The Case of the Elusive Earnout

In this episode, Heidi discusses how founders tend to swing between two extremes — thinking it's not all about them (when actually, it is), or believing it's only about them and their company (when it really isn't). She'll review both sides and point out what founders often get wrong — and how to get it right. More information: https://www.threshold.vc/podcast Further reading: On the occasion of our 40th episode, here are the names and links to the 'village' of people responsible for making this podcast a reality! My partners at Threshold: https://threshold.vc/team Carol Wentworth, my creative partner for all 40 episodes: https://www.linkedin.com/in/cawentworth/ Producer/Director Nick van der Kolk: https://loveandradio.org/     Forrest Lawrence/Working Title Recording Studio: https://workingtitlerecordingstudios.com/ Albertson Design for original concept, production, and creative artwork: https://albertsondesign.com/ Music composer Brad Wells: https://www.roomfulofteeth.org/bios/brad-wells And thanks to our own Wendy McArdle, who manages distribution

While the internal dynamics of a VC firm may feel like a black box, you can often infer what's going on based on how your VC is acting – if you know what to look for. In this episode, Heidi explains why many VC behaviors that seem confusing or inconsistent can make more sense once you understand the inner workings of venture funds and firms.  More information: https://www.threshold.vc/podcast/inside-the-black-box-of-vc-behavior Further reading: Here's a good post about when preferred converts to common, including in an IPO, as I brought up in this episode: https://www.startupventureadvisors.com/when-should-preferred-stock-be-automatically-converted-into-common-stock#:~:text=When%20a%20startup%20goes%20public,a%20minimum%20aggregate%20offering%20amount. Here's a short but sweet summary of how VC carry works: https://www.angellist.com/learn/carried-interest Mark Suster has written some great material on understanding venture capital. His post on crossover investments will help you understand why VCs don't tend to do them: https://bothsidesofthetable.com/can-vc-s-invest-across-two-funds-5ee7313808e7 Here's a link to my own prior episode about recaps: https://threshold.vc/podcast/the-case-of-the-radical-recap/ And finally, I've linked to it before, and I'll keep doing it – here's a link to Evan Epstein's great breakdown of private company governance to share with your VC if they are putting their own interests ahead of the company in your  board meetings: https://evan-epstein.medium.com/duties-of-startup-directors-and-the-rule-of-common-maximization-9a2814b2fe2a

Founders need to understand investor priorities before they require investor action. The investor's 'zone of indifference' describes an issue that can be problematic. In this episode, Heidi explains what it is, when it comes into play, and how to identify the likelihood of an investor landing in the 'zone of indifference.'  More information: https://www.threshold.vc/podcast/understanding-your-investorrsquos-zone-of-indifference Further reading: As promised, here's a post written by Evan Epstein about fiduciary duties of venture-backed directors. It's a must read! https://evan-epstein.medium.com/duties-of-startup-directors-and-the-rule-of-common-maximization-9a2814b2fe2a And if you want to go deep on the seminal case on this topic, the Trados case, here's an in-depth podcast about it with Evan and Vice Chancellor J. Travis Laster of the Delaware court: https://boardroom-governance.com/episodes/travis-laster Here's a great primer on preferred stock: https://darroweverett.com/preferred-stock-primer-value-protective-provisions-analysis/#:~:text=Preferred%20stock%20sits%20between%20debt,liquidation%20events%20and%20dividend%20payouts" Here's a breakdown of simple preferred versus participating preferred and how it impacts the zone of indifference: https://veecee.co/understanding-liquidation-preferences-and-the-zone-of-indifference

Mastering cold emails is a superpower—one that can unlock dream investors, top-tier hires, and world-class mentors. The most successful founders craft messages that break through the noise and create opportunities. In this episode, Heidi shares the proven strategies she teaches at the Stanford Graduate School of Business to help you master the art of impactful outreach.  More information: https://www.threshold.vc/podcast/the-art-of-the-cold-email

If you're considering an earnout, you should know exactly what is involved to set expectations – and to give yourself the highest chance of it amounting to something. Heidi presents recent market data along with her firsthand experience to help you understand why earnouts are so challenging. More information: https://www.threshold.vc/podcast/the-case-of-the-elusive-earnout

Successful entrepreneurs seek out mentors to positively impact their careers. But how do they find a mentor, initiate contact, and build a relationship? As an experienced mentor and mentee, Heidi believes all these questions can be answered by following her tips on becoming a great mentee.   More Information: https://www.threshold.vc/podcast/how-to-be-a-great-mentee   Further Reading:  I mentioned a bunch of organizations and resources in this episode, so here are the links to them: Fortune Brainstorm and other conferences: https://fortune.com/conferences TechCrunch Disrupt and other events: https://techcrunch.com/events Meetup Entrepreneurship groups: https://www.meetup.com/topics/entrepreneurship Startup Grind: https://about.startupgrind.com Founder Institute: https://fi.co Indie Hackers: https://www.indiehackers.com LinkedIn groups for entrepreneurs: https://www.linkedin.com/pulse/16-linkedin-groups-entrepreneurs-gs-kumar-job-search-trainer Techstars: https://www.techstars.com/communities Founders Network: https://foundersnetwork.com Reddit entrepreneurs subgroups: https://startupsavant.com/startup-center/best-subreddits-for-entrepreneurs and https://startupsavant.com/startup-center/best-subreddits-for-entrepreneurs And finally, here are first-person narratives on learning how to be interested, not interesting. There are similarities – but there's something to learn in each one of them: https://www.jodymichael.com/blog/be-interested-not-interesting https://tybennett.com/be-interested-not-interesting https://www.jackysherman.com/networking-the-art-of-being-interested-not-interesting https://sunwords.com/2024/01/28/dont-be-interesting-be-interested

All entrepreneurs should understand what venture debt is so they can make an informed decision to take it or not. Heidi poses a series of questions and scenarios to help founders know whether it's a good option for their company. And if it is, how to set it up and use it.  More Information: https://www.threshold.vc/podcast/the-case-of-the-venture-debt-dilemma Further Reading: As I mentioned in the episode, General Catalyst has an interesting offering around a financing model for growth equity that is a hybrid of debt and equity: https://www.generalcatalyst.com/stories/the-unbundling-of-growth-equity Also, as mentioned, the next version of the SAFE has arrived in the form of a SAFERloan agreement, which allows for some repayment instead of conversion: https://www.liquiditygroup.com/resource-funding/what-is-the-safer-agreement Here's a solid primer on debt covenants:https://www.lightercapital.com/blog/what-are-debt-covenants-on-a-loan#:~:text=A%20debt%20covenant%20lays%20out,more%20specific%20and%20complex%20requirements Finally, one thing I didn't cover in the episode but is relevant to the decision-making about debt is that the lender may ask you to move all your banking business to their bank. And that can prove disastrous in situations like what happened to SVB. Here's a great piece on that danger: https://www.linkedin.com/pulse/wake-svbs-collapse-some-tech-founders-turn-against-venture-tanya-dua

Many entrepreneurs start companies to solve a big problem or apply innovative technology, or both.  But when they fail, it's typically the result of a business issue. Heidi has observed that founders usually run out of money because they didn't pay close enough attention to running the company. Here, she shares practical advice to help entrepreneurs become great at business.  More information: https://www.threshold.vc/podcast/the-best-entrepreneurs-are-great-at-business

 When the world is uncertain, it is especially challenging for an entrepreneur to steer their company forward. Heidi's six-word operating manual helps founders face the unknown and lead. Caution: Heidi's operating manual may sound simple, but executing it takes grit and leadership. More information: https://www.threshold.vc/podcast/six-word-operating-manual-for-entrepreneurs Further reading: No additional reading for this episode, but as promised, here's the link to the Etsy shop that sells the bracelets. You do have to specify to the shop owner what you want the bracelets to say! https://www.etsy.com/listing/575211134/personalised-stamped-bar-bracelet-on?click_key=1ae487b1f6385e2ed98e175cf738ae2369e5fbbe%3A575211134&click_sum=eefd3991&ref=nla_rv-1&frs=1&sts=1 

Shareholder voting rights are an essential element of the many crucial decisions made in a company. For example, they may come into play during a fundraise or M&A. In this episode, Heidi explains what shareholder voting rights are so you can be well-informed and avoid messy situations in the future. For more information: https://threshold.vc/podcast/the-case-of-the-shareholder-shenanigans/ Further reading: For those of you who think shareholder shenanigans only happen in small companies, Joy's case is similar to the HP case of many years ago, fascinating reading for those who like Succession and boardroom drama: https://www.zdnet.com/article/hp-directors-slam-walter-hewlett/ Every entrepreneur should understand the impact stacked preferences may have on governance, board votes, and shareholder votes. This article does a great job of laying those out: https://thevcfactory.com/liquidation-preference-conflicts-venture-capital/ The Council of Institutional Investors has an interesting piece on dual-class stock: https://www.cii.org/dualclass_stock And for more details on why I think good governance is good for entrepreneurs and their companies, see https://www.threshold.vc/podcast/the-case-of-the-infallible-founder/