How to Start a Business

Step 11 Some Dumb Ideas

Here's a list of dumb things that you should consider not repeating.

First dumb idea: We spent a lot of time soliciting and negotiating investment directly into Squid Labs. For a chunk of cash, we were prepared to sell some fixed percentage ownership in the company (and hence ownership in any spin-off or licensing deals). Since we had a non-standard set of incorporation documents, were an LLC and could not issue preferred stock, and -- for one potential investor at least -- were doing cash rather than accrual accounting (or maybe the other way around?) the terms we got were not good. Investors want a simple story, and ours was anything but simple. It took a huge amount of time and yielded nothing. In the end, it's a good thing we never took an investment in Squid Labs because we would be totally regretting it now.

Second dumb idea: Squid Labs was founded as an innovation factory. The plan was to come up with tons of ideas, test out the physics or market by building an initial prototype, and then license the technology or find a management team and spin off a company based on the technology. The partners at Squid would remain focused on innovation and starting new things while the various successful prototypes grew into real products, services, and companies. Despite some very good technology -- strain sensing rope, for example -- we were not able to license anything. Perhaps it was bad luck, or simply lack of a track record. Next, finding management teams also proved impossible. Any founder-class individuals who could take a nascent technology and turn it in to a real product already had their own ideas and companies, and weren't interested in ours. Dan touches on some of these points and more, in this blog post, Advice for the budding inventor.

Third dumb idea: Ownership of the company had no vesting or vesting-like provisions (vesting is to give an immediately secured right of present or future enjoyment). My advice to anyone starting a company is that everyone, founders included, should vest; a 4-year period with a 1-year cliff is a good starting place. Acceleration on change-of-control can protect everyone in the event that the idea really takes off, but anyone unwilling to accept some form of vesting isn't dedicated.

Fourth (somewhat) dumb idea: Drafting our own LLC agreement was inexpensive and captured much of the spirit of what we wanted. However, once we were spinning off companies and getting venture capitalists involved in those companies, that document turned into a big liability. To invest, the VC's insisted that lawyers review everything, and because our document was something out of the ordinary, this incurred significant additional expense and time. Additionally, the spirit of the Squid agreement was neutered: Our lawyers determined that instead of making decisions based on majority or super-majority votes as specified in our agreeement, all decisions should be unanimous to mitigate risk. While we did reach unanimous consent in every case, this again required additional time and expense, and, in my opinion, didn't appreciably change the risk-profile of the spin-off company. (Some of my partners don't share this perspective, which is a testament to the challenges of drafting these agreements.) So, if you can spend the time to understand some existing structures, I still think writing your own LLC agreement is a good idea, but understand that if you will eventually want outside capital, that document will be subject to more scrutiny than originally intended.