April 28, 2010

Investors vs. Entrepreneurs – Interview with John Richards

John Richards

John is an entrepreneurial Indiana Jones.  He’s as comfortable pioneering angel investments as he is lecturing his students at Brigham Young University. John is equal parts technology entrepreneur, college professor, and angel investor.  He’s passionate & principled, generous & tough.

Quick anecdotal story:
When John was a kid he ran his own library out of his basement. but unlike the public library, he charged for rentals to the other kids. I don’t know how John got them to use him over the public library, but he did.

Just who is John Richards?

John the Entrepreneur:
John honed his entrepreneurial skills growing and managing a print yellow pages publishing company for many years. Then, in 1994, John co-developed and launched the first-ever online Yellow Pages derived from an offline print product – Yellow Pages on the Internet, LLC (YPI). He sold that company to InfoSpace, Inc and, from 1998-2001, John served as its vice president of. He was at “Ground Zero” of the Internet Revolution, seeing InfoSpace rise from less than 10 people to an Internet juggernaut valued at a peak market capitalization of over $35 billion.

John the Professor:
Appointed to an associate professorship at Brigham Young University in Provo, Utah, John teaches courses in entrepreneurship in the Marriott School of Management and the School of Technology. He is an associate director of the Rollins Center for Entrepreneurship & Technology.

John the Angel Investor:
As a partner of the Utah Angels, John is one of Utah’s most active investors (*He’s had several nominations for our ‘Angel Investor of the Year Award’).

Have you seen an investor take advantage of an entrepreneur’s trust?

John: I’m not sure what you mean by ‘take advantage.’ At some point an investor and an entrepreneur are on opposite sides of the negotiation table. If the investor has superior knowledge of how venture investments are done and the entrepreneur doesn’t have any knowledge of it, then in one way you could say the investor is ‘taking advantage’ of his superior knowledge by negotiating a favorable deal for himself. Whether that’s wrong or not, I’m not making any judgment on that. But taking advantage of a situation because you have superior knowledge or skill is an element of business.

What’s the best way for an entrepreneur to protect himself?

John: Educate himself.  Be a sponge & learn anything & everything. An entrepreneur’s number-one defense is education. FundingUniverse is a great source of knowledge & education for entrepreneurs. *thanks John!*

Would it be appropriate to have a trusted mentor read over your contract?

John: Of course. A lawyer should read over it. You’ll also want an experienced business mentor look it over and help you understand things.

What contractual clauses should raise a red-flag in an entrepreneur’s mind?

John: Fist you’ve got to ask, ‘what kind of investment is this? Is this common-stock, preferred stock, debt deal, convertible debt deal, etc… ?’ But I’ll give you some examples. You’ve got to be careful not to give too high a percentage of the company away in early rounds because there are probably going to be multiple rounds of investment. And you might find yourself, more quickly than you thought, with less than 50%.

I could talk for hours on this, but you need to be mindful of the preferred stock agreement. You don’t want to have the liquidation preference or the conversion multiple too high.  As an entrepreneur you’ll always want a 1x liquidation preference, not a 2x or 3x. The same with the conversion multiple. You want one share of prefered stock to convert to one share of common stock, not to three, five, or ten shares. those are the types of things that, as an entrepreneur, you should really fight for. Of course at the end of the day it’s a market-driven issue. If you only have one investor offering you money and you don’t have any other competitive offers, then there isn’t much you can do.

Have you ever seen an investor attempt a take-over of an entrepreneur’s business?

John: Most bona fide investors wouldn’t do that. They don’t want to. Investors are investors, they don’t want to be operators. Their goal is to optimize the situation and it’s not optimal when an investor has to come in & take over. Taking over & running your small business isn’t worth an investor’s time.  Is it possible that an investor could have that motive? Yes. But, I’ve never seen it.

How about replacing the CEO?

John: Oh yes. On that point there is no doubt. Especially for a venture capital firm (angel investors do it less frequently). A venture capital firm may invest and then give a year for the founders to perform. If a founder doesn’t perform a VC will put a lot of pressure on the board to oust that founder as CEO. I see that many times every year.

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