Check out the beginning of this story at Executive Recruiting, take 2

We extended the offer to Mr. Banker for him to join us as a third partner and founder. He was a big surprised given we had really gotten in touch with him as a banker to help us raise money. However, we explained the issues we had with the old agreement and how this offer was meant to capture all the upside of bringing him on-board without any of the legal mess. He was excited at the prospect of joining us as an entrepreneur and accepted the offer on the spot. We all agreed that the terms of the agreement would have to be worked out, but that we would take care of that over the next few months. We began discussing all the exciting partnership ideas we had in the hopper. We also spoke a bit about compensation, and Mr. Banker expressed interest in being an equal third, meaning he wanted the opportunity to earn into a full 1/3 of the founder’s equity. While we thought this was pretty rich, we realized we were not giving him a 1/3 outright. He would have to earn it over a period of time. If things didn’t “work out” before the end of his contract (probably 3 years), he would not get the remainder of his equity. We thought this was a pretty good compromise and a price worth paying to get a guy on-board who would hopefully grow the business exponentially. Seth and I agreed that it was better to have less of something big (if not something at all) than to have half of nothing.

Mr. Banker was excited to get right down to our business plan and fully understand what our vision was for the company. He also wanted to fully understand the financial model I had built and how we planned on making money. He admitted that as a partner, we was excited to get his hands dirty and learn the “nitty-gritty,” something that neither he, nor any other banker, typically did when working with a “client” to raise money. He admitted that a banker typically makes the introductions and understands the business on a high-level, leaving it to the entrepreneurs to answer the hard questions from investors. Seth and I left that meeting very optimistic. We liked Mr. Banker a lot and thought that the new partnership relationship was going to be much more beneficial for OnCard and force Mr. Banker to work harder than he would have if he were just our banker. We’ll see how this pans out…

JT

View our first journey down the recruiting road in prior posts Executive Recruiting, part 1 and Executive Recruiting, part 1 continued

So we decided to pass on hiring a banker. It was a pretty frustrating past couple of weeks, but I gained a huge education from this process. I passed it all onto Seth, who was in the loop every step of the way. After much discussion over the past week, Seth and I have decided that hiring a banker was a terrible idea. Instead, we are entertaining the idea of making Mr. Banker an offer to come on-board as a third partner. Given his 20+ experience in venture capital, investment banking, technology and financial services, we think he could probably add much more value as a team member, without all the contractual hurdles we were facing with the consulting agreement. We think that the new business relationship we are proposing will be much cleaner and will hopefully align all of our interests much more closely.

We actually began working with Mr. Banker this week under the pretense that we will get a deal done and come to terms with an agreement. We have another meeting with him in a couple days and will make the offer then. We hope that this move will bring the much-needed credibility and execution experience to our company. However, unlike before with Mr. Texas, we are going to structure this as a three-way partnership. We will ask him to buy his stock, much the same way that Seth and I have by investing our own money. We know this is for real if he commits his own money to the venture. The big difference is that we will offer him about 20% of the company over the time, say 3 years, that he stays with the company. We think this is very fair, but will just have to tell you how it goes…

JT

Do we need a banker? part 2

September 19, 2006

Get up to speed on the story before reading our first post on Hiring a Banker

So I met with Mr. Banker about two weeks ago at this point to discuss our capital needs and how he might be able to help us raise some money. Given I understood and spoke the banking jargon, Seth and I decided that I would manage this process until we were ready to make a decision, upon which time Seth and I would decide together on the right path to take. I had never dealt with a start-up banker/consultant before, so this was a real education. The basics for how this works is that these bankers typically work alone and help start-ups or small companies with a variety of financial advice, such as M&A (i.e. selling their company), raising money, and general business development (i.e. finding partnerships), among other internal finance processes. Some will even offer to stand-in as CFO (chief financial officer) to ensure that the financial processes are in place and that the accounting is being done properly. Mr. Banker offered his services on all these levels.

I thought this was a great idea and asked him for a draft agreement so we could share it with our lawyers and get a general sense for how the economics (i.e. payment to him) would work.He sent me the paper work a day after we met (about a week ago), and I went through it with a fine-toothed comb. In short, I didn’t like the fee structure and thought it was going to be very expensive. There were fees for everything, but Mr. Banker mentioned that most of the compensation would be for stock in our company so that he can “share in the upside.” Seth and I liked this part because if he did a good job raising money for us on a good valuation (more on that in another post), he would also benefit from our stock being worth more. However, I come from a world of finance where clients paid bankers significantly less for a private placement. Although the size of our deal would be much lower, I did not feel comfortable paying 60% more than I was used to at a big investment bank.

I sent the agreement back and forth with Mr. Banker, making edits to the language and negotiating the terms.After working on this for two weeks, I was comfortable with the agreement and thought it provided us with adequate protections and fair fees. But then again, I’m not a lawyer. To be sure, I sent the agreement to our lawyer for final review and waited a couple days for him to get back to me.So he came back to me yesterday with a ton of notes and a lot of issues with the agreement. In short, he said that it was very unfriendly to the company and thought that we should not sign this agreement under any circumstances. He believed so strongly that we not sign the agreement that he was going to draft a letter to us stating his advice so that his view was documented should we go ahead and sign it anyway. I assured him that we were absolutely going to follow his sound legal advice. I spoke with Mr. Banker and told him that we could not sign the agreement. I told him that Seth and I would need to speak about this and would get back to him with an alternative next week. So I’m pretty sure that we are not going to hire a banker at this point, but I’ll let you know how this goes…

Bottom Line: Be very careful when hiring a banker to help you raise money. Don’t sign anything before having a corporate contract lawyer review it. This could be your uncle, cousin, brother, or the lawyer you hired because you don’t have anybody in your family who would do it for free. It doesn’t matter. Remember, that your signature is binding, and signing anything without fully understand it (especially in business) could be a huge mistake. Look for other sources of money first before hiring a banker, since other sources will probably be free and a banker will charge you a big fee for what he’s doing. If you decide to hire a banker, make sure the contract is completely performance-based. This means that he gets nothing if he can’t raise money, form partnerships, etc. This creates ultimate accountability for the baker. If the banker you’re talking with doesn’t like that, don’t hire him. Remember, hiring a banker does not mean that he will have your best interest in mind. He wants to raise you money so that he gets his fee. It doesn’t matter how much of your business he needs to sell to do it. So make sure you understand how much of your business you’re giving away when you’re banker brings you interested investors wanting to put in money. Everything comes at a price…

JT

So Seth and I had a couple conversations with this web designer and really like her. She’s creative and has designed some pretty amazing websites. We decided to hire her and her programmer to design our site. Seth and I have have worked tirelessly on a schema for the site we want, complete with layout, page flow, graphics, and text. We’re handing it over to her as our road-map/blueprint for what we want. She’s going to put together some preliminary designs so that we can review, tweak, and then have her programmer start actually building the site. We’ve already purchased the URL at http://www.oncardmarketing.com a while back when we incorporated (highly recommended), so I need to hand over the info to the website programmer who will make sure that things are working smoothly on the actual site as the project moves along.

The big thing that we want in our site is a pretty complete demo of the service we’re hoping to sell to merchants. It’s complicated, but Seth and I have a good idea of what we want it to look like. I just hope that our design team can make it look as good as we envision it. We’ll keep you posted…

Bottom Line: When choosing a web design firm, pick somebody who has a large portfolio of sites that vary in look and feel. This shows that the designer has versatility (good thing), meaning that you’re more likely to get a site that is as original as possible. Also, if the designer has a personal relationship with somebody you know (i.e. they’ve done good work for somebody you trust), all the better. With designers, you don’t really need referrals. Their work speaks for itself. If you like the websites they’ve designed, and they’re willing to do it for the right price (don’t spend over $100/hr), then go for it. This is your corporate identity, so don’t skimp. If the site looks like crap, you’ll lose credibility, so spend the little extra to make it sharp.

JT

Read up on how the process began in Picking a board of advisors…

Out of about 12 phone calls made to prospective board members, only about half accepted, with the others claiming that they had other obligations inside and outside of work that would preclude them from providing informal advice to a start-up every few months. Obviously, I didn’t buy into it. But I’ve been told not to take anything personally in business.

Out of the 6 respondents who accepted, we have close relationships with 4; the other two we’ve never met in-person but were referred to us by close contacts. We decided to ask two Cornell professors to advise us. Seth maintains close relationships with his professors from when he was in school and keeps in touch with them on a regular basis. This is a logical choice, since one of them teaches entrepreneurship and the other is a leading technology professor in the computer science department. One (our favorite Texan) comes from marketing/advertising, and the other three come from financial services, one payments consultant, and two commercial banking and credit card experts. So now we have a board. I don’t think we’ll have any fancy meetings. But I feel much better that we have a network of older executives who can provide useful insights and advice to us in times of need (of which I imagine there will be many). I should also mention that we have received interest from 3 individuals who unfortunately could not have a formal relationship with our company (i.e. be listed on our website) due to conflicts with their corporate employers. Instead, they have pledged to help us in any way they can on an informal basis. I’m sure that will be plenty of advice.

Bottom Line: Every start-up should have a board of advisers. A board of advisers is not the same as a board of directors. Most start-ups don’t need to go through the legal hassle and paperwork to create and elect members to a board of directors. A board of advisers is much more informal (usually does not require compensation or paperwork) and gives you two of the big benefits of a board of directors. The first is credibility. Having older, successful and experienced people associated with your company will only help as you try to build your own credibility as an entrepreneur. Second, surrounding yourself with this crowd will give you a support group of qualified (hopefully) individuals to whom you can turn for advice when you need it.

JT

We need a website!

September 7, 2006

Seth and I have been talking a lot recently about building a corporate website for OnCard Marketing. We realize we need to have a web presence (since we ARE a technology company) and having an informational site would be the first step towards enhanced credibility. Once again, we find ourselves trying to do something neither of us have ever done before, building a website that is. I started pinging my contacts with emails trying to see if anybody know a web designer. At this point, I just need an education and don’t care how great the person it. We’ll evaluate that once we have some names. I’m calling a bunch of web designers I found using google adwords (great resource for finding stuff you need). The problem is I don’t know any of them and the price they’re charging is pretty steep (too steep for us).

Seth has a friend a few years older from his fraternity at Cornell who has a friend in graphic design. We checked out her work yesterday and are actually very impressed with some of the work she has done on websites. I’m so happy we finally found somebody who knows something about web design!! I’ll reach out to her and have a couple conversations about the project, our company, and the site we are hoping to build. I’ll let you know where this goes…

JT