Suscipe is a forum for entrepreneurs coorganized by the student associations in Spain of the London Business School, the Massachusetts Institute of Technology (MIT), and the Standford University, as well as by the Association of former interns of “la Caixa”, in collaboration with the Escuela Técnica Superior de Ingenieros Industriales de la Universidad Politécnica de Madrid.

The following is event’s program (pdf). The event is free of charge and you can attend only the parts you are interested in:

• 19:15: Innovative Project: Tractis
• 20:00: Special Guest: Angel Iglesias, founder of Ikusi, a Spanish company with over 700 employees present in more than 80 countries
• 21:15: Networking event

My presentation will be focused on the project itself, whereas Angel Iglesias will talk about his activity and entrepreneurial experience. The event will take place in the Escuela Técnica Superior de Ingenieros Industriales de Madrid, Room 3 (c/ José Gutierrez Abascal 2. Zona Paseo Castellana – Nuevos Ministerios).

Francisco Hernández, one of Suscipe’s coordinators, told me that 113 people have already confirmed their assistance, but there is still room for more. Whether you use Tractis or not, if you are starting your own project, or are interested in spending some time with people that want to make a difference, I will be happy to meet you in person.

Update 2008.05.26: The organizers at Suscipe have just uploaded the video of the presentation of Tractis.

On other points I don’t agree with everything he says. I think that the entire process – the initial pitch and the subsequent negotiations – are necessary and, perhaps most importantly, generate assumptions that oblige both parties to think and rethink the project. Without thinking it over, we can’t understand it.

It’s in many of these assumptions that the “lies” that Guy refers to are born.

We also shouldn’t forget that the majority of the lies are nothing more than responses to the investor’s own questions, which leads me to think that a lot of the time, those questions are badly phrased.

1- “Our projections are conservative”

Here Guy warns us that the projections of an Entrepreneur are never conservative.

I’d put it another way: an entrepreneur’s projections don’t need to be conservative. In general, as Guy says, the entrepreneur has no idea what the market turnover will be the. Similarly, the venture capitalist has no idea of market size, sales volume or related information.

If an investor asked me if the projections are conservative, I’d probably think that he doesn’t know much about risk capital.

The projections are nothing more than the starting point for deeper discussions. The help the investor get an idea of where he’s investing his money.

When we talk about projections, we’re talking about the assumptions on which the projections are based.

When an investor and entrepreneur talk about projections, the only thing they need to discuss is whether or not these assumptions are relevant. This is where an experienced investor can benefit an enterprise the most (apart from introducing the company to the right people later on).

The majority of the times, the decision to invest or otherwise in a project doesn’t come from the projections, but from the investor’s own judgement in detecting an unsatisfied need, a good business.

2- “(Big name research firm) says our market will be $50 billion in 2010.”

Guy says that all the entrepreneurs boast that their market is huge, independent of the project’s potential.

As with the first point, I think it is so difficult to define this that I can only think that the investors ask the wrong question. An investor that asks “What is the value of the market?” leaves themselves open to lies.

In innovative projects, the market value might be 50 billion if it becomes a world standard or 0 if no one shows any interest in the product.

The key question is not “What is the market value?” but “What is the chance that this project is a success?” or “what is the chance that this group of people are able to satisfy the market need?”.

3- “(Big name company) is going to sign our purchase order next week.”

Guy says that you shouldn’t play this card if you’re not sure you’ll close the order.

I agree. I think there’s nothing more shameful than an entrepreneur that lies about this.

The variation “we’re in negotiations with (Big name company)” is valid but these have to be real negotiations. I think it’s important to mention such discussions but not to make this the foundation of your project.

From my experience with Negonation, I can say that there are many meetings and negotiating sessions before closing the first sale. In the majority of cases, the sale is not completed until a while after the close of the first round of financing.

4- “Key employees are set to join us as soon as we get funded.”

Guy states that you have to ensure that the ‘key’ people confirm this information to the investor.

I think that the key people should be in the founding team.

A founding team with the key people can accomplish anything, including adding many more key people to the group.

I think that the most intelligent strategy is to demonstrate that the entrepreneurs are the key people and to not expose the need to add key people to the team.

It’s always better to visit the investors with the key team formed and not with promises to form it in the future.

5- “No one is doing what we’re doing”.

In this case, Guy says that no one is doing it because there is no market or because the entrepreneur is so lost that they cannot discover their competency.

I think that in this case Guy over-generalizes the issue. Following his reasoning, innovations would not exist, nor revolutionary ideas. Industrial secrets and confidentiality agreements would also be unnecessary.

To me, stating “no one is doing what we’re doing” is pretentious and arrogant, although it is possibly true.

In my experience with Negonation, during the development of Tractis, I’ve seen many projects that try to solve the same problem as us but in none of these cases do they have the same focus.

6- “No one can do what we’re doing”.

Guy states that arrogance is worse than stupidity…

I agree that saying this makes an entrepreneur look stupid. You just need to know that there are 6.7 billion people in the world to understand that humility and precaution are better allies.

7- “Hurry because several other venture capital firms are interested”.

Guy says that very few have the luxury of pressuring venture capitalists this way.

This is probably true but, all the same, I would never fail to mention to a venture capital firm that I’d visited others.

I wouldn’t do it with the intention of pressuring anyone, I simply believe that it’s better to have things clear from the start.
I think it’s worse that an investor finds out at the last minute that we didn’t close the deal with him because we signed with someone else. Even Guy should agree with this.

8- “Oracle is too big/dumb/slow to be a threat”.

Here guy compares the private jets and boats of the owners of the world’s largest IT companies with the budget airlines in which the entrepreneurs travel. And he uses this to demonstrate that it’s impossible to compete with the giants.

I don’t think that this is the most appropriate comparison. In the first place, the personal fortune of a shareholder, owner, CEO etc. has nothing to do with the company to which they are linked. Although there may be a correlation, it’s often not the case.

It’s also true that a big company is much slower than a smaller one. Anyone who’s worked in a multinational and a small or medium-sized business can tell you that.

But it is not enough to assume that we can ‘beat Oracle’ merely because we have a more flexible company.

The entrepreneur and the mega-company play a poker game knowing that the mega-company has the best hand. It’s a question of playing the cards at the right moment. It’s not impossible to win but it is very difficult.

9- “We have a proven management team”.

In this section, Guy ridicules those that state that their management team is experienced.

I wouldn’t be so quick to ridicule. In the first place, I think it shows a lack of respect. The entrepreneur is doing everything in his power to reach an agreement and start a business. On the other hand, the investor wants a solid team. It’s obvious that the entrepreneur will try to ‘sell’ his team.

This is just selling. Even Airbus plays up the advantages and plays down the disadvantages when selling planes.

All experience is relative. And therefore, open to subjectivity.

Guy also comments “If they were that experienced, they wouldn’t be asking for money”. Well, I know many people with a lot of experience that would move a project forward but simply don’t have the money to do it because they are young or because life itself is full of surprises.

10- “Patents make our product defensible”.

Guy says that using this statement too much may make the company seem too dependent on patents and that this, in reality, could be a weakness.

I agree with this point of view. The strengths of the project should be, primarily the group of people and secondly the idea. The rest is complementary.

11- “All we have to do is get 1% of the market”.

In this bullet, Guy says that no investor wants only 1% of the market and that it’s not that easy to even get that 1%.

Such graphic statements are nothing more than a catalyst for later reflection and discussion.

Throughout the growth of the company, 1001 such phrases and projections will be made.

With time, the numbers will start to consolidate and the moment will arrive in which the experience, time that has passed, and milestones reached will allow you to plan and project scientifically instead of predicting the future.

What is certain is that to move forward with a project and successfully close negotiations with investors, on one hand you need a first class group of people and on the other an investor with a lot of vision.

Google is a good case study because, as a result of its IPO in May 2004, it was forced to disclose partial information about shareholders and percentages to the US Securities and Exchange Commission (SEC). Moreover, its unquestionable success predicted fabulous returns, so many investors were unable to resist the temptation of boasting about their shares in the web’s star company. Its veil was lifted for once….

Founders – 31.3%

• Larry Page – 15.7%
• Sergey Brin – 15.6%

Key employees – 7.9%

• Eric Schmidt, Google CEO – 6%
• Omid Kordestani, Google Sr. VP of Sales – 1.9%

Advisory Board – 0.68%

Not including investors or their representatives (see further below):

• Wayne Rosing: 0.60%
• John Hennessy, President of Stanford University: 0.03%
• Arthur Levinson, President and CEO of Genentech: 0.03%
• Paul Otellini, President and COO of Intel: 0.03%

Investors – 25%

Silicon Valley venture capital firms, which invested 25 million each in 5 years:

• Kleiner Perkins Caufield & Byers, represented by John Doerr: 9.7%
• Sequoia Capital, represented by Michael Moritz: 9.7%

Main Business Angels, which invested 1 million dollars among them:

• Ram Shriram, former member of the executive team at Netscape and Amazon: 2.2%
• Andy Bechtolsheim, founder of Sun Microsystems: 1.10% (estimated)
• David R. Cheriton, Computer Science Professor at Stanford: 1.10% (estimated)
• Undisclosed investors: 1.10% (estimated)

Undisclosed – 35%

This is where the research and facts end and where speculation begins. Everything mentioned so far totals 65%, so where is the other 35%? Below are some Google investors whose percentage is undisclosed:

• Angel Investors Venture Fund: a failed investment fund despite Google’s success and the fact that it had contributions from famous people such as Tiger Woods, Shaquille O’Neal, Henry Kissinger, Arnold Schwarzenegger, Frank P. Quattrone, Marc Andreessen (founder of Netscape), Pierre M. Omidyar (founder of eBay), Shawn Fanning (founder of Napster) and Bill Joy (founder of Sun Microsystems).
• Stanford University: the university where the founders of Google studied owns the PageRank technology. In exchange for the user license, Google gave it an undisclosed amount of shares (“a bit of stock“) and annually pays it royalties.
• Yahoo!: In 2000-2001, Yahoo! used Google technology as its search engine. In that stage, Yahoo! invested 10 million dollars in Google in exchange for an undisclosed stake. (Google’s IPO must have left it with a bittersweet taste.)
• AOL: In 2002, America Online (AOL), now Time Warner, reached an agreement with Google that enabled it to buy 2 million shares of Google (1% of the total) for 22 million dollars. They have probably exercised that option.

We assume that the undisclosed 35% is as follows: Angel Venture Fund (10%), Stanford University (5%), Yahoo (4%), AOL (1%), stock plan (4%), other members of the board and the advisory board (1%), other key employees (2%) and undisclosed investors (8%). The result is as follows (remember that this is just an assumption):

• Founders: 31.3%
• Key employees: 10%
• Stock plan: 4%
• Advisory Board: 1.7%
• Investors: 53%

Conclusions: the risk of unreal expectations

This ends the series of posts on “How to distribute shares in an Internet start-up“. There is no (and there will never be any) single answer since the actual percentage will depend on the company, the perceived value of the collaborator/investor, the stage at where the company is, and your ability to negotiate. However, we detect certain correlation in the answers from Charlie Tillett, Guy Kawasaki, Brad Feld and the Google case. Using external objective criteria gives a very useful pattern for establishing realistic expectations for everyone and increasing the likelihood of an agreement.

An example of unreal expectations is an entrepreneur who wants to create a company with those characteristics and retain its control. This is practically impossible. Even the founders of Google had to decrease their share from 100% to 31,3%. Nevertheless, there are always some exceptions. A paradigm was eBay, which sought investors not for their money (it earned 400,000 dollars/month) but for obtaining a “seal of confidence”, which is theoretically provided by having an institutional investor and thus being able to hire a good CEO. When eBay was listed, the distribution was as follows (The Perfect Store, hardcover, page 150):

• Founders – 70% (Pierre Omydiar 42% & Jeff Skoll 28%)
• Key employees – 6.6% (Meg Whitman, CEO)
• Investors – 21.5% (Benchmark Capital)

Another example of unreal expectations is the business angel that wants to support the “next eBay” and keep 50% of the company in exchange for its 250,000 euros, and the advisor who wants 15% of the company in exchange for its sporadic services. Both are asking for too much, so they are unlikely to reach an agreement.

In the case of Google, apart from the list of famous and rich people, the initial investors had also been successful entrepreneurs previously. History repeats itself: the founders not only reinvest their fortune in new projects but this culture also extends to their employees. I am not going to idealize them but it is clear that they have come up with the cake’s recipe and the exact weight of the ingredients: in terms of both percentages and efforts. Fairy tales aside, creating a giant like Google required talent, collaboration from many heavyweights with contacts, nearly 65 million dollars of investment, and fair profit-sharing. They all understand the mechanics of the cake, they contribute to the “virtuous cycle of Silicon Valley” and they have realistic expectations.

The entrepreneur’s response

Charlie Tillett was CFO of NetScout for 10 years. Before leaving the company in 2000, he completed two rounds of financing for 6 and 45 million dollars and the IPO in August 1999. He now provides advice to technology start-ups. In 2003, he gave a presentation at MIT, which summarizes much of what he learnt and which I believe is excellent. According to Tillett, the percentages at the time of the IPO were something like this:

• Founders: 35.1%
• Key employees: 5.3%
• Stock plans: 3.5%
• Advisors: 1.1%
• Investors: 55%

If you are interested in a more in-depth view of these numbers, I have put the presentation data in this spreadsheet, which describes how the percentages change during the financing rounds. Two scenarios are included:

• Scenario 1: A company receives 570,000 dollars from business angels and 5,700,000 dollars in a first round from venture capital investors. This is the case described above.
• Scenario 2: A company receives three rounds: 745,000 dollars, 7,450,000 dollars and 7,450,000 dollars.

The investor’s response: key employees and stock plan

Guy Kawasaki is a former Apple evangelist who converted into a VC with Garage Technology Ventures, a venture capital firm in Silicon Valley. He is author of the famous book “The Art of the Start“, and talks regularly on entrepreneurship in his blog and at presentations around the world.

Kawasaki wrote a post recommending a range of percentages for “key employees” and “stock plans” in a company that raises a first round of 1-3 million dollars and has no more than 15 employees:

Key employees:

• CEO (“adult supervision” brought in to replace the founder): 5-10%
• Vice-presidents: 1.5-3%
• Architect (the “main” (wo)man, though an individual contributor): 1-1.5%

Stock plans:

• Senior engineers: 0.3-0.7%
• Mid-level engineers: 0.2-0.4%
• Product managers: 0.2-0.3%

Kawasaki advises not to just latch onto the top end of the range but to consider the salary, cash bonuses, geographic location and, most importantly, the perceived value. If you notice, you’ll see that those percentages are in line with Tillett’s percentages in a similar company phase. Other influential factors are entrepreneurs’ training, their “star” status and the company’s performance. For example, the standard for a veteran CEO at Silicon Valley is 10%. However, Pierre Omydiar, the founder of eBay, hired Meg Whitman as CEO for 6.6% (eBoys, page 58). Larry Page and Sergei Brin, founders of Google, hired Eric Schmidt as CEO for 6%. Niklas Zennström and Janus Friis went further and did not hire a CEO and distributed only 1% among their 150 employees. Nevertheless, when the size of the pie (sale of eBay) was 2.6 billion dollars, plus 1.5 billion dollars if certain objectives were met, the employees are unlikely to harbor a grudge.

The investor’s response: Board and advisors

Brad Feld is another VC with a blog. He works at Mobius Venture Capital where he has invested in (and is member of the board at) companies such as FeedBurner and NewsGator (he seems to have a soft spot for RSS ). He writes about concentrating on the reward for board members and the advisory board. Again, his recommendations are similar to those in Tillett’s presentation:

• Board: from 0.25% to 1% vesting annually over 4 years per board member and single trigger acceleration in the event of a change of control. Vesting means that the person does not own the shares but has the option to acquire them at a symbolic price at a specific time. Assume that board members receive 1% with an annual 4-year vesting. Each year they can exercise their option to acquire 0.25%. If they leave the company before the term ends, they lose their unvested options. Acceleration means that they can exercise all their options once in the event that the company changes control (e.g. the company has been sold or floated). Board members should understand those terms clearly and not receive cash compensation (only reimbursement for expenses incurred on behalf of the company) and they should be given the opportunity to invest in each financing round under the same conditions as venture capital.
• Advisors: there are no figures. This will depend on the value perceived for their contribution. Their contribution is smaller than that of a board director and, therefore, their percentage is also smaller. Feld recommends not using vesting with advisors. Since they tend to provide a larger contribution at the start, it is better to deliver shares (not options) for a year and reassess the situation annually in order to ensure that the relationship maintains the expectations of both parties.

Tomorrow: How to distribute shares in an Internet start-up: Google

Today I begin a series of three posts called “How to distribute shares in an Internet start-up?” This is a difficult question. To answer it, we will have to take the bull by the horns and decide how much percentage goes to each group.

A possible answer is as follows.

It is practically impossible to create a large company without a good team. You need the best you can get: tireless, intelligent people with talent and ambitions to change the world, and the energy and madness to try and do this. They don’t grow on trees. They all expect recognition and a just reward for their efforts and contributions. How do we divide the pie? The first answers that come to mind are the easiest, which are also subjective and useless: “the distribution should be fair”, “reasonable”, “equitable”, etc., which mean nothing. Remember: if you don’t do your homework in advance, you will soon find problems such as “that’s unfair!” “you’re being unreasonable!”, “your proposal isn’t equitable!” What comes afterwards is just as bad: physical and emotional exhaustion, bad vibes, etc. to say the least.

Get to know all the players

The first decision is how many players will receive a piece of the pie. Many entrepreneurs believe that the problem lies in deciding how much corresponds to each founder. Nothing could be further from the truth. A company can have a long life and live through different phases. Each phase requires different types of people and help. Decide how many shares you will reserve for each phase and type of player:

1. Founders: if there is only one founder, the problem of distribution is resolved (the bad news is that he/she must also be prepared for very HARSH solitary times). If there are more founders, the same percentage is usually distributed to everyone. “This way we avoid arguments“. I personally believe that this is a good option but not the only one. Sometimes each founder provides different experience, knowledge and dedication. On those occasions, the “everyone is equal” option brings problems.
2. Key employees: they help the founders to make their dream come true. They are exceptional in their work (there is always a lack of resources in a start-up, so inefficient employees find it difficult to conceal themselves) and have low risk aversion. Many end up being friends forever after sharing mutual respect, hours (and hours) of work, uncertainties and risks. The reward should be on the same level.
3. Stock plan: once everything starts working, the risk for new employees is lower and so are the rewards. Nevertheless, lower risk does not mean that it does not exist.
4. Advisory board: this includes board members and advisors; people with know-how and know-who (not postcard fame or hot air) and people with experience and contacts who can derail a train but stay down to earth. They should be full of action and ready to get going by making phone calls, investing, finding partners and visiting potential clients if necessary (and it is). If not, out they go.
5. Investors: they include both business angels and initial informal investors such as venture capital firms and institutional investors, which hardly ever invest less than seven figures.

Some believe that none or only some of those players are required for the project in mind. That’s perfect. All I’m saying is that, if you believe that you need them, decide how many shares you are going to reserve for them.

Size of the pie when eating it

There is a trick to this: suppose you are an entrepreneur with 100% of the shares of your company. Your service has become very popular and it receives many visits and obtains some revenues. You decide that it is time to seek investment in order to boost the project (more employees, servers, advertising, agreements, sales force, etc.). You find an investor who values your company at 2 million euros and wants to invest a further 2 million euros. Your company is worth 2 million euros pre-money and 4 million euros post-money (2 +2). However, the investor wants shares in exchange for its investment. Since it provides 2 million euros to create a company worth 4 million euros, it owns 50%. Your 100% has diluted to 50% in order to bring in the new investment partner. Nothing has changed: you still have the same amount of money (100% of 2 = 50% of 4). Now you have to make that money work in order to increase the size of the pie (company).

The dilution as a result of the entry of investors affects not only the entrepreneur but also the other stakeholders: managers, advisors, employees, etc., including investors from a previous round. The problem is that all of them want to agree on a percentage of shares before working but they will do so considering the number of rounds of financing (and dilution) that they believe will occur at the company and its value at the time of “leaving” (IPO or sale). The entrepreneur must also consider this and estimate (bet) how much should be offered to each group. The difference in estimates for each group can lead to a heated discussion. All of them will talk about “fairness”, “reasonableness” and “equity”. If the entrepreneur gives each group what it wants, he/she may end up without any shares or with a ridiculous percentage that does not justify his/her efforts. Conversely, if he/she distributes a small amount, he/she stands to lose valuable collaborators in a market full of competitors fighting like cats and dogs in the search for talent. This is a difficult but key decision. Mistakes should not be made.

Tomorrow: How to distribute shares in an Internet start-up: The market

Disclaimer: This list was reformulated and reorganized according to my own tastes and reflects my determination of not processing more than 3 ideas simultaneously. Any misunderstanding is due to my brains and because of the lack of context.

Idea

1. Solve something serious. If you improve only costs, efficiency, etc., nobody will try you.
2. The more difficult the problem your product/service solves, the better.
3. Changing people’s habits is impossible.

Service

1. What can we eliminate? Use only the most important things.
2. Break the processes into many small steps.
3. Good design is anonymous: invisible, neutral and toned down.

Clients

1. You’re new and small. Reasonable clients will delay their purchase.
2. It is better to sell to companies (rational) than to consumer (irrational).
3. David’s note: Search for irrational companies?

Business model

1. Freemium: Free + Premium services. Lots of things should be free in order to charge a little.
2. Subscription = recurring revenues.
3. User-generated content.

Marketing

1. A service that will be talked about by people.
2. An easy-to-use service that is understood to be critical.
3. Advertising: radio, television, etc. No! Only Internet.

Team

1. Hire people who are very good and very different. It’s more complicated to manage but it is best.
2. Invest in Sales and Technology at the same time.
3. Manuals are of no use at all. Knowledge is handled by the team. One member may leave but it’s unlikely that all of them leave.

Financing

1. Small investment: 1 million euros. Advantages: close to break-even, less money is insufficient to do something serious, more money is difficult to raise because there is no market in Spain.
2. Don’t get obsessed with confidentiality.
3. Go to people who can lose money and get the money when you can.

If you like this, I recommend Jesús’ blog (rss) where he talks about entrepreneurship, classifieds, projects, usability, etc. See Erase una vez… El Plan de Negocio, an excellent post where he demythologizes the importance of business plans: “In the real world, business plans do not compete. Teams, values and ideas compete.”

Related links:

• Loïc Lemeur’s advice for entrepreneurs.

Four years ago, Yochai Benkler, a Law Professor at Yale University, wrote an essay providing an answer to that question. The essay was called Coase’s Penguin, or, Linux and The Nature of the Firm and it captured many people’s imagination, including mine. The answer was “Yes”.

Production modes

Until now, we knew of two ways on how to organize production: markets and companies:

Markets are formed by individuals and coordinate production based on a price system. In other words, individual A says “if you want me to do that, you’ll have to pay me so much” and individual B responds “that’s too expensive, I can find someone cheaper“. In the end, an agreement is reached so that A produces (or not, and another task is sought). Markets suffer from high “transaction costs“: ask freelancers how long and how much money they use to define and ensure that each client meets their commitment.

Companies are formed by employees and coordinate production based on an order system. The manager says “I’ll pay you a salary. Do this” and the employee says “OK“. There was already an agreement at the time of hiring, the employee produces (or not, and seeks another job). Companies suffer from high “organization costs” as a result of coordinating several people in a hierarchical, centralized way.

The third way

However, the success of open source cannot be explained using either of those models. Open source projects produce the highest quality code that can make monopolies tremble. Yet they do not coordinate based on a price system or a hierarchical managerial structure. This indicates the existence of a new production method which Benkler calls “Commons-Based Peer Production” (CBPP), of which open source is one example (the most visible one) but not the only one (wikipedia, digg, blogosphere, etc.).

Benkler goes even further and states that CBPP is a better system than the other two when (a) information or culture is to be produced in large-scale projects, and (b) the necessary resources (computers, telecommunications) are widely distributed. If those two requirements are met, CBPP is superior for two reasons:

1. Lower transaction costs: Even if you allow a large number of contributors to collaborate, transaction costs are minimal. By eliminating property, no contracts are needed.
2. Lower organization costs: The costs of allocating human capital to production processes are lower because people “self-allocate” and choose where they want to contribute (what wikipedia article to improve, what news item in Digg to vote, what post to write, etc.).

Doubts and mistrust

What production method can we choose? Easy: the one that, after subtracting costs, provides greater profits. If you set up a company that provides services via the Internet, you’re producing information (software). If you do this at a large scale and believe what Benkler says, the answer is clear: CBPP is the way.

What is CBPP’s weakness? Although it’s true that, by eliminating property and hierarchy, transaction and organization costs fall, it is also true that, if profits cannot be allocated to anyone, there won’t be any motivation to participate, and that if, noone coordinates, there won’t be any organization and the system will fail. Benkler’s response is that motivation is very complex, many people participate because of social and/or psychological motivations unrelated to money. Regarding organization, the secret lies in establishing microtasks that require little motivation for completion (granularity), where each module can be completed independently, incrementally and asynchronously (modularity), and where there’s a cheap mechanism to integrate the competent contributions (a quality code that does not violate property laws).

Can CBPP be harmonized and make money? I mean real money. The same as, or more than, any other competitor that uses the company’s traditional method. And, if possible, outside the open source production for the stack (operating systems such as Red Hat, databases such as MySQL). This is the one million dollar question (I couldn’t have said it better) which Negonation will try to answer in practice.

In my next post, I will comment on our experience and difficulties in implementing CBPP. If this is not clear, I am using and will use free software and open source indistinctly. I have also deliberately left out any type of philosophic or moral consideration when commenting on the various systems. My aim is to assess and demonstrate the usefulness of CBPP in “business” terms because this is the only way that “business” people will take this seriously.

We have set ourselves the task of raising €200,000 to finance the first stage of Negonation. When talking to potential investors, the pre-money valuation we ask for is €1,800,000. This means that the post-money valuation (after the €200,000 investment) of Negonation will be €2 million and we will deliver 10% of company shares. What are the reactions to that valuation? Most investors say that it’s high (no-one has yet said that it’s low ) although they are willing to talk.

Recently, we managed to get three investors to raise a total of €140,000 . We need €60,000. So, if you have some savings, I’m sorry but all you can invest is €60,000. No, seriously, if you’re interested or know of anyone who may be interested in this type of project with that valuation, now is the time.p

In such a risky project like Tractis and at the start (completely uncertain), we all know that those valuations are merely mental lucubrations. I doubt that the current investors or those who are considering entering believe that Tractis is worth 2 million euros. They simply believe in the idea, the people, the potential, etc. and are willing to accept that valuation in order to participate in the opportunity. By the way, I would like to comment this with you: high valuation? low valuation? a 2.0 bubble? advice? not much money? too much money? other people seeking financing? etc.

The beta continues: launch of the Wiki Feedback

This week, the 1,000 beta subscriber barrier was broken. We’ve already invited 80 and this week another 100 will enter. This weekend we launched a wiki in http://feedback.negonation.com. The idea is that beta testers tell us about bugs that they find, and provide comments, suggestions and ideas for the future. Comments are welcomed. We also have an email address (feedback@negonation.com) if you want to talk about something in private although we prefer, as far as possible, to talk “in front of everybody” in the wiki. Many thanks to the first courageous people who have dared to participate.

Of all the pending tasks in the development, we are more concerned with the working of Internet Explorer (the only browser that is giving us headaches) and the contract editor (which will experience substantial improvements). This week we are having the monthly employee meeting in Valladolid and they will undoubtedly be the two main subjects.

Collaborators: We need more help

There are already 13 of us in development and around 10 in the legal profile. Some are heavyweights. The level of the conversation in signatures_negonation@googlegroups.com is growing dangerously… . People are also joining on the business and translation sides. We are very pleased with our current collaborators (in fact, we plan to give you a pleasant surprise shortly ), but we need more help: Tractis is an enormous task. We would like to have 25 developers by September (the work and number of components and ideas keep on growing: tractis-hq, tractis-identity, tractis-api…), we still need native English translators to translate the application!! and we’re preparing a legal wiki to boost the legal side after the summer. What are you waiting for?

The day before

I arrived on Thursday 6th and, on that same night, I attended a pre-conference party at a place called The Mansion. There were some investors of 3i, TVM-Capital… but, above all, there were entrepreneurs making contacts by the ton: Jan Miczaikaka, CEO of HitFlip.de (online bartering), Willem Balkerna, CEO of Second Home Market, Kasper Luursema and Joost Luback of EYEFI.nl (web consulting firm), etc.

The Conference

The conference was on the 7th and there were some surprises. Just after the start, it was announced that Kevin Rose of Digg was not going to attend and, in his place, there would be a videoconference with Jay Adelson (CEO of Digg). The list of speakers included people like Steven Pemberton of W3C, Michael Arrington of TechCrunch and Marc Tluscz of Mangrove Capital Partners (the company that invested in Skype). Steven stated that declarative programming languages were the future. He mentioned a study which shows that a larger number of code lines increases the number of bugs exponentially. When he was asked about RoR, he answered that it was “a good language in a good direction” but it still needed some things. Michael stated that he did not understand the people who complain that “many Web 2.0 applications seem to be the same” since the continued reformulation and re-use of ideas (even those that have previously failed) is the key to evolution. I liked Marc Tluscz’s explanation about Mangrove’s investment criterion: “companies that break paradigms“. He stated that, when Skype was simply an idea, the founders presented him the project and told him “look, we’re going to create a software that enables people to talk free and which will bring all telcos to their knees“. Marc asked the audience: “How could we resist?” However, Paul Molenaar of Ilse Media (the Netherlands’ largest online publisher) remembers the story in a different way. In his presentation, he stated that “When Niklas Zënstrom came to Ilse to seek financing, he spent 15 minutes explaining the idea and 45 minutes explaining how he was going to sell the company”.

At the end of each speech, there were 10 minutes in which several companies (WidSets, eSnips, Plazes, Netvibes, AllPeers, Hyves) presented their services. In the coffee breaks between presentations, I explained Tractis to Michael Arrington. To my surprise, he was very interested in the idea, he asked me quite a lot of questions, and said that he would participate in the Beta . I told Marc Tluscz that I loved his presentation and believed that Tractis had the disruptive potential that Mangrove was seeking. He told me that he wanted to go further into the idea; I’ll tell you what has been the result. It wasn’t all a bed of roses. At midday, it was time to do the elevator pitch to the people from Atlas Venture. I was in the elevator with Marc Oiknine. I told him my full pitch, 30 seconds, from “We want to create a legal system for the Internet nation…” to the end. When Marc said “I don’t know if that’s an interesting area“, I remember thinking “WTF!? What could be more interesting?”.

Kevin Kelly rocks!!

In general, the level of speakers was very high but, if I have to choose a single presentation, I have to select Kevin Kelly’s (editor of Wired and author of “New Rules for The New Economy“). He described the web in quantitative terms and stated that it was interesting that the amount of hyperlinks, clicks, data transmission, etc. corresponded quite accurately to the number of synapses, neurons and activity of the human brain. He referred to the Internet as a unique machine, of which we form part and which searches us as we search it. His speech was, at least at a personal level, inspiring and full of brilliant quotes like “The web runs on love and attention, not greed“. It looked like the birth of a religion and Kevin was its high priest. The web has only been around for 4,000 days yet every thing we ever said about the Internet is happening. The web is growing rapidly, every thing “wants” to be in the web, the web is everything and the web will own every bit. He said that many complain about the web 2.0′s hype but, according to him, “the web is under-hyped“. For me and others, that was the conference’s “quote”. The best is yet to come .

A detailed description about Kevin Kelly’s speech can be seen in The Yourdon Report: The Next Web: Kevin Kelly’s Keynote

After the conference

After the conference, there was a party at Boris’, one of the organizers, followed by another party until the early hours of the morning at Jimmy Woo. From what I hear, it’s one of Amsterdam’s most select clubs. I had a great time with Fabian (yes, I’m the one with half a head) of the Outfoxed project, the 19-year old Tariq Krim of netvibes, Diederik of TwOnes, Kat Orland of SEOmoz and Web 2.0 Awards….

Final assessment

The Next Web was an excellent opportunity to meet people behind the best European start-ups. And all this in a very beautiful city. The weather was great. There were houses at ground level (without curtains!), friendly people on their porches drinking wine and eating dinner, and boats with groups of friends sailing along the canals. It was like a Bohemian Hobbiton. Congratulations to Patrick and Boris of Fleck, the event’s organizers, for an excellent job. I can’t wait to 11 May 2007 to attend the next edition.

Usually the person has a job, lives well from it and does not need to “pay hosting”, one of the most absurd excuses in this field. I’m not referring to commercial blogs either, dedicated to the world of legal news, where you can get bored reading a post. I’m simply referring to people who blog, who talk about what they do. Unfortunately, this phenomenon only happens in excellent doses in the US, where “payment for service” is the in-thing.

Continuing with the subject, finding specialized blogs from professionals who write about their subject and don’t digress to other stories is practically impossible. It looks like people are afraid of losing clients or stoking the competition. In the first case, for example, if I write about my subject, anyone could develop it (e.g. a contract editor), which would reduce the work. In the second case, the competition would be afraid of revealing talent for the benefit of others. But I believe that, in those cases, the best thing is a master at something; it’s difficult to sit down and write a document well, such as Wayne Schiess, or create an adequate contract, such as Ken Adams. However, both show their forms, without any restrictions, so that everyone else can learn and know. I believe that they’re both making money simply because they’re telling things.

I would like to see more of this in Spain, especially in legal matters, where the general public don’t have much idea. One person or more with talent in those fields, in terms of legal matters, composition, wording and negotiation, can have their own weblogs, create their business centers based on their services, and profit terribly from this field, which I compare with a remedy: everybody gets ill, so a pharmacy will never be a loss.

Wayne has a very entertaining weblog. He focuses especially on legal writing, which is not the same as what to write in a blog or that I start writing something when I lack the knowledge even if I have manuals explaining the subject point by point. But it’s interesting to know that there are many snags in the way we write a contract, especially if it’s for something big where often an incomprehensive text or bad writing can change the situation.
You should read blogs from people who work on this, in terms of both the writing in Spanish contracts and their composition.