Friday, September 22, 2017

Twitter Features

Twitter is a product that is used and loved by hundreds of millions of users. The core product has needed the same basic features for the last 7 or 8 years. Here are the things I think Twitter should build. In this post, I stay away from areas I no longer understand for Twitter (e.g. zero rated Twitter / developing world products) or big picture ideas (e.g. how to remake the timeline). Even simple changes could go a long way for the product.

1. Tweet structure.
Long form content. A key rule in product design is if your users keep wanting to do something, let them do it. Tweet storms are clear examples of users wanting to write longer form content on Twitter.
The simplest approach to longer form content would be to allow the linking of tweets as a formal product feature and structure a la tweet storms.

It is clear users want standard longer form content as well. Twitter users will often screenshot a longer post written in e.g. iPhone notes app, and then post the image as their tweet. Obviously this content is now not searchable on Twitter. A simple, blog-like longer form editor may be a solid approach to capture this behavior on Twitter. This may include having the Tweet as the headline for a longer post, or a pull quote. Either way, being able to write a longer piece is one use case the Twitter userbase keeps trying to do.

The actual 140 character nature of Tweets does not need to change in your stream as part of this. E.g. everything could be a standard tweet with the ability to expand to see more inline.

A standard design approach is to get out of the way of your users. Just as Twitter eventually added @ mentions and replies, they should get out of their own way and add long form content. There is clear user demand.

Editable tweets. You should be able to go back and edit a tweet. A simple affordance would be the ability to switch to prior versions of the tweet / tweet history. Lots of wikis, Google docs, and other products have simple ways to reveal this.

2. Content controls.
Muting content areas. I don't care about certain sports but get deluged in my Twitter feed during game time. I should be able to keep following people but turn off specific topics. I would love to take a break from "political Twitter" and turn off politics for a few days. Twitter has the machine learning chops to build a feature like this.

Blocking people. There are classes of hyper aggressive people on Twitter who all attack someone in concert. There should be bulk controls for this. Twitter also has the odd feature that if you block someone, they are notified about it. It is unclear why you need to let someone know if they are blocked. It is the social networking equivalent of giving someone the finger. Twitter can make its platform a much nicer place to exist.

SPAM and fake users. It looks like Twitter is finally working on this feature in earnest. I have instances where I have been followed by 10 new people and 8 of them look like fake users to me. If I can tell a user is fake, a machine learning algorithm should do it even better. Fake users should be automatically removed from the platform.

3. Growth and re-engagement.
Email digest a la Nuzzel. Nuzzel is a news/social content digest that really works. Every day I read 80% of the links that Nuzzel sends me based on my Twitter feeed. Twitter's email digest is largely untargeted and therefore is largely ignored.

Twitter could re-engage me by upping the quality of their email digest, thereby pulling me back to the product daily. Alternatively, they could push me the same content via a notification, or into my Twitter feed. If a Nuzzel-like page were added within Twitter itself I would go there with some frequency. Being able to vote up and down links on such a page could create a distributed / personalized Reddit like experience. Maybe this could replace the "moments" tab?

Overall Twitter is a product whose useful core has evolved only slightly in the last few years. My hope is that some day the above features get added. This should increase utilization, engagement, and growth on a product percentages of humanity use and love daily.

Thanks to David King for comments on this post.

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Monday, September 11, 2017

VC Negotiation Tricks: Simplified Term Sheets & Post-Money Valuations

Every 5 years, the VC community comes up with new negotiation tactics that work well against first time entrepreneurs. Two such recent approaches in the VC community are (i) simplified term sheets that lack some of the details needed to assess all terms being offered and (ii) an emphasis on post-money valuations.

(i) Simplified Term Sheets
A few years ago, venture firms would send entrepreneurs a 3 to 5-page terms sheet that would spell out the explicit details of their offer. These term sheets would contain the main highlights entrepreneurs tend to focus on (mainly board and valuation), but also got into the details on terms that are key such as protective provisions (special rights for investors). This meant that signing a term sheet came with an explicit view of all the major items that are part of the round.

More recently, venture firms have been sending 1-page term sheets which have simplified out a number of important details. One term sheet I helped a founder with recently contained only 200 words (this is 10-20% the length of term sheets just a few years ago)! This means the founder was being asked to sign a term sheet without knowing a subset of key terms that would impact future financings, potential company product directions, the ability to exit or sell the company, and limits or rights on employee option pools etc[1].

Once you sign a term sheet as a founder, you lose most of the leverage in a fundraise with a VC. You are typically locked into a 30 day exclusivity period where you can not entertain other VC offers. Founder etiquette at this point is to tell the other funds you have been talking to that you have chosen your financing partner.

Before signing a term sheet, you should have your lawyer fill out the following items in a simplified term sheet:
1. Board structure.
How many common and preferred board seats are there? Is there a CEO-specific seat or would a new CEO seat get created if the founder/CEO steps down or is fired?

One common VC trick is to write the common stock (i.e. founder) board seats as
"The holders of Common Stock shall elect two directors, one of whom will be the then-serving Chief Executive Officer." While the later part of this sentence seems innocuous, it gets interpreted by overzealous lawyers to mean that if a founder ceases to be CEO they lose their board seat which goes to a new CEO (i.e. it is a "CEO" seat, rather then a founder/common board seat. If the board hires in a new external CEO, the founders may immediately lose control of the company.

2. Protective provisions.
Protective provisions are the set of special rights investors in a financing get to protect their minority investment. Protective provisions include[2]:

Future financings. Often VCs ask for the right to block any future preferred stock sales by the company. If you agree to this block, only have it apply to preferred financings with terms worse then the round you just did. In other words, if you get terms equal to, or better, then your current round you should be able to close future financings without approval.

M&A. Most investors ask to be able to block future exits by the company. If you agree to such a term, it should be voted on collectively by all future rounds of stock. I.e. the series A, B, C etc. should all vote together, in a manner representative of shareholdings in the company, on such rounds. Otherwise you can have multiple different VCs, each with their own incentive, block exits.

Company product lines. Some VCs insert language that they can block changes in major lines of business for a company. While this may make sense for a private equity buy out, it does not make sense for an early stage company and should be taken out.

Board. A commonly asked for provision is the ability to change the size or composition of the board. Talk to advisors or angels to get advice on this in the context of your own startup.

Any protective provisions that one round of investors gets (e.g. your Series A) will often carry over into future rounds (series B, C, D, etc.). Be careful in the precedents you set.

3. Liquidation Preference.
1X non-participating preferred is the most typical structure for a series A or B financing. If a VC asks for anything more complex it usually implies something weird about your company (strange re-cap?), your valuation (is it super high prematurely?) or your investors (are they taking advantage of you?).

Ask your lawyer for more details[3].

4. Option pool.
You should shoot for an option pool that allows you to hire the team needed to get you to the next fundraise or major company milestone. It is good to add a little padding to this. To see how option pool may chance effective valuation, see this venture hacks post.

(ii) Valuation: Pre-money versus post-money.
Both pre- and post-money negotiations have been around for decades. While there is not a single right way to do it, many first time entrepreneurs tend to be less savvy in their understanding of a post-money valuation negotiation.

Setting a company valuation by negotiating its pre-money first means that you and the VC agree on a price for the company before the financing occurs. You then add in SAFE and convertible note dilution and new money in, and end up with a total valuation for the company. Negotiating valuation based on post-money means that no matter how many SAFEs or convertible notes are outstanding, or even the total new money raised, the company ends up with the same post-money valuation[4].

A pre-money valuation negotiation tends to be more transparent to a first time entrepreneur. Your company is worth a certain amount before you raise money. Once the money comes in it should be worth more in a manner that scales with capital. E.g. a company that has raised $15M should be worth $5M more than an identical company that raise $10M. Negotiating valuations around post-money tend to distort these economics.

VCs will negotiate the round valuation around the post-money valuation in some cases as it leads to significant additional dilution (and a much lower pre-money) then most first time founders realize:

A. More money in the round can be incredibly dilutive.
B. SAFE Conversion can jack down your pre-money significantly.

Lets take a simple example for (A) above. Suppose you are raising $5M. If you set your post-money at $25M (for a $20M valuation before the round is funded) then you take 20% dilution for the $5M. Say that a few weeks after you sign the term sheet another investor wants to come in for an additional $5M. In a post-money situation, your valuation before the round drops to $15M and you just sold 40% of the company ($10M/$25M).

In contrast, in a pre-money situation the company itself is deemed worth $20M before any money comes in. If you raise $5M, you similarly dilute by 20% and end up with a $25M post. However, when the incremental $5M comes in, you still start off with a $20M pre-money valuation, and end up with a $30M post. In other words, you dilute by 33% instead of 40%. This 7% incremental dilution makes a huge different in ownership.

SAFE notes effectively act the same way the incremental new money coming in above does. They can jack down your effective valuation if you negotiate the valuation on a post-money basis. If you raise $5M in SAFE notes and they convert at a 20% discount, you may have just dropped your pre-money by $6M ($5M + 20% of $5M). Caveat emptor!

Post-money valuation based negotiations have become more common in the last ~2 years and I think is a way for VCs to take benefit from entrepreneurial ignorance around SAFE conversion mechanics and how financing rounds work. As an entrepreneur, you should understand these mechanics and understand the details of your prior financing docs.

[1] A good lawyer should spot and put these terms back in.
[2] There are a number of other protective provisions that I don't mention - e.g. the ability to issue new stock is often blocked by investors to prevent unlimited dilution etc.
[3] I can also understand that VCs probably simplified term sheets to make negotiation faster/simpler with founders and to emphasize the terms first time founders care the most about.
[4] There have always been pre-money and post-money driven term sheets. However, the market has largely been shifting to post-money term sheets more recently. I am guessing this is due to SAFEs. There is nothing "wrong" with a post-money term sheet a priori - although it does create inflexibility in adding money to the round over time and sets a cap on potential fundraise size. Worst case you can always amend your financing docs.

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