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Naval and Mark Suster recently gave the keynotes at the 7th Founder Showcase. Andrew Chen did a better job of describing Naval’s keynote than I ever will:

“People spend a surprising amount of time on things that will contribute little or no value to getting them to a seed round, and this talk is the best I’ve seen in terms of presenting the issues in its entirety.

“Naval broke down the 5 main qualities of an ‘exceptional startup,’ in the following order:

1. Traction
2. Team
3. Product
4. Social Proof
5. Pitch/Presentation

“And while all these qualities are important, Naval explained, the most important thing is to understand that: ‘Investors are trying to find the exceptional outcomes, so they are looking for something exceptional about the company. Instead of trying to do everything well (traction, team, product, social proof, pitch, etc.), do one thing exceptionally. As a startup you have to be exceptional in at least one regard.’”

Here are the video and slides:

Some of my favorite quotes from the presentation:

“If you can’t generate traction, do you really want to raise money?”

“If you need money to recruit the best, you’re not ready.”

“It’s easier to pitch a new investor than to convert one.”

“Capital is mobile, but capitalists are lazy.”

“Every time the other party says ‘I want’ in a negotiation, you should hear the pleasant sound of a weight dropping on your side of the leverage scales.”

– G. Richard Shell, Bargaining for Advantage

Most entrepreneurs don’t understand the power of positive leverage. Here’s a typical situation:

After weeks of fund-raising, you find a brave investor who says “Yes, I want to invest.” He says he will give you an offer soon. You’re excited. A few days later he delivers a term sheet that you don’t like. The valuation is really low. Or the non-economic terms aren’t favorable. Your excitement turns to disappointment and frustration. This is the only offer you have so far. What do you do?

First, we hope you’ve been talking to several investors at the same time and creating a market for your shares. With an adroit touch, you can use this first offer to create the scarcity and social proof that drives other investors to say “yes”. At a minimum, you can use this offer to drive investors to make any decision at all — up or down. And keep improving your alternatives until you’ve a signed term sheet.

But let’s assume you don’t have any other offers and you have to negotiate with this investor. Or that this investor is your first choice — whether or not you have alternatives.

Positive leverage

This type of negotiation is similar to a hostage negotiation because you can’t walk away from your opponent. You can’t say, “Yeah, it’s okay, go ahead and kill the hostages, we’re not interested in your demands.”

When you have to negotiate without good alternatives, the tools of positive, negative, and normative leverage are essential. Positive leverage is your ability to provide things that your opponent wants. You have positive leverage when your opponent says, “I want to buy your car”, “I want you to release my friends from jail” or “I want to buy your shares”.

As soon as your opponent says he wants something from you, you have some positive leverage. You control what they want. You can grant them access or deny it. That’s why experienced opponents delay making offers — they don’t want to give you leverage.

In practice

How does positive leverage work in practice?

First, positive leverage should improve your psychology during the negotiation. You’ve gone from a situation where you want something from the investor to a situation where you both want something from each other. Your psychology is critical in a negotiation because “leverage often flows to the party that exerts the greatest control over and appears most comfortable with the present situation.”

Second, you can now identify other things that your opponent wants and deliver them. Maybe you’re working with a partner who is trying to get his first deal done at the firm. Help him succeed and help yourself in the process. Maybe you’re working with a firm who is excited about stealing a deal from a top-tier firm. Help them succeed. Maybe you’re working with a firm who wants to co-invest with a top-tier firm so they can show off to their LPs. Help them succeed.

Third, even before investors makes an offer, you gain a little bit of leverage every time they ask for something. Don’t try to use it after the first meeting. But if you’ve been talking to them for three weeks and they’re getting deeper and deeper into diligence, you should recognize and use your leverage. At a minimum, you should ask for information about their process and thinking at every step of the way.

The prime time to negotiate is when your opponent says, “I want.”

“If they’re talking to you, you have leverage.”

– Christopher Voss, FBI Negotiator

Go read Elad Gil’s You Should Read Every Word of Every Legal Doc.

Some docs are too long and boilerplate to read, so this is how I read financing docs:

  1. Read and understand everything in the term sheet. But when it comes to the closing docs, ask your lawyer to explain all the terms that he has seen written, or could have been written, more favorably to the startup. The closing docs are too long and boilerplate to read.
  2. Get a good lawyer because you probably don’t have one. You really won’t know what a good lawyer is until you’ve fired a few. I regularly run into lawyers at big firms who give bad advice alongside good advice. Don’t assume your lawyer is good just because he works at a big Silicon Valley law firm.
  3. You probably can’t tell the difference between good legal advice and bad legal advice. So you will need a great advisor like Elad.

You should subscribe to Elad’s blog. It is consistently great.

Eric Paley’s Curve of Talent is a brutal must-read. I’ve remixed it a bit to come up with the following definitions; the word’s are Eric’s, I’ve just re-ordered them:

F performers are not at all productive.

C performers struggle to competently fill their role, but are somewhat productive with sufficient coaching. Hard to admit, but most people in the business world don’t have a particularly clear idea on how to do their job well. Startups need to help C players transition out of the organization.

B players understand their objectives well and deliver them competently with minimum coaching. Coach B players on the need to not just competently deliver their function, but drive toward innovation within that function.

A players write the book and not just read it. They not only have a clear idea how to competently accomplish their functional objectives, but actually lead the organization to innovate and be world class within their functional area. They raise the bar on the entire organization. One way these candidates can be identified during an interview is when they actually teach the interviewer something about how the company can win.

Congrats to TechCrunch Disrupt winner GetAround. Guess what they used to raise part of their first round?

We’ve covered this before, but it’s worth repeating: don’t raise money in series, raise it in parallel.

Don’t talk to one investor at a time, talk to all of them at once. It’s the only way to get market-clearing terms.

Meeting every investor over a short period of time creates a positive feedback loop of social proof and scarcity that closes deals.

Recently, we’ve noticed a new way of making this mistake. The entrepreneur says, “I’ll use AngelList if my other intros don’t work out.”

If you can get intros on your own (and all the good startups can), you should use AngelList at the same time, not afterwards. Why?

First, no matter how good your offline network is, it’s unlikely to introduce you to the optimal investors, or help you close the deal as quickly as AngelList can.

Second, if your other intros don’t work out, AngelList probably won’t work out either — the startups that do well on AngelList are the ones that use it to complement their offline intros.

Related: Why would a seasoned entrepreneur use AngelList?

Mike at TechCrunch published a nice post today about VCs who use AngelList. I especially like the quote he pulled from DFJ’s Josh Stein.

The only part I disagree with is the “VCs hate AngelList” idea. I think it’s the opposite—they’re all over it like white on rice. What’s not to like about high-quality dealflow in your inbox?

Personally, I’m juiced to see firms like Kleiner, Sequoia, Khosla, A16Z, and other “Gods of VC” use the site.

Okay, enough preamble, who is actually investing?

Mike broke the news about which investors are taking intros. Now I want to break some news about which VCs have actually invested via AngelList.

We don’t have a good way to track who is investing in what. AngelList makes the connection and gets out of the way. But here are a few of the VCs that we know sourced (or reconnected with) a startup via AngelList and then made an investment:

Kleiner
Matrix
CRV
Google
Atlas
Greylock
Softbank
Floodgate
General Catalyst…

…and angels and seed funds like Matt Mullenweg, Mitch Kapor, Dave Morin, Jim Young, Jeff Clavier, and tons more listed here and here.

I’m psyched these investors are using AngelList and I’m even more psyched to see startups like Uber, Yipit, Wanderfly, Branchout and a billion more use AngelList to raise money. That’s why we’re really here—AngelList is a platform for startups.

AngelList now has a sweet new blog. Therein, the AngelList team expounds upon the latest features, including screenshots that are sure to bring you great joy.

Our team is using the AngelList blog to post our weekly progress. We used to put it on Yammer, but now we’re posting it publicly on the blog. So don’t expect polished posts with the “final” version of each feature. We’ll be sharing works in progress (that we’ve shipped).

So check out the AngelList blog and stay up to date on our endless product developments. We promise a steady stream of pretty pictures.

I recently wrote that it’s “fair for founders to own about 100% of a startup while employee #1 only owns a few percent.”

My argument was that the dollar value of stock that founders get when they start the company is actually less than the dollar value of stock that employees get when they join the company. The disparity between founders and employees is therefore just a matter of timing.

There’s a corollary to this theorem:

The first 1000x in valuation is the easiest.

The first 1000x in stock appreciation is easier than the next 1000x. Here’s why:

Let’s say the company is worth $1 when you start. To get a 1000x increase in valuation, you only need to grow the company to $1000 in value. So if you join a company when it’s worth $1, you only have to create $999 of value for your stock to appreciate 1000x!

If someone else joins the company after it’s already worth $1000, he has to create $999,000 of value for his stock to appreciate 1000x!

To get a 1000x return on your stock, you either have to create $999 or $999,000 of value. One of these is easier. By 1000x.

The first 1000x is the easiest, because it is easier in an absolute sense.