much time just typing away numbers and figuring out formulas when you can build software that automates the process.

After multiple tests with a variety of cap table tracking services like captable.io and some terrible open-sourced spreadsheet templates provided by VC firms, I settled for capshare. I exchanged emails with the founders and got on the phone several times to help them figure out some ugly bugs and I got a great response. As my company continued to mature, the needs became more complex and they addressed the needs head on.

The killer feature on capshare for me? — An old school downloadable cap table spreadsheet properly formatted to share with your spreadsheet obsessed  accountant and lawyer and also with investors and advisors. There are many things CapShare needs to fix, starting from the onboarding process, but the tool is tailored to solving startup tracking issues brought up by Henry Ward.

However, in checking esharesinc.com I see a wonderful feature which makes eshares very interesting: The total cost to convert. So, if you have been saving money by not doing anything with your cap table and keeping a running list of your angels, founders and employees, this feature can make your life very easy. I am inclined to try the service and I am honestly expecting nothing less than awe. If eshares can take away the pain of having to worry about issuing shares, options, notes and preferred certificates, then I’m on board. Also, there is no ongoing monthly cost. The reason for this, I guess, is that a cap table does not change a lot. It either changes a little or it changes dramatically upon funding. That’s of great value to a cash poor entrepreneur.

eShares is the perfect example of a meta-startup, a startup helping startups. Paul Graham’s essay “Doing Things That Don’t Scale” expands on this concept.

Startups building things for other startups have a big pool of potential users in the other companies we’ve funded, and none took better advantage of it than Stripe. At YC we use the term “Collison installation” for the technique they invented. More diffident founders ask “Will you try our beta?” and if the answer is yes, they say “Great, we’ll send you a link.” But the Collison brothers weren’t going to wait. When anyone agreed to try Stripe they’d say “Right then, give me your laptop” and set them up on the spot.

There are startups that index startups. Startups that measure other startups‘ capabilities, traction, team, growth and investment. Startups that do lead-gen for other startups. Startups that help startups manage cap tables. This trend is fascinating as it reflects the same thing that happens in the physical business world. Just think about the thousands of agencies helping other agencies do their work.

When someone comes up with an idea and starts a company, there is already an ecosystem in place to help those companies grow faster.

Most meta-startups will never be as valuable as the truly original ideas but they do make the ecosystem a lot more fertile. Startups like Angellist, esharesinc, MatterMark, InVision and many many others are using software to provide investors a view into the growing ecosystem.

A great recent example is Yozio, a company that helps Pinterest, AirBnB and Washio grow their app users organically. These startups are usually valued at a fraction of the giants they serve but they are a very interesting and often profitable from the start.

The needs don’t stop at intelligence for investors or cap table management. There are huge holes in budgeting, cash flow management, lead generation and product design. Companies like IDEO have a proven model but that model has not been translated to the internet.

Getting back to what you need as a founder, here are two questions that I am asked often:

What are the main things a technology startup founder needs to know about?

The top touch points are cap tables, budgeting, burn rate management, convertible notes, conversion caps, valuation, vesting schedules, stock grants, stock options, common stock, preferred stock, dilution protection, warrants, single and double triggers, cash flow management among the most commonly used methods.

Does your startup need a lawyer? How do I engage one?

If it is your first startup, the answer is yes. If you’ve done it before, the answer is, it depends. Seek  a lawyer that you can trust and who can guide you through the complicated waters of compliance, tax responsibility, IP and contracts. The standard deal with a law firm that is used to working with startups is a combination of deferred fees with equity. This implies an equity stake that is charged on top of the deferred fees. Your lawyers effectively become your first investors.

We had some great luck with Perkins Coie as our counsel for one of our startups. Buddy Arnheim, one of the partners at the firm, was our legal counsel and we spent invaluable hours with him and his staff — they brought us up to speed with all the needs of a nascent startup and the nuances of negotiating contracts. They provided templates for cap tables, budgets and other legal documents. Most importantly, they provided access to their contacts and showed us the way.

 

6 Comments

  1. Great post Antonio ! I found the meta startup trend very interesting. There is always opportunity and many times servicing the startups is the better bet.

  2. Antonio, this is a solid piece and a very helpful one at that! The concept of a meta startup is appealing proving that there are ways to capture value or infuse an ecosystem with fresh momentum. Thanks for providing solid tools and insights into the journey as a startup founder. Keep em’ coming!

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