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JOSEPH HADZIMA: OK, you
met the financing sources.

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You got a little bit
of an insight there.

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Part of what you're going to
need when you talk to them

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is some idea of what
the financials look

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like for your business.

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And joining us tonight
to show you how

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to do that is Charlie Tillet.

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Now, Charlie's been doing
this for-- he was in the $10K.

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00:00:43,290 --> 00:00:45,310
I think he'll talk
about that a bit.

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CHARLIE TILLETT: Yep.

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JOSEPH HADZIMA: And I was
in-- I've been doing things

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around the world-- I
was in Istanbul two

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years ago, in a
setting with 25 teams

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from around the Muslim world.

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And I was mentoring
a team from Pakistan.

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And I'm looking at
their slide deck,

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and I get to the financials,
and I say, where did you

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get this template?

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And they didn't quite
understand what I was saying.

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And I'm looking at it,
it was Charlie's template

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that he uses in the course.

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So his speeches here have
transformed financial plans

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all over the world, in
Pakistan, and he's graciously

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come back to talk to us.

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Charlie was the
person I mentioned

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who I met outside of the MIT
Enterprise Forum meeting,

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and asked him what he was doing,
and that led to a whole career

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with a bunch of
entrepreneurs up north.

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CHARLIE TILLETT: Yep.

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JOSEPH HADZIMA: And
I'll sort of let

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you pick it up there, Charlie.

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00:01:38,500 --> 00:01:39,130
CHARLIE TILLETT: OK, great.

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Thanks, Joe.

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What was the first
story he told?

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00:01:48,280 --> 00:01:50,190
AUDIENCE: Jumping in
your pickup truck.

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CHARLIE TILLETT: OK, yeah.

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So we will get to that.

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00:01:52,830 --> 00:01:55,440
So it's great to
be here tonight.

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00:01:55,440 --> 00:01:57,365
I've got probably
twice as many slides

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as I should cover in my little
over an hour that I've got.

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So I'm going to go quick.

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00:02:02,320 --> 00:02:05,560
But feel free to ask any
questions as we go along.

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00:02:05,560 --> 00:02:08,310
And what I'll try and do is,
I wrote down a few notes,

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listening to the
panel, the great panel

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that we had here,
maybe some terms

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that they brought up
that they didn't really

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give enough explanation
or background on.

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So I'm going to try to touch
on those as we go as well.

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So tonight we're going to
talk about your business plan

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financials.

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Putting together that
critical spreadsheet

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that you've got to have when you
walk into that meeting, right?

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Or when you send
someone your deck,

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and how to put that together.

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But we're going to
step back a little bit.

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And as people say, I was a
CFO of a couple of companies.

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But part of my job was
being a salesperson.

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And what I would
do is I would walk

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into these meetings with
a deck and with a team.

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But my job was to sell
that team to the investors.

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And in return, they
would give us money,

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and we would give them stock.

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But what we're really
selling is the team,

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and the concept of the business
that we're trying to build.

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Then, will talk about what
is your business model,

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and building your
financial projections.

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And so this template that
I'm going to show you tonight

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is up on the website.

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There's a new
template this year.

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It's got a little more detail
in terms of cost of goods sold,

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in case you're doing something
that's got more of a hardware

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component.

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This gives a little
more detail on that.

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But that was what I
was trying to think of.

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So this template is
going to be out there, so

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that you can download it.

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It's an Excel spreadsheet.

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You can start plugging
in your own stuff in it.

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And I'll tell you
the things that you

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need to take out when you
actually show it to someone.

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And then, the last
part is we're going

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to talk about sharing the pie.

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So I've added a couple
things to this talk

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about putting together your
business plan spreadsheet.

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And one of them is talking
about the venture capital

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perspective, and helping
you sit it in their shoes

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and evaluate your opportunity.

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00:04:03,120 --> 00:04:09,100
But also thinking about the
other uses or takers of equity

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00:04:09,100 --> 00:04:09,830
in your company.

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And by equity, I mean stock.

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So I've got couple
slides on here

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on thinking about your
company, and all of the people,

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and all of the entities that
could potentially get stock

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in your company,
and what that does

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to your ownership
in the company.

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So my background is I was a
graduate from Sloan in '91.

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That was the inaugural
year-- oh, well, in 1990

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00:04:36,080 --> 00:04:38,810
was the inaugural year
of the $10K Contest.

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00:04:38,810 --> 00:04:40,510
Well, it's now the $100K.

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00:04:40,510 --> 00:04:42,400
And we were the
third place team.

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So rather than get,
you know, I think

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00:04:44,370 --> 00:04:47,720
it's now $20,000 or $30,000
worth of free legal service

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00:04:47,720 --> 00:04:51,040
and accounting
service, we got $300

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to split between
the three of us.

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So since that wasn't enough
to start our business,

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we all went our separate ways.

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But what I did,
Joe introduced me

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to some guys who had
an interesting idea

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00:05:03,780 --> 00:05:07,514
for some network
monitoring equipment.

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And they didn't really
know how to build

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a business around that.

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And that experience
in the $10K Contest

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was critical, because I'd
worked with these two guys.

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00:05:18,700 --> 00:05:23,100
And we'd sat at the-- we didn't
have Wi-Fi at that time--

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so we're sitting in
the computer lab,

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00:05:24,990 --> 00:05:28,540
plugging it into a
spreadsheet late at night,

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00:05:28,540 --> 00:05:33,030
going, well, if we increase
the sales price by this much,

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00:05:33,030 --> 00:05:34,470
what does it do to our business?

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00:05:34,470 --> 00:05:36,657
If we are able to reduce
cost by this much,

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00:05:36,657 --> 00:05:37,990
what does it do to our business?

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00:05:37,990 --> 00:05:40,580
How many salespeople
are we going to need?

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And I went through
that whole exercise

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of building that template for
the business plan contest.

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And because of that, I
had tremendous credibility

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when I started.

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I knew what I was talking
about when I went in

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to talk to these guys who
had this data communications

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00:05:59,610 --> 00:06:00,610
product.

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And I was able to
convince them that I could

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00:06:02,800 --> 00:06:04,170
help them build their model.

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00:06:04,170 --> 00:06:07,730
And sure enough, I
was able to do that.

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00:06:07,730 --> 00:06:09,767
But it was the entering
into the contest,

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00:06:09,767 --> 00:06:11,350
and working with the
team, and working

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00:06:11,350 --> 00:06:14,830
through all of that, that
helped give me that experience.

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00:06:14,830 --> 00:06:17,630
The company was
NetScout Systems.

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00:06:17,630 --> 00:06:21,300
We completed several
rounds of venture financing

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00:06:21,300 --> 00:06:24,780
there, and went public in 1999.

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00:06:24,780 --> 00:06:26,626
I then got involved
with a dot.com

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00:06:26,626 --> 00:06:29,770
company, which fortunately
didn't last too long.

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And then was at a
Homeland Security

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00:06:35,120 --> 00:06:38,630
company that made bomb detection
equipment for airports.

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So completely different
industry, but the same metrics.

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The same tools apply.

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The same spreadsheet that
I'd built to get NetScout

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off the ground was
the same spreadsheet

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that I used to get
Reveal off the ground.

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00:06:53,810 --> 00:06:56,080
And it's the same spreadsheet
that you guys can all

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00:06:56,080 --> 00:06:58,060
use to get your
business off the ground.

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00:06:58,060 --> 00:07:02,320
I raised $125 million in
more than 10 transactions

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over that period.

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So you're probably
saying to yourself,

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00:07:07,540 --> 00:07:10,320
I'm too busy to
do my financials.

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Right?

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00:07:10,860 --> 00:07:13,040
I've got more
important things to do.

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One, they're not going
to be right anyway.

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I mean, who can
sit here and say,

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00:07:17,190 --> 00:07:20,390
we're going to be able to be
spot on on our financials?

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00:07:20,390 --> 00:07:22,180
Right?

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The second is, the VCs aren't
going to believe it anyway.

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They're going to
look at your numbers,

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00:07:27,310 --> 00:07:29,500
and they're going
to say, they've

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00:07:29,500 --> 00:07:32,610
got their own ideas of this.

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00:07:32,610 --> 00:07:35,080
And the third is, you've got
more important things to do.

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Building the team, figuring
out what the product is,

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00:07:37,890 --> 00:07:41,140
and looking at who
your customers are.

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But the reality
is the financials

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00:07:43,680 --> 00:07:47,820
are the scoreboard, the
scorecard for your company.

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00:07:47,820 --> 00:07:51,220
So if you don't know
what you're shooting for,

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00:07:51,220 --> 00:07:53,360
then how do you know
whether you're making

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00:07:53,360 --> 00:07:55,920
progress against those goals?

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00:07:55,920 --> 00:07:57,470
But the more important
thing is kind

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00:07:57,470 --> 00:07:59,860
of what I was
talking about with me

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00:07:59,860 --> 00:08:02,970
and my team in the $10K Contest.

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00:08:02,970 --> 00:08:06,930
It helps you understand what
your key assumptions are,

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00:08:06,930 --> 00:08:10,910
because you've got to put those
assumptions into either numbers

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or formulas.

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You've got to understand
what the drivers are.

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So if you're able to
increase prices by 10%,

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00:08:18,340 --> 00:08:19,360
what does that do?

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00:08:19,360 --> 00:08:21,360
Is that an important
lever or not?

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00:08:21,360 --> 00:08:24,500
Or is it more important
to get your costs down?

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00:08:24,500 --> 00:08:28,180
Or is it more important to
outsource your development

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00:08:28,180 --> 00:08:31,790
and get your R&D spending down?

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00:08:31,790 --> 00:08:36,210
Is it more important to do
software as a service model,

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00:08:36,210 --> 00:08:37,760
or sell it is a product?

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00:08:37,760 --> 00:08:40,690
And how do those things
impact how much cash

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00:08:40,690 --> 00:08:41,580
you're going to need?

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00:08:44,200 --> 00:08:48,660
So it's a great exercise that
helps you understand what's

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00:08:48,660 --> 00:08:50,860
going on in your business.

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00:08:50,860 --> 00:08:53,990
Because as the CEO
of your company,

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00:08:53,990 --> 00:08:56,060
the number one
job is to maintain

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00:08:56,060 --> 00:08:58,360
the cash in the company.

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00:08:58,360 --> 00:09:00,080
It's the oxygen supply.

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00:09:00,080 --> 00:09:04,350
And without that, you could be
doing everything else right,

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00:09:04,350 --> 00:09:06,490
but it doesn't take
long for people

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00:09:06,490 --> 00:09:08,000
to start walking
out the door when

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00:09:08,000 --> 00:09:09,680
they're not getting a paycheck.

205
00:09:09,680 --> 00:09:11,160
Now, your management
team-- we've

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00:09:11,160 --> 00:09:13,670
had those days where I
have to go to the guys

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00:09:13,670 --> 00:09:16,380
and say, hey, guys, there's
not going to be anything

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00:09:16,380 --> 00:09:17,920
in the envelope this week.

209
00:09:17,920 --> 00:09:20,050
But for your rank
and file employees,

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00:09:20,050 --> 00:09:22,290
you can't be missing payroll.

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00:09:22,290 --> 00:09:25,510
And your vendors will only
let you stretch out payables

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00:09:25,510 --> 00:09:26,260
for so long.

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00:09:26,260 --> 00:09:32,400
So you've got to know where
you stand with your cash,

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00:09:32,400 --> 00:09:34,430
and what cash you need.

215
00:09:34,430 --> 00:09:36,290
So you don't need
to be an accountant,

216
00:09:36,290 --> 00:09:39,370
but you've got to
understand these key terms.

217
00:09:39,370 --> 00:09:41,120
And you've got to be
able to discuss them.

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00:09:41,120 --> 00:09:44,960
Because the investors
up here, they also

219
00:09:44,960 --> 00:09:46,950
don't expect you to
be an accountant.

220
00:09:46,950 --> 00:09:49,980
But they do expect you
to understand the drivers

221
00:09:49,980 --> 00:09:54,430
in your business, and what the
key metrics in your business

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00:09:54,430 --> 00:09:54,930
are.

223
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In Reveal Imaging--
Reveal Imaging

224
00:09:59,260 --> 00:10:01,900
was a company that made
bomb detection equipment.

225
00:10:01,900 --> 00:10:04,350
And there we had an
all-star management team.

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00:10:04,350 --> 00:10:09,210
We had five guys-- this
was founded in 2003,

227
00:10:09,210 --> 00:10:13,050
18 months after 9/11--
we had five guys who'd

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00:10:13,050 --> 00:10:16,565
been in Homeland Security
for more than a decade each.

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00:10:16,565 --> 00:10:17,940
So there were a
lot of people who

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00:10:17,940 --> 00:10:22,774
wanted to get into Homeland
Security on September 12, OK?

231
00:10:22,774 --> 00:10:24,190
But there were not
a lot of people

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00:10:24,190 --> 00:10:27,720
who were in Homeland Security,
the Homeland Security business,

233
00:10:27,720 --> 00:10:29,060
on September 10.

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And we had five of
those guys here.

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So we had a market opportunity.

236
00:10:33,650 --> 00:10:39,490
The Congress had said,
all passenger bags

237
00:10:39,490 --> 00:10:42,500
that go on a passenger
airliner in the United States

238
00:10:42,500 --> 00:10:44,710
have to be screened
for explosives.

239
00:10:44,710 --> 00:10:47,680
And we want a machine that
can automatically do that.

240
00:10:47,680 --> 00:10:49,900
We don't want people
looking at X-ray images.

241
00:10:49,900 --> 00:10:52,090
And there were
machines on the market.

242
00:10:52,090 --> 00:10:54,980
These guys had actually--
of the eight machines that

243
00:10:54,980 --> 00:10:56,940
had been certified--
these guys had

244
00:10:56,940 --> 00:10:59,930
been involved in getting four
of those machines certified.

245
00:10:59,930 --> 00:11:02,270
So we really had
an all-star team.

246
00:11:02,270 --> 00:11:04,510
They had come up with an
idea for a product that

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00:11:04,510 --> 00:11:07,890
was half the size of
the existing equipment.

248
00:11:07,890 --> 00:11:11,620
Also half of the throughput,
but half of the cost.

249
00:11:11,620 --> 00:11:15,280
And so those metrics were very
compelling for the smaller

250
00:11:15,280 --> 00:11:19,340
airports like Burlington,
Vermont, or Nantucket, Mass,

251
00:11:19,340 --> 00:11:21,920
rather than the Logan's.

252
00:11:21,920 --> 00:11:25,430
But there's 500 airports in
the country, and one by one

253
00:11:25,430 --> 00:11:27,760
they were getting ticked
off by our competitors.

254
00:11:27,760 --> 00:11:29,770
So we had an opportunity
to get to market

255
00:11:29,770 --> 00:11:33,410
that we had to get to fast,
because once those airports

256
00:11:33,410 --> 00:11:37,000
were staffed with our
competitors' equipment,

257
00:11:37,000 --> 00:11:39,040
they were no longer
an opportunity.

258
00:11:39,040 --> 00:11:41,470
So we went out, and we
hit the ground running.

259
00:11:41,470 --> 00:11:46,500
And we started raising money
the first day we got together

260
00:11:46,500 --> 00:11:47,770
as a management team.

261
00:11:47,770 --> 00:11:51,880
We raised an angel round within
90 days of $1 million dollars.

262
00:11:51,880 --> 00:11:54,830
And then, within six months, we
raised our first venture round.

263
00:11:54,830 --> 00:11:59,810
And it was a $5 million,
but it was in two tranches.

264
00:11:59,810 --> 00:12:03,200
The tranches were a
$5 million tranche,

265
00:12:03,200 --> 00:12:08,410
and a second $5 million tranche,
based upon hitting milestones.

266
00:12:08,410 --> 00:12:11,760
Because we wanted to raise
as much money as possible,

267
00:12:11,760 --> 00:12:15,170
but our investors were reluctant
to give us everything up front.

268
00:12:15,170 --> 00:12:16,990
So we reached this
compromise, where

269
00:12:16,990 --> 00:12:19,630
we said, OK, we're going
to hit some milestones,

270
00:12:19,630 --> 00:12:21,850
and because we had
the financial plan,

271
00:12:21,850 --> 00:12:24,950
and we knew how far $5
million would take us,

272
00:12:24,950 --> 00:12:29,480
we knew what we could get done
before we ran out of money.

273
00:12:29,480 --> 00:12:33,700
And so we were able
to pre-negotiate

274
00:12:33,700 --> 00:12:39,830
an increase in value upon
hitting that milestone.

275
00:12:39,830 --> 00:12:43,360
So it was kind of a
win-win, because we did not

276
00:12:43,360 --> 00:12:46,130
have to spend-- once we
raised the $5 million,

277
00:12:46,130 --> 00:12:49,110
we didn't have to immediately
start thinking about raising

278
00:12:49,110 --> 00:12:51,270
the next $5 million,
because we had

279
00:12:51,270 --> 00:12:54,510
that kind of in our hip pocket.

280
00:12:54,510 --> 00:12:56,970
All I can say is that,
as soon as we raised

281
00:12:56,970 --> 00:12:58,760
a round of financing,
I started thinking

282
00:12:58,760 --> 00:13:01,640
about the next financing
that we were going to do.

283
00:13:01,640 --> 00:13:03,480
It could have been
bank financing,

284
00:13:03,480 --> 00:13:06,270
like an equipment
line, which is simply

285
00:13:06,270 --> 00:13:11,680
as you buy equipment for
your manufacturing facility,

286
00:13:11,680 --> 00:13:16,190
or as you buy computers for
your software engineers,

287
00:13:16,190 --> 00:13:20,150
you send a copy of the
invoice over to the bank,

288
00:13:20,150 --> 00:13:23,250
and they will provide--
they will give you

289
00:13:23,250 --> 00:13:29,730
90% of that money back-- and
you now have a loan to the bank.

290
00:13:29,730 --> 00:13:32,860
So it didn't look like a
lot of money, $500,000.

291
00:13:32,860 --> 00:13:36,530
But as we were getting close
to running out of money,

292
00:13:36,530 --> 00:13:38,410
and we hadn't met
that milestone there

293
00:13:38,410 --> 00:13:42,420
we had committed to to
get the second $5 million,

294
00:13:42,420 --> 00:13:45,400
that $500,000 was
very important to us.

295
00:13:45,400 --> 00:13:50,270
Because that gave us an
extra three months of runway

296
00:13:50,270 --> 00:13:51,920
to get closer to the goal.

297
00:13:55,480 --> 00:13:59,680
So I'm going to kind of
take you behind the scenes

298
00:13:59,680 --> 00:14:03,000
to think about what does
a venture capitalist want.

299
00:14:03,000 --> 00:14:04,840
When they put in
their money, they're

300
00:14:04,840 --> 00:14:10,200
interested in getting 3x
to 5x absolute returns.

301
00:14:10,200 --> 00:14:14,080
So if they put $1 million
into your company,

302
00:14:14,080 --> 00:14:17,810
they want to get $3
million back to $5 million

303
00:14:17,810 --> 00:14:20,060
back, on top of the $1 million.

304
00:14:20,060 --> 00:14:24,370
So they've got to get $4
million to $6 million back.

305
00:14:24,370 --> 00:14:27,800
And if it's $5
million, do the math.

306
00:14:27,800 --> 00:14:31,140
Their investment horizon
is five to seven years.

307
00:14:31,140 --> 00:14:37,900
And what I will say is that,
when you take venture money,

308
00:14:37,900 --> 00:14:41,540
that clock starts ticking
the day that that money gets

309
00:14:41,540 --> 00:14:43,450
wired into your account.

310
00:14:43,450 --> 00:14:50,690
And while five years
seems like forever,

311
00:14:50,690 --> 00:14:55,720
the investors realize that five
years goes by in a heartbeat.

312
00:14:55,720 --> 00:14:58,500
And they will start
pounding you to run

313
00:14:58,500 --> 00:15:02,780
faster than you think you can
possibly run from day one.

314
00:15:02,780 --> 00:15:07,150
And it's motivating,
and it's a great thing.

315
00:15:07,150 --> 00:15:09,100
And if you have
the right partners,

316
00:15:09,100 --> 00:15:11,360
they're helping you
do the right things.

317
00:15:11,360 --> 00:15:13,400
But you got to
recognize that it's

318
00:15:13,400 --> 00:15:16,080
going to be-- I think they
admitted up here-- it's

319
00:15:16,080 --> 00:15:18,730
going to be a very
intense environment when

320
00:15:18,730 --> 00:15:19,650
you take that money.

321
00:15:19,650 --> 00:15:26,410
So you better be prepared for
it when you take the money.

322
00:15:26,410 --> 00:15:29,080
They also want to get--
I mean, you heard up here

323
00:15:29,080 --> 00:15:31,410
that they want to get a
significant amount of money

324
00:15:31,410 --> 00:15:31,910
invested.

325
00:15:31,910 --> 00:15:33,300
It depends on the firm.

326
00:15:33,300 --> 00:15:35,390
Some firms might want
to put in $1 million,

327
00:15:35,390 --> 00:15:38,100
some firms might want
to put in $5 million.

328
00:15:38,100 --> 00:15:39,291
It depends on the firm.

329
00:15:39,291 --> 00:15:41,040
But they want to have
a significant amount

330
00:15:41,040 --> 00:15:43,240
of money invested.

331
00:15:43,240 --> 00:15:45,360
And they want to have a
significant ownership.

332
00:15:45,360 --> 00:15:49,051
So if $5 million
is their target,

333
00:15:49,051 --> 00:15:50,550
they don't want to
put in $5 million

334
00:15:50,550 --> 00:15:52,890
and get 10% of the company.

335
00:15:52,890 --> 00:15:56,780
They want to have-- at an
early stage investment--

336
00:15:56,780 --> 00:15:59,720
they want to have a
significant amount.

337
00:15:59,720 --> 00:16:02,430
So the formula to think
about how much equity

338
00:16:02,430 --> 00:16:07,420
you have to give up is
the percentage of equity

339
00:16:07,420 --> 00:16:09,730
that the venture
capitalists are going to get

340
00:16:09,730 --> 00:16:12,030
is the money that they
invest-- and we'll

341
00:16:12,030 --> 00:16:14,720
have some examples on
the next page-- divided

342
00:16:14,720 --> 00:16:19,091
by the pre-money value plus
the money that they invested.

343
00:16:19,091 --> 00:16:20,090
Now, that's the formula.

344
00:16:20,090 --> 00:16:23,000
It doesn't really give you
the answer, because what's

345
00:16:23,000 --> 00:16:24,380
the pre-money valuation?

346
00:16:24,380 --> 00:16:31,460
But as you heard up here, kind
of where is the market today,

347
00:16:31,460 --> 00:16:33,600
he was saying he sees
a lot of companies

348
00:16:33,600 --> 00:16:39,030
in the $3 million to $6
million pre-money range, right?

349
00:16:39,030 --> 00:16:43,780
So there is kind of a sense
of where the market is today,

350
00:16:43,780 --> 00:16:47,600
and what other
companies are getting.

351
00:16:47,600 --> 00:16:51,440
But where that pre-money
valuation comes in,

352
00:16:51,440 --> 00:16:56,347
that's the key to
the negotiation

353
00:16:56,347 --> 00:16:57,180
that you have to do.

354
00:16:57,180 --> 00:17:00,650
The other part is how much
money they're investing.

355
00:17:00,650 --> 00:17:04,640
So if we look at a
couple of examples here.

356
00:17:04,640 --> 00:17:08,680
Say a Series A round, $5
million invested on a $5 million

357
00:17:08,680 --> 00:17:10,170
pre-money.

358
00:17:10,170 --> 00:17:14,000
So we take the $5 million
invested, we add that

359
00:17:14,000 --> 00:17:15,400
to the pre-money of $5 million.

360
00:17:15,400 --> 00:17:18,609
It's 5 over 10, it
comes out to 50%.

361
00:17:18,609 --> 00:17:20,960
If there's a Series B,
let's say it's $10 million

362
00:17:20,960 --> 00:17:23,530
invested on a $15
million pre-money.

363
00:17:23,530 --> 00:17:29,090
That'd be $10 million over 10
plus 15, would be 10 over 25,

364
00:17:29,090 --> 00:17:30,480
or 40%.

365
00:17:30,480 --> 00:17:34,950
But recognize that when the
Series B money comes in,

366
00:17:34,950 --> 00:17:39,820
the Series A investors get
diluted by the same 40%

367
00:17:39,820 --> 00:17:42,060
that everyone else
gets diluted by.

368
00:17:42,060 --> 00:17:46,700
And I have an example
walking through that.

369
00:17:46,700 --> 00:17:48,530
Typically, the A
and the B investors

370
00:17:48,530 --> 00:17:49,980
are going to be the same people.

371
00:17:49,980 --> 00:17:53,500
So the B investors are kind
of diluting themselves.

372
00:17:53,500 --> 00:17:56,260
But recognize that
that dilution happens.

373
00:17:56,260 --> 00:17:59,190
So don't think that you're
giving up 50% of your company,

374
00:17:59,190 --> 00:18:00,920
and then 40% of your
company, and you're

375
00:18:00,920 --> 00:18:03,170
left with 10% of your company.

376
00:18:03,170 --> 00:18:09,790
You're really left with
30% of your company, right?

377
00:18:09,790 --> 00:18:14,670
So if an investor is looking
for three to five times

378
00:18:14,670 --> 00:18:18,060
on their money, and
they've put $15 million in,

379
00:18:18,060 --> 00:18:26,100
and they own 70% of
the company, then

380
00:18:26,100 --> 00:18:31,730
three times the $15 million
invested is $45 million,

381
00:18:31,730 --> 00:18:34,100
plus the original
$15 million back,

382
00:18:34,100 --> 00:18:35,820
so they've got to
get $60 million.

383
00:18:35,820 --> 00:18:37,700
They own 70% of the company.

384
00:18:37,700 --> 00:18:43,980
So that company has to be valued
at $85 million to $130 million

385
00:18:43,980 --> 00:18:47,480
for them to get
that type of return.

386
00:18:47,480 --> 00:18:51,640
And so in order to
get so that valuation,

387
00:18:51,640 --> 00:18:56,240
you've got to grow your
revenues to $40 to $60 million.

388
00:18:56,240 --> 00:18:59,940
So there's a lot of
businesses that you guys

389
00:18:59,940 --> 00:19:04,680
could start that can grow to--
you know, another comment you

390
00:19:04,680 --> 00:19:07,640
heard here was make
sure that your investors

391
00:19:07,640 --> 00:19:11,230
and your opportunity and
your investment dollars

392
00:19:11,230 --> 00:19:12,430
are aligned, right?

393
00:19:12,430 --> 00:19:14,660
One of the big
problems was people

394
00:19:14,660 --> 00:19:19,920
going after what turned out to
be a small opportunity with too

395
00:19:19,920 --> 00:19:21,460
much capital.

396
00:19:21,460 --> 00:19:24,970
So the problem is, is that
once someone has $15 million

397
00:19:24,970 --> 00:19:31,970
invested in your company, you've
got to go after the big return.

398
00:19:31,970 --> 00:19:34,380
So you could have
a business that

399
00:19:34,380 --> 00:19:36,090
could be a great
business for you

400
00:19:36,090 --> 00:19:39,780
and a couple of your MIT
pals that goes to $5 million

401
00:19:39,780 --> 00:19:43,310
in revenue, or $10
million in revenue,

402
00:19:43,310 --> 00:19:46,630
and there's three of you,
and you each own 33%,

403
00:19:46,630 --> 00:19:50,135
and you have no outside income,
and no outside investors,

404
00:19:50,135 --> 00:19:51,300
and it's very profitable.

405
00:19:51,300 --> 00:19:54,330
It could be a
great business that

406
00:19:54,330 --> 00:19:56,430
could be just a
gold mine for you,

407
00:19:56,430 --> 00:19:59,790
but it would not be an
appropriate investment

408
00:19:59,790 --> 00:20:01,900
for some of our panelists here.

409
00:20:01,900 --> 00:20:04,540
And if they had come
in as an investor,

410
00:20:04,540 --> 00:20:09,530
then there's going to be a
mismatch, and a lot of tension.

411
00:20:09,530 --> 00:20:15,770
Because you can't get to a
happy place for both of you.

412
00:20:15,770 --> 00:20:19,180
So I know that this screen's a
little bit hard to read here,

413
00:20:19,180 --> 00:20:22,070
but let me just walk you
real quickly through.

414
00:20:22,070 --> 00:20:26,420
If you've got a
founding group here

415
00:20:26,420 --> 00:20:30,350
that has four million shares
between all of the founders,

416
00:20:30,350 --> 00:20:34,870
they've got 100% of the equity,
and there's 100% right there.

417
00:20:34,870 --> 00:20:40,410
You then bring in some early
employees and give them--

418
00:20:40,410 --> 00:20:41,910
and there'd be a
list, I have a list

419
00:20:41,910 --> 00:20:45,490
in the back of showing kind
of who would get what--

420
00:20:45,490 --> 00:20:46,980
but you have some
early employees,

421
00:20:46,980 --> 00:20:49,890
and maybe some advisors,
that get a number of shares.

422
00:20:49,890 --> 00:20:52,930
And so already the founders
get diluted a little bit.

423
00:20:52,930 --> 00:20:54,580
They then bring
in an angel round

424
00:20:54,580 --> 00:20:58,720
of $500,000 at a $4.5
million pre-money.

425
00:20:58,720 --> 00:21:02,600
So we know for our formula,
$500,000 divided by $5 million,

426
00:21:02,600 --> 00:21:05,290
the angel investors
are going to get 10%.

427
00:21:05,290 --> 00:21:10,040
In this case, and in all these
cases, new shares are issued.

428
00:21:10,040 --> 00:21:13,080
The founders continue to own
their four million shares,

429
00:21:13,080 --> 00:21:15,790
but now there's five million
shares in the company,

430
00:21:15,790 --> 00:21:20,050
and the founders have
been diluted to 80%, OK?

431
00:21:20,050 --> 00:21:25,390
We now have kind of the
classic A round venture

432
00:21:25,390 --> 00:21:28,360
capitalists come in, and
they put in $5 million

433
00:21:28,360 --> 00:21:31,170
at the $5 million that
I talked about earlier.

434
00:21:31,170 --> 00:21:32,930
They get 50%.

435
00:21:32,930 --> 00:21:34,980
But one of the
things that is going

436
00:21:34,980 --> 00:21:37,190
to happen when the
A round comes in

437
00:21:37,190 --> 00:21:38,720
is the investors
are going to want

438
00:21:38,720 --> 00:21:40,930
to see that you
have an option pool

439
00:21:40,930 --> 00:21:46,480
so that you can issue stock
options to your employees.

440
00:21:46,480 --> 00:21:49,540
Because all employees
like stock options,

441
00:21:49,540 --> 00:21:55,110
and it provides extra
incentive to your employees.

442
00:21:55,110 --> 00:21:57,760
But the investors
are saying, we don't

443
00:21:57,760 --> 00:22:03,100
want to be diluted for the
first 100 people that you hire.

444
00:22:03,100 --> 00:22:05,990
So you've got to
set aside options

445
00:22:05,990 --> 00:22:10,270
to take care of those people
without them being diluted.

446
00:22:10,270 --> 00:22:14,460
So they still get their 50%, but
you've got to create this pool.

447
00:22:14,460 --> 00:22:16,690
And in my example, it's 12%.

448
00:22:16,690 --> 00:22:22,970
But it's somewhere in the
10% to 20% range, right?

449
00:22:22,970 --> 00:22:28,110
And that's a topic for
discussion and negotiation

450
00:22:28,110 --> 00:22:29,530
with your venture capitalists.

451
00:22:29,530 --> 00:22:33,490
Anything I'm saying wrong
here, feel free to hop in.

452
00:22:33,490 --> 00:22:37,420
So then we have our final
round is that $10 million

453
00:22:37,420 --> 00:22:40,950
at $15 million, and
these investors get 40%.

454
00:22:40,950 --> 00:22:44,640
Notice the A investors
are now down to 30%,

455
00:22:44,640 --> 00:22:48,340
and our founding team
is down to 18.2%.

456
00:22:48,340 --> 00:22:50,960
So this kind of walks you
through the progression

457
00:22:50,960 --> 00:22:56,720
of how stock gets distributed
to both employees,

458
00:22:56,720 --> 00:22:59,900
angel investors, and
venture capital investors.

459
00:22:59,900 --> 00:23:00,802
Yep?

460
00:23:00,802 --> 00:23:04,176
AUDIENCE: So the question I
have is other than the stock

461
00:23:04,176 --> 00:23:06,104
distribution, do
they get more control

462
00:23:06,104 --> 00:23:08,514
because they ask for
more seats on the board?

463
00:23:08,514 --> 00:23:11,888
Is that something which happens
a lot when the second round

464
00:23:11,888 --> 00:23:13,840
and third round happens?

465
00:23:13,840 --> 00:23:16,610
CHARLIE TILLETT: So the question
is, do they-- so first off is

466
00:23:16,610 --> 00:23:20,040
the investors are going to
get preferred shares that

467
00:23:20,040 --> 00:23:24,780
have many more rights than
the common shares, OK?

468
00:23:24,780 --> 00:23:27,240
And there will be
anti-dilution provisions,

469
00:23:27,240 --> 00:23:29,010
there will be
ratchet provisions,

470
00:23:29,010 --> 00:23:30,500
in case there's a down round.

471
00:23:30,500 --> 00:23:33,900
But probably the most important
thing that will always happen

472
00:23:33,900 --> 00:23:37,150
is that they will get
board representation.

473
00:23:37,150 --> 00:23:42,480
And that is a little
bit of a negotiated--

474
00:23:42,480 --> 00:23:46,080
it's not negotiated that they
have board representation,

475
00:23:46,080 --> 00:23:49,150
but what I've seen is, so let's
say that you're the founder,

476
00:23:49,150 --> 00:23:51,690
you say we have two
seats, the founders

477
00:23:51,690 --> 00:23:54,750
have two seats on the board,
your venture capitalists

478
00:23:54,750 --> 00:23:56,590
come in, they get two
seats on the board,

479
00:23:56,590 --> 00:23:58,700
and then you agree that
the fifth board member

480
00:23:58,700 --> 00:24:02,530
will be mutually agreed upon.

481
00:24:02,530 --> 00:24:07,860
And you've got to
figure out-- again,

482
00:24:07,860 --> 00:24:12,140
if you have problems
deciding on a mutually

483
00:24:12,140 --> 00:24:17,430
agreeable fifth board member at
this stage in the relationship,

484
00:24:17,430 --> 00:24:19,900
then these are not the
right venture guys for you

485
00:24:19,900 --> 00:24:21,400
to be working with, OK?

486
00:24:21,400 --> 00:24:23,420
So it should be pretty
easy to find someone

487
00:24:23,420 --> 00:24:27,520
that everyone agrees
has domain knowledge,

488
00:24:27,520 --> 00:24:32,520
has expertise in the field, is
entrepreneurial, and is going

489
00:24:32,520 --> 00:24:35,674
to be kind of neutral, right?

490
00:24:35,674 --> 00:24:37,090
So does that answer
your question?

491
00:24:37,090 --> 00:24:37,370
Yep?

492
00:24:37,370 --> 00:24:39,869
AUDIENCE: Yeah, on a previous
slide, you were talking about,

493
00:24:39,869 --> 00:24:42,200
say you've taken $10
million in VC money,

494
00:24:42,200 --> 00:24:44,132
but it turns out the
opportunity was smaller.

495
00:24:44,132 --> 00:24:46,547
It's only $5 million
in revenue per year.

496
00:24:46,547 --> 00:24:48,310
What are the
options, then, there?

497
00:24:48,310 --> 00:24:49,810
CHARLIE TILLETT:
So her question is,

498
00:24:49,810 --> 00:24:52,101
let's say you've taken more
money than the opportunity.

499
00:24:56,600 --> 00:24:59,200
There's really no
happy ending there,

500
00:24:59,200 --> 00:25:02,570
because the investors
are going to want

501
00:25:02,570 --> 00:25:04,280
to get their money back.

502
00:25:04,280 --> 00:25:07,720
And a company that
grows to $5 million,

503
00:25:07,720 --> 00:25:11,010
it's kind of the
walking dead, right?

504
00:25:11,010 --> 00:25:12,670
So you're now
making enough money

505
00:25:12,670 --> 00:25:14,870
to where you're not
going out of business,

506
00:25:14,870 --> 00:25:19,470
but there's another problem
there, is that companies that

507
00:25:19,470 --> 00:25:25,690
only get to $5 million and $10
million-- now, I don't know,

508
00:25:25,690 --> 00:25:28,800
how much revenue does
Pinterest-- you know,

509
00:25:28,800 --> 00:25:32,050
there's a lot of companies
out there that have no revenue

510
00:25:32,050 --> 00:25:33,490
and have tremendous valuations.

511
00:25:33,490 --> 00:25:37,750
But let's not plan that we're
going to catch lightning

512
00:25:37,750 --> 00:25:39,250
in a bottle, OK?

513
00:25:39,250 --> 00:25:41,820
So a company that has $5
million to $10 million

514
00:25:41,820 --> 00:25:46,160
in revenue, the reality is that
there's a very small market.

515
00:25:46,160 --> 00:25:48,780
Who's going to buy
a company like that?

516
00:25:48,780 --> 00:25:51,650
When we were at Reveal
Imaging, we grew the company

517
00:25:51,650 --> 00:25:55,860
to $100 million, and we grew
the company to $50 million

518
00:25:55,860 --> 00:26:01,460
in revenue, but our buyers were
aerospace defense companies

519
00:26:01,460 --> 00:26:03,740
that are huge.

520
00:26:03,740 --> 00:26:08,450
And they were willing
to pay us $125 million

521
00:26:08,450 --> 00:26:14,070
for $50 million revenue,
but nothing more than that.

522
00:26:14,070 --> 00:26:18,010
They were only willing to pay
us kind of 1.5 times revenue.

523
00:26:18,010 --> 00:26:21,160
They were hoping that we would
have $500 million in revenue,

524
00:26:21,160 --> 00:26:24,480
because they were willing
to pay $1.25 billion.

525
00:26:24,480 --> 00:26:27,080
But the problem is that a
$5 million to $10 million

526
00:26:27,080 --> 00:26:30,600
company doesn't get
any big company who's

527
00:26:30,600 --> 00:26:35,050
your-- it's too small to go
public, and the big companies,

528
00:26:35,050 --> 00:26:36,870
it's not big enough
to move the needle.

529
00:26:36,870 --> 00:26:40,450
Especially if you've
already proven that it's not

530
00:26:40,450 --> 00:26:41,690
going to go like that, right?

531
00:26:41,690 --> 00:26:44,230
You've already decided that
it's going to go $5 million,

532
00:26:44,230 --> 00:26:45,880
$6 million, $7 million.

533
00:26:45,880 --> 00:26:47,625
It doesn't get anyone excited.

534
00:26:52,472 --> 00:26:56,870
So the business model,
and in my mind-- I mean,

535
00:26:56,870 --> 00:26:59,860
you heard the term used a
couple of times on the panel

536
00:26:59,860 --> 00:27:03,700
tonight-- how I think
of it is it's an income

537
00:27:03,700 --> 00:27:05,450
statement in percentage terms.

538
00:27:05,450 --> 00:27:07,710
And we'll show you some
of the business models

539
00:27:07,710 --> 00:27:12,470
from a number of companies in a
number of different industries.

540
00:27:12,470 --> 00:27:14,520
But when you think about
your business model,

541
00:27:14,520 --> 00:27:17,610
think about your business
reaching critical mass.

542
00:27:17,610 --> 00:27:22,280
Do you have to have some kind
of geographic dispersion?

543
00:27:22,280 --> 00:27:25,630
Or do you need a
critical mass of sales

544
00:27:25,630 --> 00:27:30,400
in order to get your
volume pricing down?

545
00:27:30,400 --> 00:27:32,430
Or maybe it's the
number of customers that

546
00:27:32,430 --> 00:27:35,070
gives you some kind of synergy.

547
00:27:35,070 --> 00:27:40,900
So when you think about your
business model, think about it,

548
00:27:40,900 --> 00:27:42,920
it's in the happy times, right?

549
00:27:42,920 --> 00:27:45,800
It's reached critical
mass, and it is kind

550
00:27:45,800 --> 00:27:47,065
of hitting on all cylinders.

551
00:27:49,640 --> 00:27:54,280
So how many are Course 15?

552
00:27:54,280 --> 00:27:58,899
OK, maybe about a
third, or maybe 40%.

553
00:27:58,899 --> 00:28:00,690
So this is going to be
a little bit boring.

554
00:28:00,690 --> 00:28:02,650
This section is going to be a
little bit boring for you guys,

555
00:28:02,650 --> 00:28:04,774
but I want to make sure
everyone's on the same page

556
00:28:04,774 --> 00:28:05,480
here.

557
00:28:05,480 --> 00:28:08,870
So when we talk about the income
statement, we start at the top.

558
00:28:08,870 --> 00:28:13,140
And it's your sales number,
also called your revenue number,

559
00:28:13,140 --> 00:28:17,700
and that's the products that
you're shipping out the door,

560
00:28:17,700 --> 00:28:19,930
or the service that
you're providing,

561
00:28:19,930 --> 00:28:22,830
and the dollar number that
you're putting on that invoice.

562
00:28:22,830 --> 00:28:25,680
So it's after any
discounts that you give.

563
00:28:25,680 --> 00:28:28,100
It's after any
kickbacks or anything.

564
00:28:28,100 --> 00:28:30,675
It's the number-- when
you send out an invoice

565
00:28:30,675 --> 00:28:33,977
to that customer, what's
the dollar on that invoice,

566
00:28:33,977 --> 00:28:35,560
and what's the check
that you're going

567
00:28:35,560 --> 00:28:37,390
to get from that customer.

568
00:28:37,390 --> 00:28:41,200
Your cost of goods sold
is the material costs,

569
00:28:41,200 --> 00:28:44,770
the labor it costs to
build your product,

570
00:28:44,770 --> 00:28:48,090
it's the facilities in
which that product is built,

571
00:28:48,090 --> 00:28:50,710
but it's also your support cost.

572
00:28:50,710 --> 00:28:54,440
So if you ship a product, and
you have a one year warranty,

573
00:28:54,440 --> 00:28:58,500
or you have a tech support
line that people are calling,

574
00:28:58,500 --> 00:29:00,370
that's part of your cost, too.

575
00:29:00,370 --> 00:29:02,930
So you've got to staff
that tech support line.

576
00:29:02,930 --> 00:29:06,440
You've got to man
it, maybe it's 24/7.

577
00:29:06,440 --> 00:29:08,080
If you've got a
hardware product,

578
00:29:08,080 --> 00:29:10,020
and it breaks within
the warranty period,

579
00:29:10,020 --> 00:29:11,440
you've got to fix that.

580
00:29:11,440 --> 00:29:12,880
You've got shipping costs.

581
00:29:12,880 --> 00:29:15,260
You might have to send
someone out into the field,

582
00:29:15,260 --> 00:29:17,810
if you've got a big machine
like we had at Reveal

583
00:29:17,810 --> 00:29:20,680
that weighed two tons.

584
00:29:20,680 --> 00:29:22,620
So those are all
the things that go

585
00:29:22,620 --> 00:29:24,020
into your cost of goods sold.

586
00:29:24,020 --> 00:29:28,670
It's not your R&D. So it's
not your programming cost.

587
00:29:28,670 --> 00:29:32,069
Your product development
costs go down in R&D.

588
00:29:32,069 --> 00:29:33,860
Then, you have your
three main departments.

589
00:29:33,860 --> 00:29:36,310
Sales and marketing
is self-explanatory.

590
00:29:36,310 --> 00:29:38,760
R&D would be all of your
programming, product

591
00:29:38,760 --> 00:29:41,190
development, any
material that gets

592
00:29:41,190 --> 00:29:45,970
bought as part of your
product development process.

593
00:29:45,970 --> 00:29:47,680
Then, your general
and administrative

594
00:29:47,680 --> 00:29:49,290
is kind of everything else.

595
00:29:49,290 --> 00:29:51,890
Your CFO is in there,
your CEO is in there.

596
00:29:51,890 --> 00:29:57,910
HR, IT, your facilities,
your facility staff

597
00:29:57,910 --> 00:30:00,660
for the non-manufacturing
facility.

598
00:30:00,660 --> 00:30:02,630
And at the bottom is
your operating profit,

599
00:30:02,630 --> 00:30:07,300
or EBITDA, earnings before
interest, taxes, depreciation,

600
00:30:07,300 --> 00:30:08,360
and amortization.

601
00:30:08,360 --> 00:30:12,060
And I like to use that as the
yardstick, because it gets

602
00:30:12,060 --> 00:30:15,380
really complicated adding
in capital expenses

603
00:30:15,380 --> 00:30:19,240
and depreciating stuff, and that
kind of obscures what's really

604
00:30:19,240 --> 00:30:20,870
going on in your business.

605
00:30:20,870 --> 00:30:24,590
So I would urge
you in your plans

606
00:30:24,590 --> 00:30:28,790
don't depreciate
anything, and also

607
00:30:28,790 --> 00:30:31,960
don't start allocating your
general and administrative

608
00:30:31,960 --> 00:30:34,300
expenses across
other departments.

609
00:30:34,300 --> 00:30:39,110
Just let them sit in your G&A.

610
00:30:39,110 --> 00:30:41,526
So I get a lot of
business plans.

611
00:30:41,526 --> 00:30:43,400
I'm happy to look at
anyone's business plans.

612
00:30:43,400 --> 00:30:45,380
My email is at the end
of this presentation.

613
00:30:45,380 --> 00:30:48,204
Any time, whether it's part
of this class, or any time

614
00:30:48,204 --> 00:30:50,620
in the next 10 years, you want
to send me a business plan,

615
00:30:50,620 --> 00:30:53,030
say, I'm getting ready
to make a presentation.

616
00:30:53,030 --> 00:30:54,890
I want someone to
look at this and just

617
00:30:54,890 --> 00:30:57,970
make sure it's
not totally crazy.

618
00:30:57,970 --> 00:30:59,350
So I get a lot of
business plans.

619
00:30:59,350 --> 00:31:02,370
And the first thing that I do
when I look at a business plan

620
00:31:02,370 --> 00:31:04,740
is I look at the
top line, and say,

621
00:31:04,740 --> 00:31:08,262
how big is this
business going to get?

622
00:31:08,262 --> 00:31:10,660
What is the market
opportunity here?

623
00:31:10,660 --> 00:31:12,320
So here's an
opportunity, they think

624
00:31:12,320 --> 00:31:14,295
it can grow to $75 million.

625
00:31:14,295 --> 00:31:17,130
The next thing that I
look at is, in year four,

626
00:31:17,130 --> 00:31:21,080
kind of the happy times, once
they've reached critical mass,

627
00:31:21,080 --> 00:31:22,750
what does this
business look like?

628
00:31:22,750 --> 00:31:24,444
What are the gross margins?

629
00:31:24,444 --> 00:31:25,860
I've worked in
companies that have

630
00:31:25,860 --> 00:31:29,700
80% gross margins and companies
that have 50% gross margins,

631
00:31:29,700 --> 00:31:32,140
and I can tell you it's
dramatically easier

632
00:31:32,140 --> 00:31:34,490
to make money and
run a business when

633
00:31:34,490 --> 00:31:39,370
you have 80% gross margins
versus 50% gross margins.

634
00:31:39,370 --> 00:31:41,230
It's dramatically different.

635
00:31:41,230 --> 00:31:43,490
And then, where are the
big expenses down here?

636
00:31:43,490 --> 00:31:45,970
What are they spending on R&D?

637
00:31:45,970 --> 00:31:47,600
Particularly, what
are they spending

638
00:31:47,600 --> 00:31:48,980
on sales and marketing?

639
00:31:48,980 --> 00:31:52,090
Because most firms end up
at about the same place

640
00:31:52,090 --> 00:31:54,470
in R&D spending once
they reach critical mass.

641
00:31:54,470 --> 00:31:57,740
They end up about the
same place G&A spending.

642
00:31:57,740 --> 00:32:02,270
But the sales and marketing
wildly varies, depending on

643
00:32:02,270 --> 00:32:05,780
is it a consumer product, is it
a business to business product,

644
00:32:05,780 --> 00:32:07,770
is it a luxury
product that you have

645
00:32:07,770 --> 00:32:10,590
to do a lot of advertising,
is there a lot of trade shows.

646
00:32:10,590 --> 00:32:14,440
So it depends on your whole
sales strategy and distribution

647
00:32:14,440 --> 00:32:18,650
strategy, and that shows up
in your sales and marketing.

648
00:32:18,650 --> 00:32:21,810
The last thing that I look at
is kind of the operating profit

649
00:32:21,810 --> 00:32:23,810
over the this four year period.

650
00:32:23,810 --> 00:32:26,240
Because that gives you
a pretty good yardstick

651
00:32:26,240 --> 00:32:28,780
for how much cash
this company is

652
00:32:28,780 --> 00:32:33,130
going to take to get
to profitability.

653
00:32:33,130 --> 00:32:38,950
It's not perfect, but it's
probably within 20% or 30%,

654
00:32:38,950 --> 00:32:40,890
which is a good-- you
know, it at least says

655
00:32:40,890 --> 00:32:45,350
to me this company, $3.5
million plus $2.5 million

656
00:32:45,350 --> 00:32:48,870
is $6 million, maybe it lost a
little bit here in year three,

657
00:32:48,870 --> 00:32:49,850
so it's $7 million.

658
00:32:49,850 --> 00:32:52,964
It's not a company that's
going to need $20 million.

659
00:32:52,964 --> 00:32:54,380
But it's also not
a company that's

660
00:32:54,380 --> 00:32:56,004
going to need $1
million or $2 million.

661
00:32:56,004 --> 00:32:59,810
So it gives you just a sense
of what this company needs.

662
00:32:59,810 --> 00:33:02,040
Now, let's say you're looking
at your business plan.

663
00:33:02,040 --> 00:33:03,831
I would urge you to
look at the same thing.

664
00:33:03,831 --> 00:33:08,590
Start at the top line,
and say, do I really

665
00:33:08,590 --> 00:33:11,400
think this business can
do this kind of revenue?

666
00:33:11,400 --> 00:33:14,810
I would also urge you to look
at year four or year five,

667
00:33:14,810 --> 00:33:16,290
whatever it's going
to take you get

668
00:33:16,290 --> 00:33:19,470
to that place, the
critical mass, and say,

669
00:33:19,470 --> 00:33:22,950
does this business model
look like other companies

670
00:33:22,950 --> 00:33:25,740
in my space, or is it different?

671
00:33:25,740 --> 00:33:28,490
And if it's different, that
doesn't mean it's wrong.

672
00:33:28,490 --> 00:33:31,970
It just means that you better
understand why it's different.

673
00:33:31,970 --> 00:33:34,260
Maybe you're doing something
dramatically different.

674
00:33:34,260 --> 00:33:36,360
Maybe you've got
some tremendous cost

675
00:33:36,360 --> 00:33:42,920
of goods sold value that
other companies don't have.

676
00:33:42,920 --> 00:33:46,100
But you've got to
understand that.

677
00:33:46,100 --> 00:33:50,110
Then, I would urge you to
think about a year one,

678
00:33:50,110 --> 00:33:53,530
because thinking about
expenses in year four

679
00:33:53,530 --> 00:33:58,050
is a very difficult exercise.

680
00:33:58,050 --> 00:34:00,630
Because you can't even--
I mean, here you are,

681
00:34:00,630 --> 00:34:02,600
you're getting your
business off the ground.

682
00:34:02,600 --> 00:34:07,910
It's hard to think about if
I had $75 million in revenue,

683
00:34:07,910 --> 00:34:09,409
where would that money be spent.

684
00:34:09,409 --> 00:34:12,659
But it's very easy to think
about the next 12 months.

685
00:34:12,659 --> 00:34:14,710
And who are my key hires?

686
00:34:14,710 --> 00:34:17,020
And how much are those
people going to cost?

687
00:34:17,020 --> 00:34:18,820
And what are the
stuff that they're

688
00:34:18,820 --> 00:34:21,260
going to need to buy to
help them do their job?

689
00:34:21,260 --> 00:34:23,780
And you're probably not
going to have a lot of sales,

690
00:34:23,780 --> 00:34:25,530
so you don't really
need to think too much

691
00:34:25,530 --> 00:34:27,880
about cost of goods sold yet.

692
00:34:27,880 --> 00:34:28,620
OK?

693
00:34:28,620 --> 00:34:30,500
But you need to
start thinking about

694
00:34:30,500 --> 00:34:33,570
what are my staffing
priorities, and what

695
00:34:33,570 --> 00:34:36,480
are the things that we need,
and where are we going to locate

696
00:34:36,480 --> 00:34:39,070
our business, and what we don't
have to spend on facilities,

697
00:34:39,070 --> 00:34:40,440
and that kind of thing.

698
00:34:40,440 --> 00:34:44,570
And then, while year one
should be fairly easy to do,

699
00:34:44,570 --> 00:34:47,120
year two is not that much
more of a stretch, because you

700
00:34:47,120 --> 00:34:50,590
are ready have kind of thought
about where I am in month 12.

701
00:34:50,590 --> 00:34:52,630
And so you just kind
of extrapolate that

702
00:34:52,630 --> 00:34:56,550
into what are we going to do
once we start having revenue?

703
00:34:56,550 --> 00:34:59,620
OK, so what is my support
team going to look like?

704
00:34:59,620 --> 00:35:02,070
What is my sales team
going to look like?

705
00:35:02,070 --> 00:35:03,890
And put some numbers on that.

706
00:35:03,890 --> 00:35:05,460
And then, once you've
done that, look

707
00:35:05,460 --> 00:35:08,750
at where your percentages
are out here in year two.

708
00:35:08,750 --> 00:35:12,470
And you already looked at
where they are in year four.

709
00:35:12,470 --> 00:35:16,884
And kind of make year three as
kind of a blending process, OK?

710
00:35:16,884 --> 00:35:19,050
Now, you're not going to
do this on an annual basis.

711
00:35:19,050 --> 00:35:21,360
I'm going to urge you to
do it on a quarterly basis.

712
00:35:21,360 --> 00:35:23,760
And we'll get into those
specific spreadsheets

713
00:35:23,760 --> 00:35:26,080
and talk you talk you
through that in a bit.

714
00:35:29,110 --> 00:35:37,540
So the business model in terms
of this percentage of income,

715
00:35:37,540 --> 00:35:41,060
or percentage of
revenue, exercise

716
00:35:41,060 --> 00:35:47,030
helps you think about what your
business is going to look like,

717
00:35:47,030 --> 00:35:48,650
and how you're
going to get there.

718
00:35:48,650 --> 00:35:50,610
It's going to show
how your business is

719
00:35:50,610 --> 00:35:52,750
going to make money.

720
00:35:52,750 --> 00:35:55,740
So let's look at a number
of different companies, OK?

721
00:35:55,740 --> 00:35:57,630
This is a number in
the retail sector.

722
00:35:57,630 --> 00:35:58,960
You guys all know them.

723
00:35:58,960 --> 00:36:01,510
Walmart, the low cost
leader, Target's kind

724
00:36:01,510 --> 00:36:05,920
of a middle market, and
Nordstrom is more high end.

725
00:36:05,920 --> 00:36:07,760
What has categorized
these businesses.

726
00:36:07,760 --> 00:36:11,200
They all have crappy
gross margins, right?

727
00:36:11,200 --> 00:36:14,800
24% for Walmart, 34%
percent for Target.

728
00:36:14,800 --> 00:36:17,790
They spend nothing
on R&D. Target

729
00:36:17,790 --> 00:36:20,002
should probably spend a
little something on their IT

730
00:36:20,002 --> 00:36:21,085
department, though, right?

731
00:36:26,660 --> 00:36:31,170
Now, all of this information is
available from the Securities

732
00:36:31,170 --> 00:36:34,330
and Exchange Commission, or you
can get rid of Yahoo Finance

733
00:36:34,330 --> 00:36:34,850
now.

734
00:36:34,850 --> 00:36:36,600
So just going to
Yahoo Finance, you

735
00:36:36,600 --> 00:36:38,310
can pull up the annual reports.

736
00:36:38,310 --> 00:36:40,720
You can get all this
information off of there.

737
00:36:40,720 --> 00:36:44,470
Most companies do
the lump sales,

738
00:36:44,470 --> 00:36:46,640
general and administrative
expenses together.

739
00:36:46,640 --> 00:36:48,590
So I don't have a
breakout on what

740
00:36:48,590 --> 00:36:52,000
they're spending on sales
and marketing versus G&A.

741
00:36:52,000 --> 00:36:54,900
But you can see
the sales, and SG&A

742
00:36:54,900 --> 00:36:57,510
comes in kind of
across the board here.

743
00:36:57,510 --> 00:37:00,300
But not tremendously profitable.

744
00:37:00,300 --> 00:37:03,470
But very high annual revenue.

745
00:37:03,470 --> 00:37:05,800
I mean, look at Walmart
at $344 billion.

746
00:37:05,800 --> 00:37:10,440
So 6% of a big number
is still a big number.

747
00:37:10,440 --> 00:37:12,350
One of the things that's
useful to look at,

748
00:37:12,350 --> 00:37:15,530
not comparing yourself
to these companies,

749
00:37:15,530 --> 00:37:17,840
but comparing yourself
to your peers,

750
00:37:17,840 --> 00:37:20,870
is going to be looking
at revenue per employee.

751
00:37:20,870 --> 00:37:22,710
So I just threw this
on here so you could--

752
00:37:22,710 --> 00:37:28,880
it does tell a lot how companies
within similar industries

753
00:37:28,880 --> 00:37:32,190
have very similar
revenue per employee.

754
00:37:32,190 --> 00:37:37,147
And in retail, it's in the
$150,000 to $200,000 range.

755
00:37:37,147 --> 00:37:38,730
Let's look at the
restaurant business.

756
00:37:38,730 --> 00:37:40,360
It's probably even worse, right?

757
00:37:40,360 --> 00:37:45,010
Again, terrible gross margins,
but actually the profitability

758
00:37:45,010 --> 00:37:48,000
is a little bit better
than the retail stores.

759
00:37:48,000 --> 00:37:57,610
But look at the revenue per
employee, $45,000 per employee.

760
00:37:57,610 --> 00:37:59,230
So think of this.

761
00:37:59,230 --> 00:38:01,445
The cost of goods are 68%.

762
00:38:05,072 --> 00:38:06,530
And a lot of that's
got to actually

763
00:38:06,530 --> 00:38:09,560
be meat and potatoes, right?

764
00:38:09,560 --> 00:38:11,640
So how much money is
actually left over

765
00:38:11,640 --> 00:38:16,200
to pay-- if your average
employee is $45,000 per person,

766
00:38:16,200 --> 00:38:19,740
you can't pay that
person $45,000 a year.

767
00:38:19,740 --> 00:38:22,310
So this idea that
they're going start

768
00:38:22,310 --> 00:38:26,020
being able to pay fast
food workers $15 an hour,

769
00:38:26,020 --> 00:38:29,000
which is this big
argument, there's

770
00:38:29,000 --> 00:38:31,886
just not enough money there.

771
00:38:31,886 --> 00:38:34,257
It's a crazy
business here, and I

772
00:38:34,257 --> 00:38:36,340
suspect that there are a
lot of part-time workers.

773
00:38:36,340 --> 00:38:38,550
But it is an
interesting fact here

774
00:38:38,550 --> 00:38:43,400
that all these businesses have
such low revenue per employee.

775
00:38:43,400 --> 00:38:45,690
Let's look at some
interesting companies now.

776
00:38:45,690 --> 00:38:49,800
Cisco, very good
gross margin, 64%.

777
00:38:49,800 --> 00:38:54,580
We see R&D is at 13% and
operating profit at 25%.

778
00:38:54,580 --> 00:38:56,160
These might be a
couple years old,

779
00:38:56,160 --> 00:38:59,080
but they're in line with this.

780
00:38:59,080 --> 00:39:04,510
And revenue per employee
is $573,000 per employee.

781
00:39:04,510 --> 00:39:08,230
Think of that versus
$45,000 per employee, OK?

782
00:39:08,230 --> 00:39:10,600
So you can afford
to pay your Cisco

783
00:39:10,600 --> 00:39:14,510
employees $100,000 to $125,000.

784
00:39:14,510 --> 00:39:16,940
You can't afford to do
that at McDonald's, right?

785
00:39:16,940 --> 00:39:19,700
So again, these
are characterized

786
00:39:19,700 --> 00:39:23,870
by R&D spending of kind
of the 10% to 15% range.

787
00:39:23,870 --> 00:39:25,060
Except for Dell.

788
00:39:25,060 --> 00:39:29,150
And Dell is really
just a box manufacture.

789
00:39:29,150 --> 00:39:30,330
They're just an assembler.

790
00:39:30,330 --> 00:39:32,230
They're just a
supply chain story.

791
00:39:32,230 --> 00:39:33,980
They're not an R&D story.

792
00:39:33,980 --> 00:39:35,820
And it comes out
in their numbers.

793
00:39:35,820 --> 00:39:38,200
Medtronic is a
medical device maker,

794
00:39:38,200 --> 00:39:42,300
but it really has all the
characteristics of a technology

795
00:39:42,300 --> 00:39:44,487
hardware company.

796
00:39:44,487 --> 00:39:46,070
Let's look at some
software companies.

797
00:39:46,070 --> 00:39:49,110
Again, even better
gross margins.

798
00:39:49,110 --> 00:39:53,250
Say R&D is in that
same 10% to 15%.

799
00:39:53,250 --> 00:39:55,510
And the revenue per
employee at Microsoft

800
00:39:55,510 --> 00:39:57,430
is about the same as Cisco.

801
00:39:57,430 --> 00:40:00,670
Oracle and SAP,
which are more peers,

802
00:40:00,670 --> 00:40:03,720
have very similar
revenue per employee

803
00:40:03,720 --> 00:40:08,790
in that $250,000
to $300,000 range.

804
00:40:08,790 --> 00:40:12,562
The internet companies
are all across the board.

805
00:40:12,562 --> 00:40:14,520
I mean, Apple's not really
an internet company,

806
00:40:14,520 --> 00:40:17,900
but they are kind
of interesting here

807
00:40:17,900 --> 00:40:22,660
in that they have $2 million
of revenue per employee.

808
00:40:22,660 --> 00:40:23,610
Mind-boggling.

809
00:40:23,610 --> 00:40:27,210
I mean, Google is at $1 million.

810
00:40:27,210 --> 00:40:29,750
I started putting Google on
this after they went public.

811
00:40:29,750 --> 00:40:32,490
And I said, well, they
can't sustain that.

812
00:40:32,490 --> 00:40:34,230
They were about $1
million when I first

813
00:40:34,230 --> 00:40:35,740
did it I think three years ago.

814
00:40:35,740 --> 00:40:39,510
And they've actually increased
their revenue per employee

815
00:40:39,510 --> 00:40:40,230
as they've grown.

816
00:40:40,230 --> 00:40:42,550
So they've become
more productive,

817
00:40:42,550 --> 00:40:45,940
which is kind of-- few
companies are able to do that.

818
00:40:45,940 --> 00:40:47,900
Usually, companies
have a decrease

819
00:40:47,900 --> 00:40:50,320
in revenue per employee
as they get bigger.

820
00:40:50,320 --> 00:40:52,880
Google's been able
to increase it.

821
00:40:52,880 --> 00:40:55,250
Again, here, R&D spending.

822
00:40:55,250 --> 00:40:58,931
I mean, Apple is so big that
that 2% is still a huge number,

823
00:40:58,931 --> 00:40:59,430
right?

824
00:40:59,430 --> 00:41:02,490
But if we look at
the rest of these,

825
00:41:02,490 --> 00:41:04,000
it is a little bit
across the board,

826
00:41:04,000 --> 00:41:08,350
and it's part of where a company
is in this stage of their life

827
00:41:08,350 --> 00:41:09,810
cycle.

828
00:41:09,810 --> 00:41:12,679
But this gives you kind of a
sense of where companies are.

829
00:41:12,679 --> 00:41:14,220
Another thing that's
interesting here

830
00:41:14,220 --> 00:41:16,680
is the two companies with
the lowest gross margin

831
00:41:16,680 --> 00:41:20,970
are Apple, which is
selling hardware,

832
00:41:20,970 --> 00:41:23,580
and Pandora, which
is selling music.

833
00:41:23,580 --> 00:41:27,900
So just because you're in a
intellectual property business,

834
00:41:27,900 --> 00:41:32,670
or in a-- I don't know what you
would call music, if you're not

835
00:41:32,670 --> 00:41:34,120
calling it hardware.

836
00:41:34,120 --> 00:41:38,140
But it's kind of interesting
that their cost of goods

837
00:41:38,140 --> 00:41:41,280
are actually as high as Apple's,
because of the royalties

838
00:41:41,280 --> 00:41:42,670
that they have to pay.

839
00:41:42,670 --> 00:41:46,484
And that creates some
problems for them.

840
00:41:46,484 --> 00:41:48,400
I think they're now
starting to show a profit,

841
00:41:48,400 --> 00:41:50,115
but it's still a
very tough business.

842
00:41:53,560 --> 00:41:56,170
Looking at business models
over a period of time,

843
00:41:56,170 --> 00:41:57,670
they evolve slowly.

844
00:41:57,670 --> 00:42:00,230
I've been doing this
talk since at least '98.

845
00:42:00,230 --> 00:42:07,730
And just looking at Cisco,
it looks like the same.

846
00:42:07,730 --> 00:42:10,380
I mean, yeah, it goes up
and down a little bit.

847
00:42:10,380 --> 00:42:12,520
But companies do
not dramatically

848
00:42:12,520 --> 00:42:15,120
change over a period of
time once they kind of

849
00:42:15,120 --> 00:42:17,600
hit that critical mass.

850
00:42:20,630 --> 00:42:23,530
So as you're
building your model--

851
00:42:23,530 --> 00:42:27,010
I know the talk yesterday was
on your product and pricing

852
00:42:27,010 --> 00:42:31,470
your product-- what's the value
that you bring to the customer?

853
00:42:35,040 --> 00:42:38,240
And how is that value
going to be split

854
00:42:38,240 --> 00:42:40,270
between you and the customer?

855
00:42:40,270 --> 00:42:41,730
I hear a lot of
people say, well,

856
00:42:41,730 --> 00:42:46,980
we have a product that will
save our customers $10,000.

857
00:42:46,980 --> 00:42:50,060
So we think we should
charge them $10,000.

858
00:42:50,060 --> 00:42:52,380
Well, at $10,000,
they're indifferent

859
00:42:52,380 --> 00:42:54,520
whether they do it manually
or whether they do it

860
00:42:54,520 --> 00:42:56,640
with your new
piece of equipment.

861
00:42:56,640 --> 00:42:59,260
So you've got to
price that product

862
00:42:59,260 --> 00:43:04,040
to where it's compelling for
the customer to take that risk

863
00:43:04,040 --> 00:43:05,600
and make that change.

864
00:43:05,600 --> 00:43:09,190
And if it's a $10,000
value to them,

865
00:43:09,190 --> 00:43:13,580
you've probably got to price
that at $2,000 or $3,000,

866
00:43:13,580 --> 00:43:17,670
and let them capture the
majority of that savings,

867
00:43:17,670 --> 00:43:19,890
because they're taking the risk.

868
00:43:19,890 --> 00:43:21,920
And so you've got
to figure out how,

869
00:43:21,920 --> 00:43:24,050
at a $2,000 or
$3,000 price, you're

870
00:43:24,050 --> 00:43:27,280
going to be able to sell
that and capture enough value

871
00:43:27,280 --> 00:43:29,980
yourself, OK?

872
00:43:29,980 --> 00:43:33,140
Your distribution strategy.

873
00:43:33,140 --> 00:43:36,690
So think about the price, and
then your cost of goods sold

874
00:43:36,690 --> 00:43:39,010
should be pretty
straightforward.

875
00:43:39,010 --> 00:43:41,370
I mean, you know the
material that goes in there.

876
00:43:41,370 --> 00:43:43,680
Again, it's not how
long is it going to take

877
00:43:43,680 --> 00:43:45,140
to develop this product.

878
00:43:45,140 --> 00:43:48,660
That's part of your R&D, and
that's a whole other exercise.

879
00:43:48,660 --> 00:43:54,010
But it's, if I sell a unit, how
much material goes into it, how

880
00:43:54,010 --> 00:43:57,400
much labor goes into
it, how much overhead

881
00:43:57,400 --> 00:44:00,310
in the manufacturing
facility goes into it,

882
00:44:00,310 --> 00:44:02,570
how much support am I
going to have to provide?

883
00:44:02,570 --> 00:44:06,110
These are all questions that,
if you sit there and noodle away

884
00:44:06,110 --> 00:44:11,932
at it, you can come up with
a pretty reasonable range,

885
00:44:11,932 --> 00:44:14,820
and come up with your
cost of goods sold.

886
00:44:14,820 --> 00:44:16,966
When you think about your
distribution strategy,

887
00:44:16,966 --> 00:44:18,590
how am I going to
sell my product, that

888
00:44:18,590 --> 00:44:20,850
could have-- I have an
example of that in here--

889
00:44:20,850 --> 00:44:26,220
that could have a huge impact
on everything involving

890
00:44:26,220 --> 00:44:30,130
your business, in both your
revenue all the way down

891
00:44:30,130 --> 00:44:32,530
to your sales and marketing
and your operating profit.

892
00:44:32,530 --> 00:44:35,100
So that's a huge decision
you're going to have to make.

893
00:44:35,100 --> 00:44:38,110
R&D, I would argue, should
end up at the 10% to 20%

894
00:44:38,110 --> 00:44:39,880
range generally.

895
00:44:39,880 --> 00:44:41,620
As we've looked at
a lot of companies,

896
00:44:41,620 --> 00:44:42,920
that's where they end up.

897
00:44:42,920 --> 00:44:46,470
That doesn't mean you shouldn't
be at 30%, like Zynga was,

898
00:44:46,470 --> 00:44:49,550
depending on where you
are in your life cycle.

899
00:44:49,550 --> 00:44:52,060
But if you're a
technology company,

900
00:44:52,060 --> 00:44:58,080
and you're not spending
10% of your revenue on R&D,

901
00:44:58,080 --> 00:45:01,210
you're yourself short for
tomorrow's products, right?

902
00:45:01,210 --> 00:45:03,540
Because you've always
got to be evolving.

903
00:45:03,540 --> 00:45:06,110
G&A is going to end
up at 5% to 15%.

904
00:45:06,110 --> 00:45:09,950
The lower you can
get that, the better.

905
00:45:09,950 --> 00:45:13,210
That's where the CFO is,
so just squeeze that down.

906
00:45:13,210 --> 00:45:16,400
And make sure you build
in an operating profit.

907
00:45:16,400 --> 00:45:21,770
Now, you're operating profit
shouldn't be 40% to 50%.

908
00:45:21,770 --> 00:45:24,360
There's a few companies
that can get away with that.

909
00:45:24,360 --> 00:45:26,910
But to think that your
company is one of those

910
00:45:26,910 --> 00:45:30,360
is probably unrealistic.

911
00:45:30,360 --> 00:45:36,140
So if you're putting
together your model,

912
00:45:36,140 --> 00:45:40,174
and you keep coming up with a
40% to 50% operating profit,

913
00:45:40,174 --> 00:45:42,340
you should really question
some of your assumptions.

914
00:45:42,340 --> 00:45:45,390
Do I really, am I
missing anything here?

915
00:45:45,390 --> 00:45:47,780
I'm not saying it's wrong.

916
00:45:47,780 --> 00:45:49,500
It might be doable.

917
00:45:49,500 --> 00:45:52,860
But you're going to get
some pushback on that

918
00:45:52,860 --> 00:45:56,780
from people who've looked
at a lot of business plans.

919
00:45:56,780 --> 00:46:00,520
So I talked about how
your distribution strategy

920
00:46:00,520 --> 00:46:03,260
is going to impact
your operating profit.

921
00:46:03,260 --> 00:46:04,970
So let's look at an
example here where

922
00:46:04,970 --> 00:46:07,220
you're selling it through
your own direct sales force.

923
00:46:07,220 --> 00:46:09,590
You have $100 million in
revenue, your cost of goods

924
00:46:09,590 --> 00:46:11,880
is $40 million, leaving
you with $60 million,

925
00:46:11,880 --> 00:46:13,900
or 60% gross margin.

926
00:46:13,900 --> 00:46:17,040
You have $23 million in sales
and marketing, $12 million

927
00:46:17,040 --> 00:46:20,540
in R&D, and some G&A,
bringing your total expenses

928
00:46:20,540 --> 00:46:24,475
to $40 million, and an operating
profit of $20 million, or 20%.

929
00:46:24,475 --> 00:46:26,100
So let's say, instead
of that, you say,

930
00:46:26,100 --> 00:46:28,290
I'm going to bring
in a distributor,

931
00:46:28,290 --> 00:46:33,250
and give him a 20% discount off
of our list price or selling

932
00:46:33,250 --> 00:46:34,090
price.

933
00:46:34,090 --> 00:46:37,814
And in return for that 20%,
he's going to go out and sell it

934
00:46:37,814 --> 00:46:38,480
to the customer.

935
00:46:38,480 --> 00:46:41,630
He gets to keep the
20%, but he frees me up

936
00:46:41,630 --> 00:46:44,530
of all the sales and
marketing activity.

937
00:46:44,530 --> 00:46:46,370
Well, not entirely.

938
00:46:46,370 --> 00:46:48,760
Because even the
distribution channel

939
00:46:48,760 --> 00:46:50,360
needs some care and feeding.

940
00:46:50,360 --> 00:46:53,260
So you can't completely get
rid of your sales force.

941
00:46:53,260 --> 00:46:56,020
You can't completely get rid
of your marketing efforts.

942
00:46:56,020 --> 00:46:57,270
But you can cut those back.

943
00:46:57,270 --> 00:46:59,580
And in my example, I said,
well, you could cut it back

944
00:46:59,580 --> 00:47:02,390
from $23 million to $8 million.

945
00:47:02,390 --> 00:47:05,050
Now, your R&D is
still going to be

946
00:47:05,050 --> 00:47:06,810
the same, because
you've got to keep

947
00:47:06,810 --> 00:47:10,230
feeding the machine with
new products, right?

948
00:47:10,230 --> 00:47:12,630
And your cost of goods is
going to be exactly the same,

949
00:47:12,630 --> 00:47:15,190
because you're shipping
the same number of units.

950
00:47:15,190 --> 00:47:16,810
But because you have
fewer employees,

951
00:47:16,810 --> 00:47:19,610
you probably don't need
quite as many people in HR,

952
00:47:19,610 --> 00:47:21,380
you don't need as
many bean counters.

953
00:47:21,380 --> 00:47:23,720
Your G&A is going to
be a little bit less,

954
00:47:23,720 --> 00:47:25,500
and so that's going
to be $4 million.

955
00:47:25,500 --> 00:47:30,920
So in this example, your revenue
is reduced from $100 million

956
00:47:30,920 --> 00:47:33,090
to $80 million, and
your operating profit

957
00:47:33,090 --> 00:47:35,560
is reduced from $20
million to $16 million,

958
00:47:35,560 --> 00:47:38,030
but you're still
getting a 20% profit.

959
00:47:38,030 --> 00:47:43,400
Now, I don't know whether
one is right or wrong.

960
00:47:43,400 --> 00:47:45,900
I would say that the
distributor model

961
00:47:45,900 --> 00:47:48,790
is going to be great if it
can get you to market faster,

962
00:47:48,790 --> 00:47:52,390
or if it can take you from
$80 million to $160 million

963
00:47:52,390 --> 00:47:56,030
faster than you could grow
organically from $100 million

964
00:47:56,030 --> 00:47:57,750
to $160 million.

965
00:47:57,750 --> 00:47:59,490
You're still getting
the same 20%.

966
00:47:59,490 --> 00:48:06,230
And whether that 20%
came out at 15% or 25%,

967
00:48:06,230 --> 00:48:08,990
the more important number
here is the $16 million

968
00:48:08,990 --> 00:48:12,300
in operating profit
versus the $20 million

969
00:48:12,300 --> 00:48:15,600
in operating profit.

970
00:48:15,600 --> 00:48:17,470
So as you're
building your model,

971
00:48:17,470 --> 00:48:19,560
there is some business
planing software out there,

972
00:48:19,560 --> 00:48:20,560
kind of like a TurboTax.

973
00:48:20,560 --> 00:48:23,080
It asks you a
bunch of questions.

974
00:48:23,080 --> 00:48:25,940
It asks you the questions,
you answer the assumptions,

975
00:48:25,940 --> 00:48:28,630
and it spits out a plan.

976
00:48:28,630 --> 00:48:31,410
Do not use that software,
because the beauty

977
00:48:31,410 --> 00:48:34,310
of this exercise, the
benefit of this exercise,

978
00:48:34,310 --> 00:48:38,880
is understanding exactly
what's going into your model,

979
00:48:38,880 --> 00:48:40,510
and building it yourself.

980
00:48:40,510 --> 00:48:47,530
And when something doesn't add
up, figuring out what's broken.

981
00:48:47,530 --> 00:48:52,080
When you start getting
50% operating profits,

982
00:48:52,080 --> 00:48:58,200
start saying, let's look
at my revenue per employee.

983
00:48:58,200 --> 00:49:02,190
Oh, my revenue per employee
is $1 million per employee.

984
00:49:02,190 --> 00:49:05,659
Well, Google does that,
and Apple does that,

985
00:49:05,659 --> 00:49:07,450
but there are not very
many other companies

986
00:49:07,450 --> 00:49:10,200
that have $1 million in
revenue per employee.

987
00:49:10,200 --> 00:49:15,910
So maybe I need to add more
employees to my staffing plan.

988
00:49:15,910 --> 00:49:20,740
And where am I going to
deploy those people in order

989
00:49:20,740 --> 00:49:23,790
to build up my organization?

990
00:49:23,790 --> 00:49:26,910
So it's doing it, it's
working the exercise

991
00:49:26,910 --> 00:49:29,870
that is the real benefit.

992
00:49:29,870 --> 00:49:35,420
Build your sales projections
from the bottom up.

993
00:49:35,420 --> 00:49:38,000
Anyone watch Shark Tank?

994
00:49:38,000 --> 00:49:38,880
OK.

995
00:49:38,880 --> 00:49:41,651
I gave this talk
about two months ago,

996
00:49:41,651 --> 00:49:43,900
and everyone said, no, it's
on Friday night, I go out.

997
00:49:43,900 --> 00:49:46,240
You know, I'm not waiting
at home Friday night.

998
00:49:46,240 --> 00:49:48,210
So someone was on
Shark Tank last week,

999
00:49:48,210 --> 00:49:50,580
and they said they're
selling a product that

1000
00:49:50,580 --> 00:49:52,090
went into school lockers.

1001
00:49:52,090 --> 00:49:56,080
And they said, why are
you valuing your company

1002
00:49:56,080 --> 00:49:57,040
at $5 million?

1003
00:49:57,040 --> 00:50:01,570
And he said, well, there's
50 million school lockers

1004
00:50:01,570 --> 00:50:05,170
in the country, and we only
need to get 5% of them.

1005
00:50:05,170 --> 00:50:10,810
I mean, it's a crazy-- that's
wrong on so many counts.

1006
00:50:10,810 --> 00:50:12,917
Because it doesn't
talk about how

1007
00:50:12,917 --> 00:50:15,250
you're going to get into each
school, how many are going

1008
00:50:15,250 --> 00:50:18,920
to sell into each school, what
is your distribution strategy

1009
00:50:18,920 --> 00:50:20,090
to get there.

1010
00:50:20,090 --> 00:50:22,790
So instead of saying,
the market is huge

1011
00:50:22,790 --> 00:50:24,650
and we're going to
get a slice of it,

1012
00:50:24,650 --> 00:50:26,600
what you said need
to say is, we're

1013
00:50:26,600 --> 00:50:28,590
going to have five sales guys.

1014
00:50:28,590 --> 00:50:30,330
And each sales
guy is going to be

1015
00:50:30,330 --> 00:50:32,760
responsible for a
territory in the country.

1016
00:50:32,760 --> 00:50:35,750
And each territory has--
I'm kind of making this up

1017
00:50:35,750 --> 00:50:37,780
about the school
lockers as I go here--

1018
00:50:37,780 --> 00:50:41,860
but each territory
has 25,000 schools.

1019
00:50:41,860 --> 00:50:45,320
And I expect each sales
guy to higher 10 reps.

1020
00:50:45,320 --> 00:50:48,460
And each rep is going to
go to two schools a day.

1021
00:50:48,460 --> 00:50:55,040
And we expect a closure rate of
10% when they go to a school,

1022
00:50:55,040 --> 00:51:00,670
and each school that buys these
is going to buy 50 lockers.

1023
00:51:00,670 --> 00:51:02,610
And you put that
all in, and it'll

1024
00:51:02,610 --> 00:51:05,230
come up with a model for how
many you're going to sell.

1025
00:51:05,230 --> 00:51:10,320
And that may not be--
it will not be accurate.

1026
00:51:10,320 --> 00:51:13,554
Because as you put this
together, it's a crystal ball.

1027
00:51:13,554 --> 00:51:14,970
And when you get
out there, you're

1028
00:51:14,970 --> 00:51:19,730
going to find out a sales guy
can't go to two schools a day,

1029
00:51:19,730 --> 00:51:24,000
and he can't close 10%,
and they don't buy 50.

1030
00:51:24,000 --> 00:51:27,540
But when you get a guy
out there selling stuff,

1031
00:51:27,540 --> 00:51:29,710
he's going to be
providing data, and you're

1032
00:51:29,710 --> 00:51:32,480
going to start getting
feedback to say,

1033
00:51:32,480 --> 00:51:34,860
we can visit three
schools a day,

1034
00:51:34,860 --> 00:51:37,270
but there's only
a 5% closure rate,

1035
00:51:37,270 --> 00:51:40,210
but each school that does
buy is going to buy 75.

1036
00:51:40,210 --> 00:51:43,130
And then, you can
adjust your model.

1037
00:51:43,130 --> 00:51:45,040
But since you've
built your model,

1038
00:51:45,040 --> 00:51:48,610
now you can adjust
it, and figure out

1039
00:51:48,610 --> 00:51:50,490
where you're going to go next.

1040
00:51:50,490 --> 00:51:54,490
The last thing is that
there's spreadsheet overload.

1041
00:51:54,490 --> 00:51:58,380
So never do a best
case, worst case,

1042
00:51:58,380 --> 00:52:00,550
and present three
different models, and say,

1043
00:52:00,550 --> 00:52:03,000
if everything goes right,
here's what we need.

1044
00:52:03,000 --> 00:52:06,990
I'm not saying don't
look at contingencies.

1045
00:52:06,990 --> 00:52:10,320
But just put your
best foot forward.

1046
00:52:10,320 --> 00:52:12,289
Put your best
estimate on the paper.

1047
00:52:12,289 --> 00:52:13,830
Say, here's what we
think we're going

1048
00:52:13,830 --> 00:52:23,430
to do, and leave the best case,
worst case for someone else.

1049
00:52:23,430 --> 00:52:26,110
I might give you some rules of
thumb on the next spreadsheet.

1050
00:52:26,110 --> 00:52:29,730
These are focused on making
your investment interest

1051
00:52:29,730 --> 00:52:30,870
attractive to investors.

1052
00:52:30,870 --> 00:52:33,410
Just like your $5
million business

1053
00:52:33,410 --> 00:52:35,021
might be a great
business, it's not

1054
00:52:35,021 --> 00:52:36,520
going to be attractive
to investors.

1055
00:52:36,520 --> 00:52:39,370
So I may say, don't put
together a business plan that

1056
00:52:39,370 --> 00:52:41,189
only gets you to $5 million.

1057
00:52:41,189 --> 00:52:42,480
That could be a great business.

1058
00:52:42,480 --> 00:52:44,720
OK, so don't let me
discourage you from that.

1059
00:52:44,720 --> 00:52:47,770
It's most relevant for
technology companies.

1060
00:52:47,770 --> 00:52:52,050
So if you're going to
start a fast food chain,

1061
00:52:52,050 --> 00:52:54,770
these metrics are not
going to apply to you.

1062
00:52:54,770 --> 00:52:57,710
And like I said, it might
not apply to your industry.

1063
00:53:00,320 --> 00:53:04,520
Staffing is what's going
to drive your expenses, OK?

1064
00:53:04,520 --> 00:53:09,720
Most technology companies,
staffing is 50% to 66%

1065
00:53:09,720 --> 00:53:11,100
of your expense.

1066
00:53:11,100 --> 00:53:12,680
And your average
cost per employee

1067
00:53:12,680 --> 00:53:15,900
is going to be about $90,000.

1068
00:53:15,900 --> 00:53:18,590
I know it sounds crazy,
sounds crazy high.

1069
00:53:18,590 --> 00:53:20,870
But the reality is,
in Boston, first

1070
00:53:20,870 --> 00:53:24,740
off is, who has administrative
assistants anymore?

1071
00:53:24,740 --> 00:53:28,130
Unless you have like a
large manufacturing staff

1072
00:53:28,130 --> 00:53:31,950
that's doing kind of
assembly and stuff like that.

1073
00:53:31,950 --> 00:53:34,820
But in most of the companies
that you guys are going

1074
00:53:34,820 --> 00:53:38,360
to be starting, it's going to
be a lot of technology workers,

1075
00:53:38,360 --> 00:53:40,240
it's going to be a
lot of programmers,

1076
00:53:40,240 --> 00:53:43,270
it's going to be a lot of
sales and marketing staff,

1077
00:53:43,270 --> 00:53:45,780
it's going to be a
few finance people.

1078
00:53:45,780 --> 00:53:47,490
I mean, the finance
and HR are probably

1079
00:53:47,490 --> 00:53:49,810
going to be the cheapest
people in your company.

1080
00:53:49,810 --> 00:53:50,960
I mean, really.

1081
00:53:50,960 --> 00:53:52,770
A programmer these
days, especially

1082
00:53:52,770 --> 00:53:54,850
if you want to get a
algorithm engineer,

1083
00:53:54,850 --> 00:53:57,000
algorithm engineer is
probably going to cost you

1084
00:53:57,000 --> 00:54:00,070
$125,000, $150,000 a year.

1085
00:54:00,070 --> 00:54:02,410
OK?

1086
00:54:02,410 --> 00:54:05,590
Just a programmer's
going to cost you

1087
00:54:05,590 --> 00:54:07,370
$80,000, $90,000, $100,000.

1088
00:54:07,370 --> 00:54:10,310
And these folks are going
to want raises every year.

1089
00:54:10,310 --> 00:54:17,890
So salaries are going to
come in at about $90,000.

1090
00:54:17,890 --> 00:54:20,920
Employee benefits are going
to add about 15% to that.

1091
00:54:20,920 --> 00:54:23,510
So I know you've all heard
horror stories about General

1092
00:54:23,510 --> 00:54:26,530
Motors pays their
guys $25 an hour,

1093
00:54:26,530 --> 00:54:29,190
but they're true
cost is $50 an hour.

1094
00:54:29,190 --> 00:54:31,760
Ignore all that
accounting mumbo-jumbo.

1095
00:54:31,760 --> 00:54:35,030
You can add in 15%, and that'll
be a pretty good yardstick

1096
00:54:35,030 --> 00:54:37,440
to cover their FICA
expenses, which

1097
00:54:37,440 --> 00:54:40,660
is Social Security tax,
and their health insurance.

1098
00:54:40,660 --> 00:54:42,180
OK?

1099
00:54:42,180 --> 00:54:45,920
As I said, salaries are going to
be about 2/3 of your expenses.

1100
00:54:45,920 --> 00:54:49,040
And sales staff is really
industry dependent.

1101
00:54:49,040 --> 00:54:50,990
So I've got some
yardsticks on here,

1102
00:54:50,990 --> 00:54:53,330
but it really
depends on-- if you

1103
00:54:53,330 --> 00:54:55,930
got a guy who's selling
lockers to a school system,

1104
00:54:55,930 --> 00:54:59,490
OK, you can probably get that
guy for, I don't know, probably

1105
00:54:59,490 --> 00:55:02,459
$50,000 a year, and maybe
give him a 10% commission

1106
00:55:02,459 --> 00:55:03,000
or something.

1107
00:55:03,000 --> 00:55:04,870
Or maybe $40,000 a year.

1108
00:55:04,870 --> 00:55:06,790
So you know, this
is not a guy that's

1109
00:55:06,790 --> 00:55:10,360
selling complicated
software sale, OK?

1110
00:55:10,360 --> 00:55:12,470
But someone who is selling
something like that

1111
00:55:12,470 --> 00:55:18,900
is going to need $150,000
to $250,000 a year.

1112
00:55:18,900 --> 00:55:22,150
So I don't have time to go
through a case study here,

1113
00:55:22,150 --> 00:55:29,980
but a couple years ago,
I went in when OpenTable

1114
00:55:29,980 --> 00:55:32,400
went public, and just looked
at some of their publicly

1115
00:55:32,400 --> 00:55:33,980
available information.

1116
00:55:33,980 --> 00:55:37,030
And this first page is all
of the publicly available

1117
00:55:37,030 --> 00:55:37,980
information.

1118
00:55:37,980 --> 00:55:41,720
But I was able to really
uncover a lot of things

1119
00:55:41,720 --> 00:55:43,540
about how they ran
their business,

1120
00:55:43,540 --> 00:55:46,660
and how they were
generating revenue.

1121
00:55:46,660 --> 00:55:49,750
And I would just urge you to
look at these next few pages.

1122
00:55:49,750 --> 00:55:51,835
This presentation will
be on the website.

1123
00:55:54,720 --> 00:55:58,270
In terms of cash flow, it's
critical to understand it.

1124
00:55:58,270 --> 00:56:01,100
But producing a
cash flow statement

1125
00:56:01,100 --> 00:56:04,260
is really complicated, and
it's really prone to error.

1126
00:56:04,260 --> 00:56:06,090
And the reason is
that you have to put

1127
00:56:06,090 --> 00:56:08,030
in all of these
formulas, and then

1128
00:56:08,030 --> 00:56:12,460
the plug number that makes
all the formulas work is cash.

1129
00:56:12,460 --> 00:56:18,100
So any error in any formula, or
anything that you fat-fingered

1130
00:56:18,100 --> 00:56:22,280
wrong shows up as cash.

1131
00:56:22,280 --> 00:56:24,120
And sometimes it's
to the negative,

1132
00:56:24,120 --> 00:56:26,840
sometimes it's to the positive.

1133
00:56:26,840 --> 00:56:28,480
Every time I do
this, I say I'm going

1134
00:56:28,480 --> 00:56:32,140
to put together a cash flow
just so people can look at one.

1135
00:56:32,140 --> 00:56:35,070
And maybe I'll chastise myself,
and I'll go home and do this.

1136
00:56:35,070 --> 00:56:37,200
And if I do, I'll
send it to Joe.

1137
00:56:37,200 --> 00:56:40,150
But a good proxy for
cash flow is just

1138
00:56:40,150 --> 00:56:42,150
looking at your
cumulative operating

1139
00:56:42,150 --> 00:56:46,150
losses over the period of
time, and adding in any capital

1140
00:56:46,150 --> 00:56:47,780
expenses that you had.

1141
00:56:47,780 --> 00:56:50,030
And while that's
not perfect, it's

1142
00:56:50,030 --> 00:56:52,870
a pretty good number
for how much money

1143
00:56:52,870 --> 00:56:56,670
this business is going to need.

1144
00:56:56,670 --> 00:57:01,200
So a lot of people ask me, well,
how much should I pay myself?

1145
00:57:01,200 --> 00:57:05,650
And venture catalysts, they
don't want their entrepreneurs

1146
00:57:05,650 --> 00:57:09,790
to starve, but they
want them to be hungry.

1147
00:57:09,790 --> 00:57:14,780
So what I would urge you
to do is think about maybe

1148
00:57:14,780 --> 00:57:17,384
what you made before
you came back to school.

1149
00:57:17,384 --> 00:57:19,550
I mean, I assume a lot of
you are graduate students.

1150
00:57:19,550 --> 00:57:22,240
Or think about
what your peers are

1151
00:57:22,240 --> 00:57:24,960
going to make as they're
going out into industry.

1152
00:57:24,960 --> 00:57:31,330
Now, if you're in a very
specific discipline,

1153
00:57:31,330 --> 00:57:35,010
and your peers are going out
to work in that discipline,

1154
00:57:35,010 --> 00:57:37,565
and because-- let's say
they're geological engineers,

1155
00:57:37,565 --> 00:57:39,315
and they're going to
go up to North Dakota

1156
00:57:39,315 --> 00:57:44,020
and make $250,000 a year because
they're helping drill for oil.

1157
00:57:44,020 --> 00:57:45,840
Well, you can't
say, well, look, I

1158
00:57:45,840 --> 00:57:49,070
could be drilling for oil
in North Dakota for $250,000

1159
00:57:49,070 --> 00:57:49,660
a year.

1160
00:57:49,660 --> 00:57:52,050
Therefore, that's what
I need to pay myself.

1161
00:57:52,050 --> 00:57:54,550
So that's kind of
an extreme case.

1162
00:57:54,550 --> 00:57:56,520
But think about what
your peers are making,

1163
00:57:56,520 --> 00:57:58,590
and generally you
can argue that that's

1164
00:57:58,590 --> 00:58:00,280
what you ought to be paid.

1165
00:58:00,280 --> 00:58:02,420
Or what you were getting
paid in your prior life,

1166
00:58:02,420 --> 00:58:05,460
unless you were an investment
banker in your prior life,

1167
00:58:05,460 --> 00:58:05,960
right?

1168
00:58:09,030 --> 00:58:11,030
Your investors want you
to earn a living wage.

1169
00:58:11,030 --> 00:58:13,120
They don't want you to be
worried about paying the bills,

1170
00:58:13,120 --> 00:58:14,203
or getting your car fixed.

1171
00:58:14,203 --> 00:58:16,850
They don't want you
to work 23 hours a day

1172
00:58:16,850 --> 00:58:19,620
with as few distractions
as possible.

1173
00:58:19,620 --> 00:58:21,880
But they want to make sure
that you're still hungry,

1174
00:58:21,880 --> 00:58:27,840
and increasing shareholder
value every day.

1175
00:58:27,840 --> 00:58:31,480
So here's what we want to
get to is our profit and loss

1176
00:58:31,480 --> 00:58:34,250
statement for four years, OK?

1177
00:58:34,250 --> 00:58:37,070
And so I've got this
color coded spreadsheet,

1178
00:58:37,070 --> 00:58:39,260
and here's the code here.

1179
00:58:39,260 --> 00:58:42,510
Anything that's in blue comes
from another spreadsheet.

1180
00:58:42,510 --> 00:58:44,050
And I've got a
little column here

1181
00:58:44,050 --> 00:58:46,550
that you would take out when
you actually presented this

1182
00:58:46,550 --> 00:58:51,030
to anyone that says, here,
this is coming from the P&L

1183
00:58:51,030 --> 00:58:52,780
by quarter spreadsheet.

1184
00:58:52,780 --> 00:58:56,940
And so this spreadsheet's got
about 12 pages on it, right?

1185
00:58:56,940 --> 00:59:00,090
So here's your summary page
here, and as you can see,

1186
00:59:00,090 --> 00:59:01,870
everything comes
from another page.

1187
00:59:01,870 --> 00:59:04,490
So nothing shows
up on this page.

1188
00:59:04,490 --> 00:59:06,714
But as you're putting
together your spreadsheet,

1189
00:59:06,714 --> 00:59:08,380
you're going to keep
coming back to this

1190
00:59:08,380 --> 00:59:10,040
and say, how does this look?

1191
00:59:10,040 --> 00:59:11,380
Does this make sense?

1192
00:59:11,380 --> 00:59:13,350
Do my sales go like this?

1193
00:59:13,350 --> 00:59:15,440
Or do my expenses go like this?

1194
00:59:15,440 --> 00:59:19,080
Or is everything kind of in
a nice, smooth trend line?

1195
00:59:19,080 --> 00:59:21,080
Or if it's not,
can I explain it?

1196
00:59:21,080 --> 00:59:24,540
So for example, I might have no
marketing expenses in year one.

1197
00:59:24,540 --> 00:59:27,190
I might have a tremendous amount
of marketing expenses in year

1198
00:59:27,190 --> 00:59:28,830
two as we launch our product.

1199
00:59:28,830 --> 00:59:31,780
And then those expenses,
maybe not in absolute terms,

1200
00:59:31,780 --> 00:59:34,750
but in percentage terms,
come down in year three,

1201
00:59:34,750 --> 00:59:40,210
because now we've already
reached the market.

1202
00:59:40,210 --> 00:59:43,050
So the next spreadsheet, and
this spreadsheet is actually--

1203
00:59:43,050 --> 00:59:46,020
I would urge you to,
at least to start with,

1204
00:59:46,020 --> 00:59:48,879
do for your projections
on quarterly terms.

1205
00:59:48,879 --> 00:59:50,420
Because there's a
lot of times you're

1206
00:59:50,420 --> 00:59:52,640
going to be fat-fingering
stuff in here,

1207
00:59:52,640 --> 00:59:56,250
and when you have
48 cells that you

1208
00:59:56,250 --> 00:59:58,630
have to fat-finger
something in, you're

1209
00:59:58,630 --> 01:00:00,670
going to make more
errors than if you only

1210
01:00:00,670 --> 01:00:02,730
have 16 to put them in.

1211
01:00:02,730 --> 01:00:05,380
And so this spreadsheet goes
out to about here, which

1212
01:00:05,380 --> 01:00:09,900
is year 4, Q4, right?

1213
01:00:09,900 --> 01:00:12,570
But as we can see, everything
from our quarterly statement

1214
01:00:12,570 --> 01:00:14,560
also comes from
another spreadsheet.

1215
01:00:14,560 --> 01:00:16,440
So let's look at the
detailed spreadsheets.

1216
01:00:16,440 --> 01:00:18,680
And the first one is
our sales spreadsheet.

1217
01:00:18,680 --> 01:00:21,020
So here, in the red,
is input numbers.

1218
01:00:21,020 --> 01:00:24,970
So I've got my unit
sales in units,

1219
01:00:24,970 --> 01:00:26,960
and I've just plugged
in some numbers here.

1220
01:00:26,960 --> 01:00:29,360
Now, you're going to
have to justify these

1221
01:00:29,360 --> 01:00:32,710
in the rest of your projections
by what's my sales staff,

1222
01:00:32,710 --> 01:00:38,010
and how much units am I
expecting a salesperson

1223
01:00:38,010 --> 01:00:40,040
to sell.

1224
01:00:40,040 --> 01:00:42,990
Here's my unit price, and I've
got a couple different models.

1225
01:00:42,990 --> 01:00:46,730
And as you can see,
when I launch model two,

1226
01:00:46,730 --> 01:00:49,460
I decrease the
price on model one,

1227
01:00:49,460 --> 01:00:54,380
because now it's old technology.

1228
01:00:54,380 --> 01:00:58,830
And so our product revenue
is simply a multi-- you know,

1229
01:00:58,830 --> 01:01:00,640
the black is a
calculated figure--

1230
01:01:00,640 --> 01:01:03,700
it's just a multiplication
of those two.

1231
01:01:03,700 --> 01:01:05,560
And then the magenta
number, that's

1232
01:01:05,560 --> 01:01:09,000
what goes to our
other spreadsheet.

1233
01:01:09,000 --> 01:01:14,340
So our support revenue,
here's our installed base,

1234
01:01:14,340 --> 01:01:16,690
and there's some retention
on our installed base,

1235
01:01:16,690 --> 01:01:19,980
and then we charge 15% of
what the value of that product

1236
01:01:19,980 --> 01:01:22,187
is to show what our
support revenue would be.

1237
01:01:22,187 --> 01:01:24,020
But you're just going
to have to play around

1238
01:01:24,020 --> 01:01:25,750
with these
percentages, depending

1239
01:01:25,750 --> 01:01:27,540
on your product
and your company.

1240
01:01:27,540 --> 01:01:30,590
But I just wanted to show that
there was actually some support

1241
01:01:30,590 --> 01:01:33,250
revenue in it as well,
and this support revenue

1242
01:01:33,250 --> 01:01:36,400
goes to the other spreadsheet.

1243
01:01:36,400 --> 01:01:38,500
So then we have our
cost of goods sold.

1244
01:01:38,500 --> 01:01:42,240
So we have our units that
are coming from our others

1245
01:01:42,240 --> 01:01:52,770
spreadsheet, and we've plugged
in our unit cost down here.

1246
01:01:52,770 --> 01:01:55,450
And so this gives us our
variable cost per unit.

1247
01:01:55,450 --> 01:01:58,850
We've got the 20 units at
$1,500 per unit, comes down

1248
01:01:58,850 --> 01:02:02,390
to $30,000 in material cost.

1249
01:02:02,390 --> 01:02:03,960
But I've also got some staffing.

1250
01:02:03,960 --> 01:02:07,220
I've got a VP of manufacturing,
I've got a supervisor,

1251
01:02:07,220 --> 01:02:08,650
I've got a technician.

1252
01:02:08,650 --> 01:02:10,710
He can build one unit a day.

1253
01:02:10,710 --> 01:02:13,220
And so I've got to think
about how many technicians I

1254
01:02:13,220 --> 01:02:15,890
need as I ramp up
that product volume.

1255
01:02:15,890 --> 01:02:16,390
OK?

1256
01:02:24,200 --> 01:02:26,670
So we'll talk about the
staffing plan on another page,

1257
01:02:26,670 --> 01:02:29,050
but those staffing
costs get added up

1258
01:02:29,050 --> 01:02:31,160
into salary and benefits.

1259
01:02:31,160 --> 01:02:33,170
We have our variable cost here.

1260
01:02:33,170 --> 01:02:36,910
We have a facilities cost that
is really a step function,

1261
01:02:36,910 --> 01:02:39,890
because you can't ramp
up facilities in line

1262
01:02:39,890 --> 01:02:43,240
with-- you can't add
another 100 square feet,

1263
01:02:43,240 --> 01:02:47,130
you've got to rent 10,000 square
feet, and then another 10,000

1264
01:02:47,130 --> 01:02:48,880
square feet if you need more.

1265
01:02:48,880 --> 01:02:50,830
So we just plugged
in some numbers

1266
01:02:50,830 --> 01:02:54,550
on our facilities expense, and
that gives us our total product

1267
01:02:54,550 --> 01:02:56,650
cost of goods sold here.

1268
01:02:56,650 --> 01:02:58,090
When we look at
the staffing plan,

1269
01:02:58,090 --> 01:03:00,131
this is a spreadsheet
you're going to keep coming

1270
01:03:00,131 --> 01:03:02,170
back to over and over
again, because, as I said,

1271
01:03:02,170 --> 01:03:05,480
this is where 66% of your
expenses are going to be.

1272
01:03:05,480 --> 01:03:07,710
So first is, you've
got a spreadsheet that

1273
01:03:07,710 --> 01:03:10,950
goes down to about here with
all of your departments.

1274
01:03:10,950 --> 01:03:14,200
And I would urge you, don't
create too many lines in here.

1275
01:03:14,200 --> 01:03:16,920
Don't create a junior
programmer, senior programmer,

1276
01:03:16,920 --> 01:03:18,620
programmer level three.

1277
01:03:18,620 --> 01:03:20,860
You know, kind of
glom things together,

1278
01:03:20,860 --> 01:03:23,380
because you're going to be
fat-fingering a lot of stuff

1279
01:03:23,380 --> 01:03:23,880
in.

1280
01:03:23,880 --> 01:03:26,690
And do the same thing
with their salaries.

1281
01:03:26,690 --> 01:03:30,580
If a junior programmer
makes $80,000,

1282
01:03:30,580 --> 01:03:33,340
and a programmer makes $100,000,
and a senior programmer makes

1283
01:03:33,340 --> 01:03:36,550
$120,000, just
put in programmer,

1284
01:03:36,550 --> 01:03:38,990
put them all in at $100,000.

1285
01:03:38,990 --> 01:03:46,070
You know, again, this is going
to be your guideline, right?

1286
01:03:48,610 --> 01:03:51,040
So you've got this for all of
your departments down here,

1287
01:03:51,040 --> 01:03:53,790
and again, this spreadsheet
goes all the way out to here.

1288
01:03:53,790 --> 01:03:56,450
So the companion part
to this spreadsheet

1289
01:03:56,450 --> 01:03:59,950
is actually over on the
right side of this thing.

1290
01:03:59,950 --> 01:04:03,980
And now you plug in salaries
for each of these staffing

1291
01:04:03,980 --> 01:04:05,030
positions.

1292
01:04:05,030 --> 01:04:11,000
And all this spreadsheet does is
take your number of employees,

1293
01:04:11,000 --> 01:04:12,580
and remember, this
is a quarterly,

1294
01:04:12,580 --> 01:04:15,200
so we're taking the annual
salary, dividing it by 4,

1295
01:04:15,200 --> 01:04:18,100
multiplying it by the number
of people in that position,

1296
01:04:18,100 --> 01:04:22,400
and then we're adding
in our benefits at 15%.

1297
01:04:22,400 --> 01:04:24,390
So FICA is 7%.

1298
01:04:24,390 --> 01:04:29,150
And I've done the math, I've
done the math dozens of times,

1299
01:04:29,150 --> 01:04:33,830
8% of your total
payroll is usually

1300
01:04:33,830 --> 01:04:37,660
enough to cover health
insurance for everyone,

1301
01:04:37,660 --> 01:04:41,130
at kind of a 75% to 25% ratio.

1302
01:04:41,130 --> 01:04:43,310
Because some people
aren't going to take it.

1303
01:04:43,310 --> 01:04:45,907
Some people are going to
be on their spouse's plan.

1304
01:04:45,907 --> 01:04:47,490
If you're a tech
company, you're going

1305
01:04:47,490 --> 01:04:50,770
to have a lot of single people,
so they cost about a third

1306
01:04:50,770 --> 01:04:52,610
as much as the married people.

1307
01:04:52,610 --> 01:04:55,990
And so 8% works out
to be pretty good.

1308
01:04:55,990 --> 01:04:58,000
But your employees
are still going

1309
01:04:58,000 --> 01:04:59,620
to want to get
raises in year two.

1310
01:04:59,620 --> 01:05:01,670
Just because you're a
start up, they still

1311
01:05:01,670 --> 01:05:03,070
want a little something extra.

1312
01:05:03,070 --> 01:05:05,290
And as I mentioned,
a lot of companies

1313
01:05:05,290 --> 01:05:07,130
have problems getting
those expenses up

1314
01:05:07,130 --> 01:05:10,697
in years three and four because
they don't add people enough.

1315
01:05:10,697 --> 01:05:12,280
One of the things
that people don't do

1316
01:05:12,280 --> 01:05:14,230
is they don't ramp
up their salaries.

1317
01:05:14,230 --> 01:05:19,040
So add in 2% a quarter,
that gives you 8% a year.

1318
01:05:19,040 --> 01:05:21,000
It's not an unreasonable number.

1319
01:05:21,000 --> 01:05:25,800
And again, while most payrolls
are going up kind of 3%

1320
01:05:25,800 --> 01:05:30,772
these days, if you're trying to
hold on to technology talent,

1321
01:05:30,772 --> 01:05:33,230
you're going to have to give
them a little something extra.

1322
01:05:33,230 --> 01:05:36,000
So again, this goes out--
just add 2% a year out

1323
01:05:36,000 --> 01:05:37,160
until year four.

1324
01:05:37,160 --> 01:05:39,340
And so the math gets
done, and these go

1325
01:05:39,340 --> 01:05:42,760
to the departmental expenses.

1326
01:05:42,760 --> 01:05:44,970
Non-salary expenses.

1327
01:05:44,970 --> 01:05:46,480
Well, we've got our
salary expenses,

1328
01:05:46,480 --> 01:05:51,380
and then you've got tech
supplies and miscellaneous.

1329
01:05:51,380 --> 01:05:54,820
I would urge you to put in
as many formulas as you can.

1330
01:05:54,820 --> 01:05:59,520
So for like your programmers,
put in $2,000 per person,

1331
01:05:59,520 --> 01:06:00,020
per month.

1332
01:06:00,020 --> 01:06:03,800
It sounds like a lot, but I've
worked in a couple technology

1333
01:06:03,800 --> 01:06:07,780
companies, and it could
be an oscilloscope,

1334
01:06:07,780 --> 01:06:11,090
it could be some cabling, it
could be some CAD software.

1335
01:06:11,090 --> 01:06:13,940
Whatever it is, these guys can
figure out a way to spin it.

1336
01:06:13,940 --> 01:06:16,870
If that sounds like too much
to you, put in $1,000 a month.

1337
01:06:16,870 --> 01:06:19,710
But the beauty of that is that,
as you change your staffing

1338
01:06:19,710 --> 01:06:23,679
plan, this number just ramps
up and down in line with that.

1339
01:06:23,679 --> 01:06:25,970
So you can make dramatic
changes to your staffing plan,

1340
01:06:25,970 --> 01:06:29,465
you don't have to come back
here and fat-finger anything in.

1341
01:06:29,465 --> 01:06:31,590
But some of these things,
you are going to have to,

1342
01:06:31,590 --> 01:06:33,030
especially in the
marketing area.

1343
01:06:33,030 --> 01:06:36,310
You're going to have to decide,
what trade shows do I go to,

1344
01:06:36,310 --> 01:06:42,040
and what am I going to
do for sales expenses?

1345
01:06:45,520 --> 01:06:48,910
And then you could
even put in commissions

1346
01:06:48,910 --> 01:06:52,300
in here, commissions as
a percentage of sales,

1347
01:06:52,300 --> 01:06:53,980
if that seems to work.

1348
01:06:53,980 --> 01:06:56,350
And so therefore, as
your cells ramp up,

1349
01:06:56,350 --> 01:07:00,550
your commissions ramp
up in line with that.

1350
01:07:00,550 --> 01:07:04,230
And here's your travel per
person per month for your sales

1351
01:07:04,230 --> 01:07:06,500
people is $3,000.

1352
01:07:06,500 --> 01:07:09,890
That seems to be pretty
good number there.

1353
01:07:09,890 --> 01:07:12,480
I put in telephone and
internet per person,

1354
01:07:12,480 --> 01:07:15,170
and that just ramps up
as your company ramps up.

1355
01:07:15,170 --> 01:07:18,940
So use as many formulas
in this as you can.

1356
01:07:18,940 --> 01:07:23,480
And so that brings us
back to our quarterly P&L,

1357
01:07:23,480 --> 01:07:27,570
and where it all comes together.

1358
01:07:27,570 --> 01:07:30,500
I've got a quick example
here on your CAPEX.

1359
01:07:30,500 --> 01:07:33,050
And so what I did was I
took your total revenues,

1360
01:07:33,050 --> 01:07:36,220
but I offset revenues
by a quarter,

1361
01:07:36,220 --> 01:07:38,590
figuring that
customers are going

1362
01:07:38,590 --> 01:07:41,830
to take 60 to 90 days to pay.

1363
01:07:41,830 --> 01:07:44,520
So if you bill them
now, assume that you're

1364
01:07:44,520 --> 01:07:47,320
going to get money 90
days from now, right?

1365
01:07:47,320 --> 01:07:50,860
And hopefully,
you'll get it sooner.

1366
01:07:50,860 --> 01:07:52,589
But your other expense
is your employees,

1367
01:07:52,589 --> 01:07:53,880
which are 2/3 of your expenses.

1368
01:07:53,880 --> 01:07:55,960
They want to get paid
on payday, right?

1369
01:07:55,960 --> 01:07:57,970
They don't want to get
paid 30 days from now.

1370
01:07:57,970 --> 01:07:59,550
So I just assumed--
you know, this

1371
01:07:59,550 --> 01:08:03,180
is a little bit of a
conservative look at it--

1372
01:08:03,180 --> 01:08:08,120
but I assume your other expenses
come due in the current period.

1373
01:08:08,120 --> 01:08:13,170
And so based on that, you plug
in a starting balance here,

1374
01:08:13,170 --> 01:08:17,140
and you say, where does
this money get us to?

1375
01:08:17,140 --> 01:08:22,920
This money gets us
to the end of Q3.

1376
01:08:22,920 --> 01:08:26,180
In that case, I'm going to
need to raise additional money,

1377
01:08:26,180 --> 01:08:29,080
and how much money am I going
to have to raise there to get us

1378
01:08:29,080 --> 01:08:30,710
to the next milestone?

1379
01:08:30,710 --> 01:08:32,460
So in this case, I
said, well, maybe we've

1380
01:08:32,460 --> 01:08:34,830
hit a milestone here
at the end of Q3,

1381
01:08:34,830 --> 01:08:36,760
and that's going to
allow us to raise

1382
01:08:36,760 --> 01:08:38,189
our next round of funding.

1383
01:08:38,189 --> 01:08:38,689
OK?

1384
01:08:41,330 --> 01:08:42,890
I've talked about most of these.

1385
01:08:42,890 --> 01:08:47,020
Showing steady and
consistent growth.

1386
01:08:47,020 --> 01:08:48,790
And here's some
suggestions in here,

1387
01:08:48,790 --> 01:08:52,010
in terms of an executive summary
versus a full blown business

1388
01:08:52,010 --> 01:08:52,510
plan.

1389
01:08:52,510 --> 01:08:56,046
In reality, the
executive summary

1390
01:08:56,046 --> 01:08:58,045
is all most people are
going to want to look at,

1391
01:08:58,045 --> 01:08:59,858
at the beginning, and
then when they really

1392
01:08:59,858 --> 01:09:01,399
get into due diligence,
they're going

1393
01:09:01,399 --> 01:09:04,390
to want to look at the rest.

1394
01:09:04,390 --> 01:09:07,979
So I think I can get through the
rest of this in five minutes,

1395
01:09:07,979 --> 01:09:11,430
because I've gone
over a lot of it.

1396
01:09:11,430 --> 01:09:14,069
What I would say, as you think
about equity in your company--

1397
01:09:14,069 --> 01:09:18,870
you're sitting around a
conference table here at MIT,

1398
01:09:18,870 --> 01:09:21,220
and you're thinking
about the company,

1399
01:09:21,220 --> 01:09:26,060
or maybe you've been working
on the company for the last two

1400
01:09:26,060 --> 01:09:28,420
years and you're really
ready to launch it--

1401
01:09:28,420 --> 01:09:32,149
all I would urge you is that
the work that is yet to be done

1402
01:09:32,149 --> 01:09:34,990
is far more than the work
that has been done already.

1403
01:09:34,990 --> 01:09:38,240
Even though it feels like
you've done a tremendous amount,

1404
01:09:38,240 --> 01:09:42,050
the work that it takes growing
to a $1 million dollars

1405
01:09:42,050 --> 01:09:42,979
is hard.

1406
01:09:42,979 --> 01:09:45,770
But growing from $1
million to $10 million

1407
01:09:45,770 --> 01:09:48,490
is equally hard, if not harder.

1408
01:09:48,490 --> 01:09:52,750
And going from $10 million to
$100 million is really hard.

1409
01:09:52,750 --> 01:09:56,870
So the fact that a lot
has been accomplished,

1410
01:09:56,870 --> 01:09:59,050
there's still a lot left to do.

1411
01:09:59,050 --> 01:10:03,670
So you don't want to
reward people for what's

1412
01:10:03,670 --> 01:10:04,860
been done in the past.

1413
01:10:04,860 --> 01:10:09,160
You want to incentivize them
to do things in the future.

1414
01:10:09,160 --> 01:10:13,800
So I'm a big believer
that everyone should vest.

1415
01:10:13,800 --> 01:10:15,690
I used to be
adamantly against this

1416
01:10:15,690 --> 01:10:17,740
when I was a member
of a founding team.

1417
01:10:17,740 --> 01:10:20,570
But I've heard horror stories
where three or four people

1418
01:10:20,570 --> 01:10:24,430
get together, and one
guy, or one person,

1419
01:10:24,430 --> 01:10:26,760
gets an opportunity
that they can't pass up

1420
01:10:26,760 --> 01:10:29,880
and they leave with
their 25% of the company.

1421
01:10:29,880 --> 01:10:32,280
And then the three
people that are left

1422
01:10:32,280 --> 01:10:37,080
are now working for
themselves, and not

1423
01:10:37,080 --> 01:10:41,560
taking a paycheck, for someone
who's actually got a great job.

1424
01:10:41,560 --> 01:10:45,670
So I think everyone should vest
over some kind of three or four

1425
01:10:45,670 --> 01:10:47,630
your period.

1426
01:10:47,630 --> 01:10:51,246
Typically, this is the
ranges that you would see.

1427
01:10:51,246 --> 01:10:55,450
A CEO in the 5% range,
5% to maybe 10%.

1428
01:10:55,450 --> 01:10:57,590
VPs in the 1% to 2 and 1/2%.

1429
01:10:57,590 --> 01:11:00,160
This would be after dilution.

1430
01:11:00,160 --> 01:11:04,490
Senior managers about 0.25%, and
a senior individual contributor

1431
01:11:04,490 --> 01:11:06,790
about 0.10%.

1432
01:11:06,790 --> 01:11:12,350
If you're on the
founding management team,

1433
01:11:12,350 --> 01:11:16,560
you might get two to three
times this amount, in part

1434
01:11:16,560 --> 01:11:18,596
because you're going
to get diluted.

1435
01:11:18,596 --> 01:11:20,970
And if you're founding employee,
you might get even more.

1436
01:11:20,970 --> 01:11:26,147
So if you have a senior
individual contributor,

1437
01:11:26,147 --> 01:11:27,730
who's really important
to the company,

1438
01:11:27,730 --> 01:11:31,300
and he's going to get 0.10%,
that's the kind of person you

1439
01:11:31,300 --> 01:11:37,570
might give 0.25%
or 0.50% up front.

1440
01:11:37,570 --> 01:11:39,920
So let's look at
some examples here.

1441
01:11:39,920 --> 01:11:43,910
You get a sense I always
like to look at the endpoint,

1442
01:11:43,910 --> 01:11:45,514
and then go back
to the beginning

1443
01:11:45,514 --> 01:11:47,680
and figure out how I'm going
to get to the endpoint.

1444
01:11:47,680 --> 01:11:50,620
So my endpoint here is looking
at this whole dilution,

1445
01:11:50,620 --> 01:11:52,215
and here this is
the same spreadsheet

1446
01:11:52,215 --> 01:11:54,060
that we had earlier,
I've just add

1447
01:11:54,060 --> 01:11:56,430
a little more detail
with some names here,

1448
01:11:56,430 --> 01:11:59,130
and some specifics
about the people.

1449
01:11:59,130 --> 01:12:03,450
So looking at this point, this
is where we're going to get to.

1450
01:12:03,450 --> 01:12:05,800
But at the beginning,
we have four founders

1451
01:12:05,800 --> 01:12:08,520
that have split the equity
$2 million, $1 million,

1452
01:12:08,520 --> 01:12:09,580
and $1 million.

1453
01:12:09,580 --> 01:12:12,240
OK, that all sounds
well and good.

1454
01:12:12,240 --> 01:12:13,800
They have 100% here.

1455
01:12:13,800 --> 01:12:16,040
As we bring in our
key employees-- here

1456
01:12:16,040 --> 01:12:18,410
we have a VP of
R&D. He's critical.

1457
01:12:18,410 --> 01:12:22,580
Normally, you'd say a VP
of R&D would get about 1%.

1458
01:12:22,580 --> 01:12:26,550
Well, in reality, by the
time we get out to this,

1459
01:12:26,550 --> 01:12:29,590
after all of our dilution
out here, this VP of R&D

1460
01:12:29,590 --> 01:12:31,290
is going to be at 1%.

1461
01:12:34,270 --> 01:12:36,270
And some other key
employees here.

1462
01:12:36,270 --> 01:12:39,080
And maybe a board of
advisors or board members,

1463
01:12:39,080 --> 01:12:40,680
who would get some equity.

1464
01:12:40,680 --> 01:12:43,670
We then bring in our angel
investors, who get 10%,

1465
01:12:43,670 --> 01:12:45,790
and everyone up
here gets diluted.

1466
01:12:45,790 --> 01:12:49,290
And we then bring in
our VC round at 50%,

1467
01:12:49,290 --> 01:12:52,560
and, again, everyone
up above gets diluted,

1468
01:12:52,560 --> 01:12:54,010
including the angels.

1469
01:12:54,010 --> 01:12:56,520
One of the things that
got brought up-- you know,

1470
01:12:56,520 --> 01:13:00,020
Axel was talking
about $50 for 10%.

1471
01:13:00,020 --> 01:13:04,360
And my initial reaction was
that seems really onerous.

1472
01:13:04,360 --> 01:13:07,190
It doesn't seem
like a great deal.

1473
01:13:07,190 --> 01:13:11,080
But when you realize that
he's coming in at this stage,

1474
01:13:11,080 --> 01:13:15,300
he's coming in really
as the angel investor,

1475
01:13:15,300 --> 01:13:19,340
and by the time this all gets
done-- well, what's my example?

1476
01:13:19,340 --> 01:13:21,250
My example actually works out.

1477
01:13:21,250 --> 01:13:23,700
Just take a zero off of this.

1478
01:13:23,700 --> 01:13:28,600
His 10% is going to get
diluted down to 2.3%.

1479
01:13:28,600 --> 01:13:35,310
So if you're getting all that
other value, then that 2.3%

1480
01:13:35,310 --> 01:13:39,060
doesn't seem to be
too much to give up.

1481
01:13:39,060 --> 01:13:42,590
I will say that angel investors
are pretty keen on looking

1482
01:13:42,590 --> 01:13:44,450
at this spreadsheet, too.

1483
01:13:44,450 --> 01:13:48,530
And while a lot of people think
that angel investors will not

1484
01:13:48,530 --> 01:13:53,210
be as tough negotiators
as the VC investors,

1485
01:13:53,210 --> 01:13:56,820
I would argue they're investing
their own money rather than

1486
01:13:56,820 --> 01:14:00,470
the firm's money, and they have
seen this spreadsheet as well,

1487
01:14:00,470 --> 01:14:08,220
and the angel investors will
be every bit as tough as the VC

1488
01:14:08,220 --> 01:14:09,350
negotiations.

1489
01:14:09,350 --> 01:14:12,280
Now, friends and family
is a different story.

1490
01:14:12,280 --> 01:14:15,850
And I've had very good success
with friends and family coming

1491
01:14:15,850 --> 01:14:18,060
in, but I mean they're
your friends and family.

1492
01:14:18,060 --> 01:14:20,200
You're not going to try
and screw them over.

1493
01:14:20,200 --> 01:14:23,990
So hopefully you're going
to give them a fair deal

1494
01:14:23,990 --> 01:14:25,080
to begin with.

1495
01:14:25,080 --> 01:14:28,330
So it's 9 o'clock on the dot.

1496
01:14:28,330 --> 01:14:30,710
I can take one or two
questions, but then I

1497
01:14:30,710 --> 01:14:34,440
know that Joe's
going to shut me off.

1498
01:14:34,440 --> 01:14:37,460
Any-- OK, one here.

1499
01:14:37,460 --> 01:14:40,750
AUDIENCE: What are the
usual terms on the vests

1500
01:14:40,750 --> 01:14:43,570
with the original founders?

1501
01:14:43,570 --> 01:14:45,690
CHARLIE TILLETT: I
think over four years,

1502
01:14:45,690 --> 01:14:50,440
what you might say-- so four
years with quarterly vesting.

1503
01:14:50,440 --> 01:14:52,640
I mean, you could do
monthly, but I mean it really

1504
01:14:52,640 --> 01:14:54,330
doesn't matter at that point.

1505
01:14:54,330 --> 01:15:00,010
So four year vesting
with 1/16 every quarter.

1506
01:15:00,010 --> 01:15:01,800
Or you what you could
say is, let's say

1507
01:15:01,800 --> 01:15:06,210
you've been working
together for a year,

1508
01:15:06,210 --> 01:15:09,520
you say, everyone
starts with 20% vested,

1509
01:15:09,520 --> 01:15:13,280
and then the remaining
80% vests over four years,

1510
01:15:13,280 --> 01:15:14,200
or three years.

1511
01:15:14,200 --> 01:15:16,380
Something like that,
just so that someone

1512
01:15:16,380 --> 01:15:19,020
doesn't get cold
feet when they going

1513
01:15:19,020 --> 01:15:23,268
starts to get tough and
bail on the rest the team.

1514
01:15:23,268 --> 01:15:27,100
AUDIENCE: So if they leave after
two years, would they still get

1515
01:15:27,100 --> 01:15:29,834
the part they had
before, or would they--

1516
01:15:29,834 --> 01:15:30,750
CHARLIE TILLETT: Yeah.

1517
01:15:30,750 --> 01:15:33,010
So let's say you
were going to get

1518
01:15:33,010 --> 01:15:35,730
160,000 shares over four years.

1519
01:15:35,730 --> 01:15:38,930
That would be $40,000 a
year, or $10,000 a quarter.

1520
01:15:38,930 --> 01:15:41,600
Every quarter, you vest $10,000.

1521
01:15:41,600 --> 01:15:45,170
So if you leave after two years,
you have your 80,000 shares,

1522
01:15:45,170 --> 01:15:48,600
and you go, and they're yours.

1523
01:15:48,600 --> 01:15:53,845
And the $80,000 that
you didn't invest--

1524
01:15:53,845 --> 01:15:55,970
look, if you thought it
was going to be successful,

1525
01:15:55,970 --> 01:15:57,370
you shouldn't be leaving.

1526
01:15:57,370 --> 01:16:00,995
So you've left that,
and those are gone.

1527
01:16:00,995 --> 01:16:02,578
AUDIENCE: I was
wondering if you could

1528
01:16:02,578 --> 01:16:04,161
talk a little bit
about the difference

1529
01:16:04,161 --> 01:16:06,554
between the CEOs and the CFOs?

1530
01:16:06,554 --> 01:16:09,701
First, the difference, B,
whether a start-up needs

1531
01:16:09,701 --> 01:16:12,701
a CFO at a very early
stage, and the last part

1532
01:16:12,701 --> 01:16:15,631
is, you know, who
makes the decision?

1533
01:16:15,631 --> 01:16:18,130
CHARLIE TILLETT: Well, look the
CEO makes all the decisions.

1534
01:16:18,130 --> 01:16:21,173
I serve at the
pleasure of the CEO.

1535
01:16:21,173 --> 01:16:26,930
But the CFO-- I
think by the time

1536
01:16:26,930 --> 01:16:30,580
you take your first
venture money,

1537
01:16:30,580 --> 01:16:34,020
first off you have the
money to pay a CFO,

1538
01:16:34,020 --> 01:16:36,470
and it will be money well spent.

1539
01:16:36,470 --> 01:16:39,600
Because as I showed you, all
those rounds of financing

1540
01:16:39,600 --> 01:16:44,340
at Reveal, I can't tell
you how much dilution

1541
01:16:44,340 --> 01:16:48,800
I saved my founders
by thinking ahead

1542
01:16:48,800 --> 01:16:51,960
about what we needed to do.

1543
01:16:51,960 --> 01:16:58,300
So I saved my salary and
equity for him, you know,

1544
01:16:58,300 --> 01:17:00,860
10 times over.

1545
01:17:00,860 --> 01:17:01,870
But we did have a deal.

1546
01:17:01,870 --> 01:17:04,520
For the very first
year, I worked half time

1547
01:17:04,520 --> 01:17:06,060
for half salary.

1548
01:17:06,060 --> 01:17:11,840
And then, we agreed that as the
company-- I was in a position

1549
01:17:11,840 --> 01:17:13,260
where I could work half time.

1550
01:17:13,260 --> 01:17:16,080
And so I think it's
good to have-- maybe you

1551
01:17:16,080 --> 01:17:21,560
have a mentor advisor for that
first year and a controller.

1552
01:17:21,560 --> 01:17:26,210
But the problem is, is that
you really want someone,

1553
01:17:26,210 --> 01:17:28,260
especially when you
start raising money,

1554
01:17:28,260 --> 01:17:31,710
you want someone who's been
through the process before.

1555
01:17:31,710 --> 01:17:36,510
And they will save
you-- you know,

1556
01:17:36,510 --> 01:17:41,080
an experienced person will
save you a couple percent

1557
01:17:41,080 --> 01:17:43,100
of dilution right off the bat.

1558
01:17:43,100 --> 01:17:44,130
So what's that worth?

1559
01:17:44,130 --> 01:17:44,755
It all depends.

1560
01:17:44,755 --> 01:17:48,650
So you sell your company for
$200 million, it's worth a lot.

1561
01:17:48,650 --> 01:17:51,227
OK, maybe one more.

1562
01:17:51,227 --> 01:17:52,810
Oh, looks like I've
gotten everything.

1563
01:17:52,810 --> 01:17:53,900
So thank you very much.

1564
01:17:53,900 --> 01:17:55,069
[APPLAUSE]