The Startup Solution

A person with a big online presence is calling out Athena for the seed investment she received from a big corporation that appears to be in opposition with Athena’s company’s mission. Heidi points out why founders need to know as much as they can about potential investors before they take their money to avoid being blindsided by an association that may lead to reputational fallout.  More Information: https://www.threshold.vc/podcast/the-case-of-the-compromised-capital Further Reading:  Spot on to the topic in this podcast, Should Climate Tech Startups Accept Money From Big Oil?: https://sifted.eu/articles/climate-tech-startups-big-oil-gas An article about tainted donors, though topics also relevant to tainted investors, Tainted Money and Tainted Donors:  A Growing Crisis: https://johnsoncenter.org/blog/tainted-money-and-tainted-donors-a-growing-crisis Business Insider’s take on the topic: https://www.businessinsider.com/startups-silicon-valley-jeffrey-epstein-problem-2019-8 An article highlighting increasing concern about taking money from Chinese investors due to geopolitical clouds on the horizon: https://www.wired.com/story/chinese-venture-capital-silicon-valley-party-over Here’s the apology statement from Joi Ito, former director of MIT’s Media Lab, about taking money from Jeffrey Epstein: https://www.media.mit.edu/posts/my-apology-regarding-jeffrey-epstein/ Interesting Quora thread on “Catch and Kill” startup M&A: https://www.quora.com/Why-do-big-companies-acquire-and-then-kill-promising-startups

Rudy, a founder in fund-raising mode, received a verbal term sheet. A what? Heidi informs Rudy that there is no such thing as a verbal term sheet and flags all the other issues with the investor’s offer. In this episode, Heidi resets Rudy’s expectations of what is involved in the fund-raising process, including the time it will take to properly diligence investors.  More information: https://www.threshold.vc/podcast/the-case-of-the-verbal-term-sheet Further Reading: Here’s a great piece about whether Term Sheets are legally binding, and what happens to your reputation if you renege on one. Term sheets are typically non-binding in that neither side is obligated to close the deal. But what is usually binding is confidentiality and exclusivity: https://www.jdsupra.com/legalnews/are-term-sheets-really-nonbinding-1765649/ Y Combinator has a great piece on seed fundraising, which goes into detail about debt versus equity here: https://www.ycombinator.com/library/4A-a-guide-to-seed-fundraising Here’s a good post on SAFEs versus convertible notes: https://blog.hubspot.com/sales/safe-vs-convertible-note And, finally, seed-stage investor Chris Neumann on how to diligence a VC: https://chrisneumann.com/archives/how-to-diligence-a-vc   

Simone is a founder in a challenging situation. The only financing she can raise comes with a catch – she needs to do a recap. Heidi reviews how Simone landed in this position, what a recap entails, and the best path forward for the company and investors.  More information: https://www.threshold.vc/podcast/the-case-of-the-radical-recap Further Reading:  This is an excellent four-part series for entrepreneurs that explains how to navigate down rounds and recaps by Eric Ashman, highly recommended! https://www.linkedin.com/pulse/navigating-funding-roadblocks-intro-down-rounds-recaps-eric-ashman A great summary of the legal pitfalls and best practices for a cram down financing from the law firm Gibson, Dunn & Crutcher: https://www.gibsondunn.com/wp-content/uploads/documents/publications/Weirick-Wortmann-Stephens-Barinsky-DownRoundFinancings.pdf From the great Bill Gurley of Benchmark, a comprehensive tome about recaps and other forms of “the party is over” financings. He wrote it in 2016, but it is just as relevant today: https://abovethecrowd.com/2016/04/21/on-the-road-to-recap Here’s an interesting take from Joanne Wilson, an early-stage angel investor, on a recap of a seed company, with additional commentary by Brad Feld, my old partner and dear friend. It covers the danger of too many note financings and also talks about the people/reputation/relationship aspects of recapping a seed stage deal: https://gothamgal.com/2015/07/recapping-a-round  And here’s another interesting take from my fellow Stanford Lecturer and amazing entrepreneur Steve Blank about why recaps/cram downs are a bad idea. I don’t 100% agree with him, but I think his position is excellent food for thought: https://steveblank.com/2022/04/26/cram-down-a-test-of-character-for-vcs-and-founders

What do you do when you want to exercise your startup’s stock options but need to borrow money to do so? Do you take an interest-free loan from your company? Heidi counsels her former student Aisha on why that may sound like a great offer, but the devil is in the details. It’s likely that a loan could lead to painful financial consequences later. More Information: https://www.threshold.vc/podcast/the-case-of-the-dubious-debt Further Reading: Here it is, straight from the IRS, what capital gains are and the rate at which they are taxed:  https://www.irs.gov/taxtopics/tc409 And also, straight from the IRS, how they look at forgiven loans as ordinary income: https://www.irs.gov/taxtopics/tc431 And here’s a comprehensive

Many founders, like Alyssa, worry that a 409a valuation is considered a true market-based assessment of a company’s overall worth or potential. It is not. Heidi points out factors that influence a 409a valuation along with what is not reflected, namely, leadership, team quality, and disruptive potential.  More information: https://www.threshold.vc/podcast/the-case-of-the-409a-freak-out Further Reading: Carta provides a pretty comprehensive discussion of 409a’s here: https://rb.gy/z4vsky While we all think of 409a’s in the context of getting a valuation for common shares, it stems from The Internal Revenue Code, section 409a. A little ‘fun’ (if you think of the Enron bankruptcy as fun) history here: https://www.equityeffect.com/blog/irc-409a-overview-409a-valuations-explained/

An independent director can play a crucial role in mitigating conflicts of interest among board members while also providing valuable input. Heidi explains what an independent director does and why it’s important for a founder to include one on their board. More information:  https://www.threshold.vc/podcast/the-case-for-the-independent-director Further Reading: Every entrepreneur who raises capital should understand how preference structures work and the inherent pitfalls this creates in corporate governance. Excellent article on the topic here: https://thevcfactory.com/liquidation-preference-conflicts-venture-capital Fortune recently published an interesting piece on director independence. While it is mostly aimed at public companies, there are good considerations for private companies too: https://fortune.com/2023/10/16/modern-board-directors-independence PwC issued this handy guidebook to the whys and hows of adding independent directors to private boards, which you can find here: https://www.pwc.com/us/en/services/governance-insights-center/pwc-why-private-company-boards-need-outside-directors-v2.pdf A solid checklist from Underscore.vc for bringing on an independent director here: https://underscore.vc/startupsecrets/add-an-independent-director-to-your-board And finally, when you’re ready to actually look for that great independent director, theBoardlist (https://www.theboardlist.com) can be a great resource for you, as can Bolster (https://bolster.com).

Chester, an early-stage entrepreneur, wants to put terms in place so he can never be fired by his board. Like many founders, he saw what went down with Sam Altman at OpenAI and wants to know what he can do to avoid a similar situation from ever happening to him. Heidi explains why boards are set up the way they are and reassures him that a board and accountability are good for an entrepreneur and their company.  More information: https://www.threshold.vc/podcast/the-case-of-the-infallible-founder

Some ambitious entrepreneurs embellish the truth to achieve their goals. Is this seemingly innocent practice appropriate, or is it a gateway to engaging in illegal activities down the road? Heidi shares why well-meaning people become frauds and the steps every founder can take to catch and prevent this behavior. More information: https://www.threshold.vc/podcast/the-case-of-the-fraudulent-founder

Miles wants to hire an advisor, a well-respected University of California professor but needs help defining the role, setting expectations, and formalizing the rules of engagement. Heidi, an experienced advisor herself, walks Miles through a step-by-step process to help him establish an advisor’s obligations and compensation to ensure a mutually beneficial relationship.  More Information: https://www.threshold.vc/podcast/the-case-of-the-ace-advisor

The CTO needs to fire someone who is awful at their job but is the big brother of the CEO. Heidi recounts firsthand experience of navigating a complex commingling of family and startup dynamics to strengthen a healthy and productive company. More info: https://www.threshold.vc/podcast/the-case-of-the-nepo-nightmare