John pointed me to a Peter Ireland blog post and asks whether VCs really do co-opt businesses on a regular basis – investing with a plan to replace founders and bring in their own management. "[S]ounds kinda scary," he writes, "the thought that a ‘clever’ VC could take away one’s company just like that…"

Scary indeed.  And while founding CEO’s are certainly replaced in venture backed businesses, it’s significantly overstated to say that "in about 50% of instances where an early stage company actually succeeds in raising venture capital, the founder CEO is fired within the first year".

Before I get into this, however, I feel compelled to remind you that you really should not be taking venture capital in the first place (remember?) and that investors in your business get both positive control (the ability to vote as shareholders and board members for various actions) and negative control (the long list of things that you can’t do without your investor’s approval) – see Brad and Jason’s term sheet series for more detailed information on this.

So . . . now that you’re not taking venture capital, or if you are you fully understand what control your new funding partners have over your business you can hopefully minimize the chances that your big bad VC’s term sheet is just a back-door way to gain control of your business.  Most VCs are actually pretty up front about this as they are making their investments.  After all, a significant part of what we’re investing in is the people who actually came up with the idea in the first place (meaning you and your co-founders).  That said, recognize that differences of opinion really do happen in companies, and that you may not always see eye-to-eye with your investors (or they with your management team or co-founders for that matter) about the right path forward.  Founders are sometimes asked to leave their companies or to take on a diminished role.  Founders themselves sometimes have disagreements that lead to one or more co-founders leaving a company. 

Here’s a couple of things I’d suggest that you think about to avoid the situation that John is asking about:

1. Know your investors.  All money may be green, but what comes along with that money is most certainly not created equally.  Make sure you do due diligence on your investors and board members.  Ask other entrepreneurs who have worked with them about their experiences.  Talk to friends in the industry to get a sense for their overall reputation.  Ask your prospective VCs how they imagine working with you and the company.  You’re about to enter into a multi-year relationship with these people – make sure you’re comfortable.
2. Understand the agreements you’re signing and have good representation.  Investment documents are complicated and pretty specialized (and not something you’ve probably dealt with on a regular basis).  Make sure you have a good lawyer and that they fully explain to you what you’re signing.  Know what rights you have and what rights your investors have.
3. Negotiate up front.  Things like your vesting schedule, vesting acceleration if you are fired, voting agreements and board representation are all negotiated as part of your financing deal.  While you can’t solve for every possible situation, the good lawyer you hired (see #2) should be able to help you figure out with your investors how these and other key items will work.
4. Fill your board.  If you have a spot designated for an independent board member, find one.  If you and your co-founder each get a seat – make sure you’re active participants in the business of the board.
5. Stay close to your investors and board – keep things in the open.  Take responsibility for your relationship with your investors and your board.  Reach out to them on a regular basis for advice and help.  Make sure they are up to speed on important decisions and be open about the challenges you are having running your business and determining strategic direction. 

At the end of the day, it comes down to a combination of trust and communication.  The best way to avoid surprises is to know your investors and board before you formalize your relationship with them and to stay close to them once you do. 

I’ll keep this brief since I hear from readers that they are not crazy about me using this space for plugging portfolio companies.  I rarely do that, but yesterday’s announcement from Newmerix was too good to pass up.  You can read the full release here.  For the 95% of you who aren’t familiar with the company, Newmerix provides a suite of tools for managing, testing and maintaining packaged application environments – specifically SAP, Oracle and PeopleSoft. I know – you’re probably wondering where you can get a copy for yourself (here), but actually it’s a sticky problem for a huge number of companies around the world. 

As you’ll see from the release the company had an outstanding 4th quarter and fiscal 2007, signing a bunch of new customers, more then doubling bookings and revenue and releasing a handful of key products.  I’m pretty sure this is their first "here’s how we’re doing" release – they picked a good one.

Here’s the 8th grade competence exam from 1895.  Thank god I went through 8th grade about 90 years later…

Hat tip to dad for sending this over.

Grammar (Time, one hour)

1. Give nine rules for the use of capital letters.

2. Name the parts of speech and define those that have no modifications.

3. Define verse, stanza and paragraph

4. What are the principal parts of a verb? Give principal parts of "lie", "play", and "run."

5. Define case; illustrate each case.

6. What is punctuation? Give rules for principal marks of punctuation.

7 – 10. Write a composition of about 150 words and show therein that you understand the practical use of the rules of grammar.

Arithmetic (Time, 65 minutes)

1. Name and define the Fundamental Rules of Arithmetic.

2. A wagon box is 2 ft. deep, 10 feet long, and 3 ft. wide. How many bushels of wheat will it hold?

3. If a load of wheat weighs 3942 lbs., what is it worth at 50cts/bushel, deducting 1050 lbs. for tare?

4. District No 33 has a valuation of $35,000. What is the necessary levy to carry on a school seven months at $50 per month, and have $104 for incidentals?

5. Find the cost of 6720 lbs. coal at $6.00 per ton.

6. Find the interest of $512.60 for 8 months and 18 days at 7 percent.

7. What is the cost of 40 boards 12 inches wide and 16 ft. long at $20 per meter?

8. Find bank discount on $300 for 90 days (no grace) at 10 percent.

9. What is the cost of a square farm at $15 per acre, the distance of which is 640 rods?

10. Write a Bank Check, a Promissory Note, and a Receipt

U.S. History (Time, 45 minutes)

1. Give the epochs into which U.S. History is divided

2. Give an account of the discovery of America by Columbus .

3. Relate the causes and results of the Revolutionary War.

4. Show the territorial growth of the United States .

5. Tell what you can of the history of Kansas .

6. Describe three of the most prominent battles of the Rebellion.

7. Who were the following: Morse, Whitney, Fulton, Bell, Lincoln, Penn, and Howe?

8. Name events connected with the following dates: 1607, 1620, 1800, 1849, and 1865.

Orthography (Time, one hour)

1. What is meant by the following: alphabet, phonetic, orthography, etymology, and syllabication.

2. What are elementary sounds? How classified?

3. What are the following, and give examples of each: trigraph, sub vocal, diphthong, cognate letters, and lingual.

4. Give four substitutes for caret ‘u.’

5. Give two rules for spelling words with final ‘e.’ Name two exceptions under each rule.

6. Give two uses of silent letters in spelling. Illustrate each.

7. Define the following prefixes and use in connection with a word: bi-, dis-, mis-, pre-, semi-, post-, non-, inter-, mono-, and sup-.

8. Mark diacritically and divide into syllables the following, and name the sign that indicates the sound:

card, ball, mercy, sir, odd, cell, rise, blood, fare, last.

9. Use the following correctly in sentences: cite, site, sight, fane, fain, feign, vane, vain, vein, raze, raise, rays.

10. Write 10 words frequently mispronounced and indicate pronunciation by use of diacritical marks and by syllabication.

Geography (Time, one hour)

1 What is climate? Upon what does climate depend?

2. How do you account for the extremes of climate in Kansas ?

3. Of what use are rivers? Of what use is the ocean?

4. Describe the mountains of North America 5. Name and describe the following: Monrovia , Odessa , Denver , Manitoba , Hecla , Yukon , St. Helena , Juan Fernandez, Aspinwall and Orinoco .

6. Name and locate the principal trade centers of the U.S.

7. Name all the republics of Europe and give the capital of each.

8. Why is the Atlantic Coast colder than the Pacific in the same latitude?

9. Describe the process by which the water of the ocean returns to the sources of rivers.

10. Describe the movements of the earth. Give the inclination of the earth.

Wise words from my 4 year old daughter after seeing my reaction to the Patriots losing the Super Bowl tonight.  How true . . .

I had a bizarre request earlier this week to send in original signatures to some board documents that I had signed (a lender to the company in question wanted them).  I regularly send around scanned documents – for everything ranging from board resolutions to investment documents (and shred the originals).

I can’t think of the last time I actually had to provide an original signature.  Strange . . .

An entrepreneur started a meeting with me a few days ago by asking me to sign a non-disclosure agreement.  I politely declined and thought I’d back that up with a post on the subject (I recall reading a few other VC blogger’s views on NDAs in past years – there’s certainly no lack of thought on the subject, although it does seem to consistently come up every year).

VC’s, as a general rule, won’t sign NDAs. No – we’re not trying to steal ideas from entrepreneurs or pass confidential information along.  We’re just not in a position to review, negotiate and keep track of literally thousands of NDAs that would result if we started signing them on a regular basis.  Here are a few specifics from my point of view:

• VC’s have little but their reputation.  I can think of few industries where individual reputation plays such a large and transparent role as it does in venture capital.  As a VC, I have little more to trade on than the reputation I’ve built up with entrepreneurs, my investors, other VC’s, etc.  Destroying this by sharing confidential information would just be plain stupid.

• I can’t manage that many NDAs.  It’s hard to imagine the challenge of managing a few thousand or a few tens of thousand of NDAs if we started signing them for every company meeting or business plan that we received.  Even if I put them all on my own form (so that they were in theory all uniform in their requirements) it would be impossible to keep track of what information was presented and for what purpose. 

• I meet with competing companies. In the course of a year I see hundreds of business plans and take meetings with maybe 100 companies.  In some cases these companies have similar ideas for products, are in similar markets or occasionally are direct competitors with one another.  While I don’t trade information across companies, it could appear that way if I’ve met with two competitors or if one of the companies I’ve met with changes direction and starts to look like another company I met with at.  I’d hate to get caught in the middle of a legal mess, exacerbated because I had NDAs in place with both companies.

• I don’t know who my partners are meeting with.  At Foundry, we tend to take a team approach to looking at deals and we have pretty advanced systems for tracking what deals we’re looking closely at.  That said, I don’t know every company that my partners have reviewed a business plan for or have taken a meeting with.  Not only can I not manage that many NDA’s from bullet 2, but as a firm, we can’t manage the added complexity of who has seen what from what company in what context.

Finding information out about your competitors is something that all companies do on a regular basis.  Trolling web sites, reading blogs, setting up news alerts for articles, talking to customers and prospects, trolling trade show booths and listening in on webinars are all pretty common occurrences in the business of knowing what you don’t know about your competitors.

One great way to get a pulse on what’s going on down the street is to keep your eye on your competitors job board. The pace of hiring and the positions with open recs all give incredible (and generally overlooked) insight into the state of their business.

TechStars applications for this summer are officially open and I’d encourage any budding entrepreneur with a half-baked (or quarter baked – or fully baked) idea they are passionate about to apply. 

For those of you who are not familiar with TechStars, it’s a program started by successful Boulder entrepreneur David Cohen that brings about a dozen promising start-up teams to Boulder for an intensive summer of work on their start-up business idea.  You can read more about what the teams last year worked on (and some of the machinations they went through to get there) on both David’s blog and the TechStars web site. 

I was a huge fan of TechStars last year and worked closely with a handful of the teams (most notably Filtrbox, for whom I was the "lead mentor").  For entrepreneurs looking to get their feet off the ground, there’s no better experience and no better way to quickly get access to everything the Boulder entrepreneurial ecosystem has to offer.  For a more detailed perspective from one of last year’s participants, check out what Tom Chikoree has to say about the experience in his blog on the topic.

If you’re interested there’s more information about the program specifics and detail on how to apply on the TechStars web site (details and application info).

Without question TechStars is a huge commitment, but one that brings its participants a lasting experience that they will continue to benefit from for many years.  Apply!

From my partner, Chris Wand, describing a program one of his companies put in place over the holiday to encourage employees to clear a bunch of outstanding bugs in their backlog:

Anyone that wanted to fix a bug during their holiday break could earn $50/$75/$100 (depending on the severity of the bug) for each known bug they fixed (the catch was that QA had to approve the fix). The person that fixed the most bugs also earned an additional bonus (I think it was $500). They managed to clear about 100 bugs off their list… It was so successful, they’re thinking of implementing it at other times (i.e. over a long weekend, etc.—of course making sure that they don’t set it up so people are working on the bug fixes during normal working hours).

With thanks to Ross for actually pulling everything together, I’m launching a new look and a new site today. Seth Levine’s VC Adventure is now hosted on my own domain – www.sethlevine.com – and is sporting an updated look. My old TypePad site is still active (although I’m no longer posting there) and in theory (at least until it breaks) is redirecting traffic to my new site (and should be directly specific posts to their respective post here at sethlevine.com). Let me know if you find anything broken or in need of editing/updating/improvement/better design.