Term Sheets: Landmines and Ticking Time Bombs!

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. – Warren Buffett

are u ready

So the big day is here. You have evangelized your product across various circles and the good news is that a VC has stepped forward to invest in your company. So the hard work is all done! You can rest on your laurels, sign the term sheet that the VC has pushed across the table, and execute the sheet, trigger the stock purchase, voter and investor rights agreements, get the wire and you are up and running! Wait … sounds too good to be true, doesn’t it? And yes you are right! If only things were that easy. The devil is in the details. So let us go over some of the details that you need to watch out for.

1. First, term sheet does not trigger the wire. Signing a term sheet does not mean that the VC will invest in your company. The road is still long and treacherous.  All the term sheet does is that it requires you to keep silent on the negotiations, and may even prevent you to shop the deal to anyone else.  The key investment terms are laid out in the sheet and would be used in much greater detail when the stock purchase agreement, the investor rights agreement, the voting agreement and other documents are crafted.

landmines2. Make sure that you have an attorney representing you. And more importantly, an attorney that has experience in the field and has reviewed a lot of such documents. As noted, the devil is in the details. A little “and” or “or” can put you back significantly. But it is just as important for you to know some of the key elements that govern an investment agreement. You can quiz your attorney on these because some of these are important enough to impact your operating degree of freedom in the company.The starting point of a term sheet is valuation of the company. You will hear the concept of pre-money valuation vs. post-money valuation. It is quite simple.  The Pre-Money Valuation + Investment = Post-Money Valuation. In other words, Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Post-Money thus includes the pre-money plus the incremental injection of capital. Let us look at an example:

Let’s explain the difference by using an example. Suppose that an investor is looking to invest in a start up. Both parties agree that the company is worth $1 million and the investor will put in $250,000.

The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.  Thus in a pre-money valuation, the Investor owns 20%. Why? The total valuation is $1.25M which is $1M pre-money + $250K capital. So the math translates to $250K/$1,250K = 20%.  If the investor says that they will value company $1M post-money, what they are saying is that they are actually giving you a pre-money valuation of $750K. In other words, they will own 25% of the company rather than 20%. Your ownership rights go down by 5% which, for all intents and purposes, is significant.

3. When a round of financing is done, security is exchanged in lieu of cash received. You already have common stock but these are not the securities being exchanged. The company would issue preferred stock. Preferred stock comes with certain rights, preferences, privileges and covenants. Compared to common stock, it is a superior security. There are a number of important rights and privileges that investors secure via a preferred stock purchase, including a right to a board seat, information rights, a right to participate in future rounds to protect their ownership percentage (called a pro-rata right), a right to purchase any common stock that might come onto the market (called a right of first refusal), a right to participate alongside any common stock that might get sold (called a co-sale right), and an adjustment in the purchase price to reflect sales of stock at lower prices (called an anti-dilution right).  Let us examine this in greater detail now. There are two types of preferred. The regular vanilla Convertible Preferred and the Participating Preferred. As the latter name suggests, the Participating Preferred allows the VC to receive back their invested capital and the cumulative dividends, if any before common stockholders (that is you), but also enables them to participate on an as-converted basis in the returns to you, the common stockholder.  Here is the math:Let us say company raises $3M at a $3M pre-money valuation. As mentioned before in point (3), the stake is 50%-50% owner-investor.

Let us say company sells for $25M. Now the investor has participating preferred or convertible preferred. How does the difference impact you, the stockholder or the founder. Here goes!

i.      Participating Preferred. Investor gets their $3M back. There is still $22M left in the coffers. Investor splits 50-50 based on their participating preferred. You and Investor both take home $11M from the residual pool. Investor has $14M, and you have $11M. Congrats!

ii.      Convertible Preferred. Investor gets 50% or $12.5M and you get the same – $12.5M. In other words, convertible preferred just got you a few more drinks at the bar. Hearty Congratulations!

Bear in mind that if the Exit Value is lower, the difference becomes more meaningful. Let us say exit was $10M. The Preferred participant gets $3M + $3.5M = $6.5M while you end up with $3.5M.

bombs4. One of the key provisions is Liquidation Preferences. It can be a ticking time bomb. Careful! Some investors may sometimes ask for a multiple of their investment as a preference. This provision provides downside protection to investors. In the event of liquidation, the company has to pay back the capital injected for preferred. This would mean a 1X liquidation preference. However, you can have a 2X liquidation preference which means the investor will get back twice as much as what they injected. Most liquidation preferences range from 1X to 2X, although you can have higher liquidation preference multiples as well. However, bear in mind that this becomes important only when the company is forced to liquidate and sell of their assets. If all is gung-ho, this is a silent clause and no sweat off your brow.

5. Redemption rights. The right of redemption is the right to demand under certain conditions that the company buys back its own shares from its investors at a fixed price. This right may be included to require a company to buy back its shares if there has not been an exit within a pre-determined period. Failure to redeem shares when requested might result in the investors gaining improved rights, such as enhanced voting rights.

6. The terms could demand that a certain option pool or a pot of stock is kept aside for existing and future employees, or other service providers. It could be a range anywhere between 10-20% of the total stock. When you reserve this pool, you are cutting into your ownership stake. In those instances when you have series of financings and each financing requires you to set aside a small pool, it dilutes you and your previous investors.  In general, the way these pools are structured is to give you some headroom up to at least 24 months to accommodate employee growth and providing them incentives. The pool only becomes smaller with the passage of time.

7. Another term is the Anti-Dilution Provision.  In its simplest form, anti-dilution rights are a zero- sum game. No one has an advantage over the other. However, this becomes important only when there is a down round.  A down round basically means that the company is valued lower in subsequent financing than previously. A company valued at $25M in Series A and $15M in Series B – the Series B would be considered a down round.  Two Types of Anti-Dilution:

Full ratchet Anti-Dilution: If the new stock is priced lower than prior stock, the early investor has a clause to convert their shares to the new price. For example, if prior investor paid $1.00 and then it was reset in a later round to $0.50, then the prior investors will have 2X rights to common stock. In other words, you are hit with major dilution as are the later investors. This clause is a big hurdle for new investors.

Weighted Average Anti-Dilution. Old investor’s share is adjusted in proportion to the dilution impact of a down round

8. Pay to Play. These are clauses that work in your, the Company, favor. Basically, investors have to invest some money in later financings, and if they do not – their rights may be reduced.  However, having these clauses may put your mind at ease, but may create problems in terms of syndicating or getting investments. Some investors are reluctant to put their money in when there are pay to play clauses in the agreement.

9. Right of First Refusal. A company has no obligation to sell stock in future financing rounds to existing investors. Some investors would like to participate and may seek pro-rata participating to keep their ownership stake the same post-financing. Some investors may even want super pro-rata rights which means that they be allowed to participate to such an extent that their new ownership in the company is greater than their previous ownership stake.

10. Board of Directors. A large board creates complexity. Preferable to have a small but strategic board. New investors will require some representation. If too many investors request representation, the Company may have smaller internal representatives and may be outvoted on certain issues. Be aware of the dynamics of a mushrooming board!

11.Voting Rights. Investors may request certain veto authority or have rights to vote in favor of or against a corporate initiative.  Company founders may want super-voting rights to exercise greater control. These matters are delicate and going one way or the other may cause personal issues among the participants. However, these matters can be easily resolved by essentially having carve-outs that spell out rights and encumbrances.

12.Drag Along Provision. Might create an obligation on all shareholders of the company to sell their shares to a potential purchaser if a certain percentage of the shareholders (or of a specific class of shareholders) votes to sell to that purchaser. Often in early rounds drag along rights can only be enforced with the consent of those holding at least a majority of the shares held by investors. These rights can be useful in the context of a sale where potential purchasers will want to acquire 100% of the shares of the company in order to avoid having responsibilities to minority shareholders after the acquisition. Many jurisdictions provide for such a process, usually when a third party has acquired at least 90% of the shares.

13.Representations and Warranties. Venture capital investors expect appropriate representations and warranties to be provided by key founders, management and the company. The primary purpose of the representations and warranties is to provide the investors with a complete and accurate understanding of the current condition of the company and its past history so that the investors can evaluate the risks of investing in the company prior to subscribing for their shares. The representations and warranties will typically cover areas such as the legal existence of the company (including all share capital details), the company’s financial statements, the business plan, asset ownership (in particular intellectual property rights), liabilities (contingent or otherwise), material contracts, employees and litigation. It is very rare that a company is in a perfect state. The warrantors have the opportunity to set out issues which ought to be brought to the attention of the new investors through a disclosure letter or schedule of exceptions. This is usually provided by the warrantors and discloses detailed information concerning any exceptions to or carve-outs from the representations and warranties. If a matter is referred to in the disclosure letter the investors are deemed to have notice of it and will not be able to claim for breach of warranty in respect of that matter. Investors expect those providing representations and warranties about the company to reimburse the investors for the diminution in share value attributable to the representations and warranties being inaccurate or if there are exceptions to them that have not been fully disclosed. There are usually limits to the exposure of the warrantors (i.e. a dollar cap on the amount that can be recovered from individual warrantors). These are matters for negotiation when documentation is being finalized. The limits may vary according to the severity of the breach, the size of the investment and the financial resources of the warrantors. The limits which typically apply to founders are lower than for the company itself (where the company limit will typically be the sum invested or that sum plus a minimum return).

14. Information Rights. In order for venture capital investors to monitor the condition of their investment, it is essential that the company provides them with certain regular updates concerning its financial condition and budgets, as well as a general right to visit the company and examine its books and records. This sometimes includes direct access to the company’s auditors and bankers. These contractually defined obligations typically include timely transmittal of annual financial statements (including audit requirements, if applicable), annual budgets, and audited monthly and quarterly financial statements.

15. Exit. Venture capital investors want to see a path from their investment in the company leading to an exit, most often in the form of a disposal of their shares following an IPO or by participating in a sale. Sometimes the threshold for a liquidity event or will be a qualified exit. If used, it will mean that a liquidity event will only occur, and conversion of preferred shares will only be compulsory, if an IPO falls within the definition of a qualified exit. A qualified exit is usually defined as a sale or IPO on a recognized investment exchange which, in either case, is of a certain value to ensure the investors get a minimum return on their investment. Consequently, investors usually require undertakings from the company and other shareholders that they will endeavor to achieve an appropriate share listing or trade sale within a limited period of time (typically anywhere between 3 and 7 years depending on the stage of investment and the maturity of the company). If such an exit is not achieved, investors often build in structures which will allow them to withdraw some or the entire amount of their investment.

16. Non-Compete, Confidentiality Agreements. It is good practice for any company to have certain types of agreements in place with its employees. For technology start-ups, these generally include Confidentiality Agreements (to protect against loss of company trade secrets, know-how, customer lists, and other potentially sensitive information), Intellectual Property Assignment Agreements (to ensure that intellectual property developed by academic institutions or by employees before they were employed by the company will belong to the company) and Employment Contracts or Consultancy Agreements (which will include provisions to ensure that all intellectual property developed by a company’s employees belongs to the company). Where the company is a spin-out from an academic institution, the founders will frequently be consultants of the company and continue to be employees of the academic institution, at least until the company is more established. Investors also seek to have key founders and managers enter into Non-compete Agreements with the company. In most cases, the investment in the company is based largely on the value of the technology and management experience of the management team and founders. If they were to leave the company to create or work for a competitor, this could significantly affect the company’s value. Investors normally require that these agreements be included in the Investment Agreement as well as in the Employment/Consultancy Agreements with the founders and senior managers, to enable them to have a right of direct action against the founders’ and managers if the restrictions are breached.

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Manage to an Optimum Inventory

Inventory is booked as an asset in the Balance Sheet. However, from an operational standpoint, any excess inventory is an operational liability. To determine what constitutes “excess inventory”, one must determine what is the optimum inventory.

inventory whs

Optimum inventory would be considered the minimum level of inventory that is required to prevent stock outs and ensure a steady fill against existing or potential market demand. It is generally assessed by calculating inventory turns. An inventory turn of 6 suggests that the company is holding inventory for 60 days while an inventory turn of 8 suggests that a 45 day hold period. The higher the turns, the lower the hold period and less dollars are tied up in inventory. However, if the hold period is too low vis a vis demand, that would mean that the company may lose customers to other competitors and the loss of margin is greater than the costs of holding inventory. Inventory turns is defined as the Cost of Goods Sold of the Product divided by the Average Inventory Balance for the Period.  Thus, if COGS increase and inventory balance does not change, the turns would increase.  Another way of looking at this is that if the Gross Margins go down, inventory turns would go up, assuming that the average inventory balance does not change.

 

A common metric that is often used as a rule of thumb is that excess inventory has a carrying cost of 20% per annum. In other words, if the company carries $5M of excess inventory, then the costs of carrying the excess could translate to $1M. These are costs associated with tying down cash and hence the interest that you pay on the cash or lose on the cash, warehouse costs, staffing, general inefficiencies in the operational infrastructure, shrinkage, obsolescence risks and potential liquidation and markdown triggers.

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The optimum inventory level also has the same carrying costs but the key underlying assumption is that the velocity of sales against the inventory level and the accompanying margins offset the costs sufficiently enough to make holding an optimum level of inventory at all times to be a strategic asset(s) in the organization. Note that the optimum inventory can vary: it can go up and down depending on market demand and sales forecasts and the internal corporate stock out policy.

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So how do you determine what is the optimum inventory level? The key drivers are the following:

 

  1. Market demand and the volatility of market demand
  2. Lead time to fill inventory
  3. Order Costs
  4. Frequency of Orders
  5. Safety Stock requirement
  6. Product Margins
  7. Carrying Cost of the Inventory

A steady market demand makes it easy to define what the optimum inventory level would be. You would know how much to order and when and in theory, if there is no variability in the demand, you may not even have to factor in safety stock. You would optimize flow of inventory against the lead time and the order costs and manage the frequency of the orders.  This is the best case scenario, but alas … very few companies work at that rhythm.

 

However, if there is market demand variability, then managing to an optimum inventory level creates significant challenges. The first order question is to determine what are the risks of a stock out?  Some companies are more impacted by stock outs than others, and thus they may decide to hold a larger safety stock. The loss of margins and customer goodwill offsets the costs of holding the extra inventory. Once that is determined, the next step is to assess how many days of inventory you must hold. A quick and dirty approach is to look at companies in the same space and calculate their inventory turns based upon a review of their financial statements. You can then adjust your metric based on scale differences or internal capital constraints. Some companies are well capitalized and can afford to hold more inventory and thus have less turns. Their main focus is market penetration and the carrying costs of “excess inventory” is in lieu of marketing and advertising spend. But smaller companies have less degree of freedom and thus they may hold themselves to higher inventory turns that will optimize how they allocate their capital. Once the inventory days are assessed and internally agreed upon, then the company has to ensure that the projections are revisited in a timely manner. High inventory turns would require shorter and more frequent forecasting cycles. In addition, purchasing has to be tightened up. Some companies would implement a purchase cap. To get even more granular, purchase caps can be established not at a dollar value but at a unit value.  The inventory turn would be calculated at a product level based on Units Sold at a particular time period divided by Units Held for the equivalent time period. Once the turn has been agreed upon, the next item is to assess how much inventory flows in and out within a specific time period. If more comes in then goes out, inventory will start piling up. Conversely, you may exhaust inventory fast and quickly dip into the safety stock thus reducing your flex against the market demand. The flow of inventory can be regulated by analyzing demand at the increment, and a series of other basic maneuvers like breaking up inventory orders into smaller lots,  mixing products to accompany the demand composition, opening up new channels to move inventory, reducing lead time for filling inventory, etc.

promos

But now that we have arrived at an understanding of some optimum dollar value or units of inventory that we carry, anything over that would constitute excess. The process of managing the excess inventory is critical. The objective is to ideally take it out completely. However, realities of the market and the lack of optimal operational efficiencies could preclude that from happening. The high level question to start the analysis would be to understand the costs. As mentioned before, the general rule of thumb is 20% and if you are carrying $5M in excess inventory, you are exhausting $1M of capital every year. Let us say a company makes 10% EBIT to the bottom line. That means that excess inventory is taking the wind out of $10M of incremental sales. That is an important point. If a private company wants to focus on bottom line impact, it would be wise to reallocate resources to develop process to reduce the excess inventory. Aside from the immediate impact, these process improvements tend to be sustainable and its beneficial impact carries over into the future fiscal years. So what can be done?

 

  1. Open New Channels to push the excess inventory out
  2. Markdown Inventory to incentivize purchases. Technically, a 20% markdown against cost is the appropriate breakeven.
  3. New Promotions or Marketing Programs
  4. Incentivize Sales in a tiered compensation to move inventory out. Provide the benefit of accelerators and spiffs.
  5. Use inventory as rewards or gifts. This obviously depends on the value of the inventory and you need to be prudent to use this method. It has to be measured against the value of the goodwill earned.
  6. The least preferable obviously is to turn the inventory over to liquidators. But as noted, the worst case scenario is that it would save a $1M annual leak of capital and at 50 cents a dollar, you would get another $2.5M. You would walk away from $1.5M which is a bad thing obviously but interestingly … this also suggests that your breakeven time of holding excess inventory is 18 months in the event you are able to sell all inventory at cost.  Being that it is an unlikely scenario and holding long may lower the value of the inventory over time, limiting your losses to a fixed target may still be a prudent move.

Convertible Debt: What, How, Plus, Minus?

Convertible Debt is also called convertible loans or convertible notes. This is a common method of financing for early stage companies. Typically, an investor or a group of investors (investor syndicate) extends a loan to a company that could later convert to an equity instrument. Like any debt, it is an interest bearing instrument. However, the key element in this form of financing is that the investors will get equity at a discount when the Company raises a Series A round. In other cases, it could be a warrant issue. In most instances, there is a cap on the valuation at which the debt will convert.

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Hence, there are four key components of convertible debt:

  1. Convertible Debt has an interest.
  2. Convertible Debt has a discount
  3. Convertible Debt may have warrants
  4. Valuation at which Debt converts is capped.

Let us discuss each of these in detail.

Convertible Debt is interest bearing.

Like any debt, the borrower has a loan on their balance sheet. They are responsible for the principal and the interest. The interest is simple interest rate, and there is a fixed due date (or “maturity date”) for repayment of the amount borrowed. In other words, if there is no Series A funding before the maturity of the convertible debt, there could be some problems for the company. In an extreme case, the note holder can force the company into bankruptcy, unless the startup can renegotiate and extend the terms. The appropriate interest rate for convertible debt could be anywhere between 6% up to 10%. The Applicable Federal Rates (AFRs) can establish the lowest legally allowable interest rates.

Convertible Note Discount.

As a sweetener, the note will have an automatic conversion discount feature by which the investor will exchange the convertible debt for shares of a Series A Preferred Stock at a discount to the price per share paid by a VC in a Qualified Financing Round.  Here is how this works:

A)     Angel invests $100,000 in the startup company.

B)      Startup issues the convertible note for $100K which has an interest and maturity date.

C)      The Note has an automatic conversion feature at $1M with a conversion discount equal to 20%.

D)     Now, let us say that the Startup closes $1M Series A Preferred Stock at $1 per share.

E)      The Angel thus gets the shares at 80 cents.

F)      So Angel gets $100,000/$0.80 per share of the Series A Preferred which totals to 125,000 shares.

Convertible Notes may have warrants.

The warrants are very similar to options. In a typical convertible note, the Warrant will be an option for whatever security is sold in the next round.  It is often expressed in terms of “warrant coverage percentage”. A 20% warrant coverage means that you can take the same $1M, multiply by 20%, and the Warrant independently will enable you to get $200K of additional securities in the next round.  For example, let us say a Series A round is $4M (Company has raised $4M). The warrant coverage kicks in and now the size of the round becomes $5.2M. ($4M New Fund + $1M size of Note + $200K warrant coverage = $5.2M) So there is a dilution impact of $1.2M for the $1M of angel cash that was extended in the form of the Note with the Warrant Coverage.

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Convertible Notes Caps

Cap is a term that protects the angel investor and puts a ceiling on the conversion price of debt. This is seen mostly in seed financings. For example, angel invests a $100K in a company at 20% discount and thinks that the pre-money valuation maxes out at $3M. If the angel was correct and the valuation was indeed at $3M (assume $1.00 for preferred share) , then the angel would have 125,000 shares. That would be 125,000 shares/(3M shares + 125,000) = 4%. The investor would own 4% immediately upon Qualified Financing.

However, assume that the company is hugely successful and the pre-money valuation is assessed at $10M. Let us say that the preferred stock is at $1.00. So now you have 10M shares. Angel Investor gets 125,000 shares.  Then the Investor is diluted down to 1.23%. (125K shares/ (10M shares + 125K shares)).  Hence the higher the valuation in Series A, the investor gets diluted down further. Hence they use Convertible Notes Caps as a protection to their downside dilution risk. The cap sets a limit for how much the Company can raise before the investor’s shares stop getting diluted. It sets an upper limit. So if the investor in the above example sets a cap at $5M, then the discount would increase to offset the additional dilution that occurred.  So in this case, the investor actually gets a 50% discount, not a 20% discount. It is important to note that the cap is structured as either or – in other words, the angel investor gets the value of the greater of the two discounts.

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Advantages of Convertible Debt Financing

  1. Easy to raise
  2. Paperwork could be less than 10 pages.
  3. Quick turnaround time to get this signed off
  4. Terms are generally clearly defined
  5. Legal Expenses are typically less than $5000-$8000.
  6. Company can defer the valuation discussion until a later date
  7. Notes have fewer rights than Equity. Investors in Notes have less say in the direction and execution of company plans.

 

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Disadvantages of Convertible Debt Financing

  1. It is a loan and there is a maturity date on the loan. If financing does not occur, the investor can recall the note and force the company into bankruptcy.
  2. Incentives are not necessarily aligned. Company wants more valuation in Series A but investor would want less to own larger pool. With a cap, they accomplish that but the Company owners are diluted down depending on cap or size of discount.
  3. Size of discount or cap could create problems for the Company seeking Series A. Series A investors might force a renegotiation thus increasing legal and other costs to the Company. A low valuation cap could adversely affect the owners of the Company.
  4. Conversion to equity would mean equivalent privileges with respect to rights. Bear in mind that angel investors are generally not professional VC’s and each of them have very different expertise. Equivalent rights for the different expertise may create problems and issues among all parties involved.
  5. Convertible Notes may have senior preferences.  In the event of liquidation, the Note Holders are first in line to get their money back.
  6. Some angel investors may want subscription rights or super pro-rata rights to the next round of funding. This is to prevent their dilution. So they may want to have the option to participate up to a certain percentage of the next round. In other words, if the round is $5M, the subscription right might specify that the investor can participate up to 30% and that would mean that the investor has a bigger seat on the table.  Such clauses may not be favorably looked at by Series A investor and these clauses could hold up financing.

Disseminating financial knowledge to develop engaged organizations

Financial awareness of key drivers are becoming the paramount leading indicators for organizational success. For most, the finance department is a corner office service that offers ad hoc analysis on strategic and operational initiatives to a company, and provides an ex-post assessment of the financial condition of the company among a select few. There are some key financial metrics that one wants to measure across all companies and all industries without exception, but then there are unique metrics that reflect the key underlying drivers for organizational success. Organizations align their forays into new markets, new strategies and new ventures around a narrative that culminates in a financial metric or a proxy that illustrates opportunities lost or gained.

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Having been cast in operational finance roles for a good length of my career, I have often encountered a high level of interest to learn financial concepts in areas such as engineering, product management, operations, sales, etc. I have to admit that I have been humbled by the fairly wide common-sense understanding of basic financial concepts that these folks have. However, in most cases, the understanding is less than skin deep with misunderstandings that are meaningful. The good news is that I have also noticed a promising trend, namely … the questions are more thoroughly weighed by the “non-finance” participants, and there seems to be an elevated understanding of key financial drivers that translate to commercial success. This knowledge continues to accelerate … largely, because of convergence of areas around data science, analytics, assessment of personal ownership stakes, etc. But the passing of such information across these channels to the hungry recipients are not formalized. In other words, I posit that having a formal channel of inculcating financial education across the various functional areas would pay rich dividends for the company in the long run. Finance is a vast enough field that partaking general knowledge in these concepts which are more than merely skin-deep would also enable the finance group to engage in meaningful conversations with other functional experts, thus allowing the narrative around the numbers to be more wholesome. Thus, imparting the financial knowledge would be beneficial to the finance department as well.

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To be effective in creating a formal channel of disseminating information of the key areas in finance that matter to the organization, it is important to understand the operational drivers. When I say operational drivers, I am expanding that to encompass drivers that may uniquely affect other functional areas. For example, sales may be concerned with revenue, margins whereas production may be concerned with server capacity, work-in-process and throughput, etc. At the end, the financial metrics are derivatives. They are cross products of single or multiple drivers and these are the elements that need to be fleshed out to effect a spirited conversation. That would then enable the production of a financial barometer that everyone in the organization can rally behind and understand, and more importantly … be able to assess how their individual contribution has and will advance organization goals.

Aaron Swartz took down a piece of the Berlin Wall! We have to take it all down!

“The world’s entire scientific … heritage … is increasingly being digitized and locked up by a handful of private corporations… The Open Access Movement has fought valiantly to ensure that scientists do not sign their copyrights away but instead ensure their work is published on the Internet, under terms that allow anyone to access it.”  – Aaron Swartz

Information, in the context of scholarly articles by research at universities and think-tanks, is not a zero sum game. In other words, one person cannot have more without having someone have less. When you start creating “Berlin” walls in the information arena within the halls of learning, then learning itself is compromised. In fact, contributing or granting the intellectual estate into the creative commons serves a higher purpose in society – an access to information and hence, a feedback mechanism that ultimately enhances the value to the end-product itself. How? Since now the product has been distributed across a broader and diverse audience, and it is open to further critical analyses.

journals

The universities have built a racket. They have deployed a Chinese wall between learning in a cloistered environment and the world who are not immediate participants. The Guardian wrote an interesting article on this matter and a very apt quote puts it all together.

“Academics not only provide the raw material, but also do the graft of the editing. What’s more, they typically do so without extra pay or even recognition – thanks to blind peer review. The publishers then bill the universities, to the tune of 10% of their block grants, for the privilege of accessing the fruits of their researchers’ toil. The individual academic is denied any hope of reaching an audience beyond university walls, and can even be barred from looking over their own published paper if their university does not stump up for the particular subscription in question.

journal paywalls

This extraordinary racket is, at root, about the bewitching power of high-brow brands. Journals that published great research in the past are assumed to publish it still, and – to an extent – this expectation fulfils itself. To climb the career ladder academics must get into big-name publications, where their work will get cited more and be deemed to have more value in the philistine research evaluations which determine the flow of public funds. Thus they keep submitting to these pricey but mightily glorified magazines, and the system rolls on.”

http://www.guardian.co.uk/commentisfree/2012/apr/11/academic-journals-access-wellcome-trust

jstor

JSTOR is a not-for-profit organization that has invested heavily in providing an online system for archiving, accessing, and searching digitized copies of over 1,000 academic journals.  More recently, I noticed some effort on their part to allow public access to only 3 articles over a period of 21 days. This stinks! This policy reflects an intellectual snobbery beyond Himalayan proportions. The only folks that have access to these academic journals and studies are professors, and researchers that are affiliated with a university and university libraries.  Aaron Swartz noted the injustice of hoarding such knowledge and tried to distribute a significant proportion of JSTOR’s archive through one or more file-sharing sites. And what happened thereafter was perhaps one of the biggest misapplication of justice.  The same justice that disallows asymmetry of information in Wall Street is being deployed to preserve the asymmetry of information at the halls of learning.

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MSNBC contributor Chris Hayes criticized the prosecutors, saying “at the time of his death Aaron was being prosecuted by the federal government and threatened with up to 35 years in prison and $1 million in fines for the crime of—and I’m not exaggerating here—downloading too many free articles from the online database of scholarly work JSTOR.”

The Associated Press reported that Swartz’s case “highlights society’s uncertain, evolving view of how to treat people who break into computer systems and share data not to enrich themselves, but to make it available to others.”

Chris Soghioian, a technologist and policy analyst with the ACLU, said, “Existing laws don’t recognize the distinction between two types of computer crimes: malicious crimes committed for profit, such as the large-scale theft of bank data or corporate secrets; and cases where hackers break into systems to prove their skillfulness or spread information that they think should be available to the public.”

 

Kelly Caine, a professor at Clemson University who studies people’s attitudes toward technology and privacy, said Swartz “was doing this not to hurt anybody, not for personal gain, but because he believed that information should be free and open, and he felt it would help a lot of people.”

And then there were some modest reservations, and Swartz actions were attributed to reckless judgment. I contend that this does injustice to someone of Swartz’s commitment and intellect … the recklessness was his inability to grasp the notion that an imbecile in the system would pursue 35 years of imprisonment and $1M fine … it was not that he was not aware of what he was doing but he believed, as does many, that scholarly academic research should be available as a free for all.

We have a Berlin wall that needs to be taken down. Swartz started that but he was unable to keep at it. It is important to not rest in this endeavor and that everyone ought to actively petition their local congressman to push bills that will allow open access to these academic articles.

John Maynard Keynes had warned of the folly of “shutting off the sun and the stars because they do not pay a dividend”, because what is at stake here is the reach of the light of learning. Aaron was at the vanguard leading that movement, and we should persevere to become those points of light that will enable JSTOR to disseminate the information that they guard so unreservedly.

 

 

 

 

 

Introduce Culture into Product Development

All products go through a life-cycle. However, the genius of an organization lies in how to manage the life-cycle of the product and extend it as necessary to serve the customers. Thus, it is not merely the wizardry in technology and manufacturing that determine the ultimate longevity of the product in the market and the mind share of the customer. The product has to respond to the diversity of demands determined by disposable income, demographics, geography, etc. In business school speak, we say that this is part of market segmentation coupled with the appropriate marketing message. However, there is not an explicit strategy formulated around identifying

  1. Corporate Culture
  2. Extended Culture

To achieve success, firms increasingly must develop products by leveraging ad coordinating broad creative capabilities and resources, which often are diffused across geographical and cultural boundaries. But what we have to explore is a lot more than that from the incipient stages that a product has imagined: How do we instill unique corporate DNA into the product that immediately marks the product with a corporate signature? In addition, how do we built out a product that is tenable across the farthest reaches of geography and cultural diversity?



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Thus, an innovative approach is called for in product development … particularly, in a global context. The approach entails getting cross-disciplinary teams in liberal arts, science, business, etc. to work together to gather deeper insights into the cultural strains that drive decisions in various markets. To reiterate, there is no one particular function that is paramount: all of them have to work and improvise together while ensuring that there are channels that gather feedback. The cross disciplinary team and the institutionalization of a feedback mechanism that can be quickly acted upon are the key parameters to ensure that the right product is in the market and that it will be extended accordingly to the chatter of the crowds.

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Having said that, this is hardly news! A lot of companies are well on their way to instill these factors into product design and development. Companies have created organizational architectures in the corporate structure in a manner that culturally appropriate products are developed and maintained in dispersed local markets. However, in most instances, we have also seen that the way they view this is to have local managers run the show, with the presumption that these “culturally appropriate” products will make good in those markets. But along the way, the piece that dissembles over time on account of creating the local flavor is that the product may not mirror the culture that the corporate group wants to instill. If these two are not aptly managed and balanced, islands of conflict will be created. Thus, my contention is that a top-down value mandate ought to set the appropriate parameters inside which the hotbed of collaborative activity would take place for product design and development in various markets.

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Thus the necessary top down value systems that would bring culture into products would be:

  1. Open areas for employees to express their thoughts and ideas
  2. Diversity of people with different skill sets in product teams will contribute to product development
  3. Encouraging internal and external speakers to expound upon the product touch points in the community.
  4. Empowerment and recognition systems.
  5. Proper formulation of monetary incentives to inspire and maintain focus.

 

LinkedIn Endorsements: A Failure or a Brilliant Strategy?

LinkedIn endorsements have no value. So says many pundits! Here are some interesting articles that speaks of the uselessness of this product feature in LinkedIn.

http://www.businessinsider.com/linkedin-drops-endorsements-by-year-end-2013-3

http://mashable.com/2013/01/03/linkedins-endorsements-meaningless/

I have some opinions on this matter. I started a company last year that allows people within and outside of the company to recommend professionals based on projects. We have been ushered into a world where our jobs, for the most part, constitute a series of projects that are undertaken over the course of a person’s career. The recognition system around this granular element is lacking; we have recommendations and recognition systems that have been popularized by LinkedIn, Kudos, Rypple, etc. But we have not seen much development in tools that address recognition around projects in the public domain. I foresee the possibility of LinkedIn getting into this space soon. Why? It is simple. The answer is in their “useless” Endorsement feature that has been on since late last year. As of March 13, one billion endorsements have been given to 56 million LinkedIn members, an average of about 4 per person.  What does this mean? It means that LinkedIn has just validated a potential feature which will add more flavor to the endorsements – Why have you granted these endorsements in the first place?

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Thus, it stands to reason the natural step is to reach out to these endorsers by providing them appropriate templates to add more flavor to the endorsements. Doing so will force a small community of the 56 million participants to add some flavor. Even if that constitutes 10%, that is almost 5.6M members who are contributing to this feature. Now how many products do you know that release one feature and very quickly gather close to six million active participants to use it? In addition, this would only gain force since more and more people would use this feature and all of a sudden … the endorsements become a beachhead into a very strategic product.

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The other area that LinkedIn will probably step into is to catch the users young. Today it happens to be professionals; I will not be surprised if they start moving into the university/college space and what is a more effective way to bridge than to position a product that recognizes individuals against projects the individuals have collaborated on.

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LinkedIn and Facebook are two of the great companies of our time and they are peopled with incredibly smart people. So what may seemingly appear as a great failure in fact will become the enabler of a successful product that will significantly increase the revenue streams of LinkedIn in the long run!

Darkness at Noon in Facebook!

Facebook began with a simple thesis: Connect Friends. That was the sine qua non of its existence. From a simple thesis to an effective UI design, Facebook has grown over the years to become the third largest community in the world. But as of the last few years they have had to resort to generating revenue to meet shareholder expectations. Today it is noon at Facebook but there is the long shadow of darkness that I posit have fallen upon perhaps one of the most influential companies in history.

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The fact is that leaping from connecting friends to managing the conversations allows Facebook to create this petri dish to understand social interactions at large scale eased by their fine technology platform. To that end, they are moving into alternative distribution channels to create broader reach into global audience and to gather deeper insights into the interaction templates of the participants. The possibilities are immense: in that, this platform can be a collaborative beachhead into discoveries, exploration, learning, education, social and environmental awareness and ultimately contribute to elevated human conscience.  But it has faltered, perhaps the shareholders and the analysts are much to blame, on account of  the fangled existence of market demands and it has become one global billboard for advertisers to promote their brands. Darkness at noon is the most appropriate metaphor to reflect Facebook as it is now.

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Let us take a small turn to briefly look at some of other very influential companies that have not been as much derailed as has Facebook. The companies are Twitter, Google and LinkedIn. Each of them are the leaders in their category, and all of them have moved toward monetization schemes from their specific user base. Each of them has weighed in significantly in their respective categories to create movements that have or will affect the course of the future. We all know how Twitter has contributed to super-fast news feeds globally that have spontaneously generated mass coalescence around issues that make a difference; Google has been an effective tool to allow an average person to access information; and LinkedIn has created professional and collaborative environment in the professional space. Thus, all three of these companies, despite supplementing fully their appetite for revenue through advertising, have not compromised their quintessence for being. Now all of these companies can definitely move their artillery to encompass the trajectory of FB but that would be a steep hill to climb. Furthermore, these companies have an aura associated within their categories: attempts to move out of their category have been feeble at best, and in some instances, not successful. Facebook has a phenomenal chance of putting together what they have to create a communion of knowledge and wisdom. And no company exists in the market better suited to do that at this point.

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One could counter that Facebook sticks to its original vision and that what we have today is indeed what Facebook had planned for all along since the beginning. I don’t disagree. My point of contention in this matter is that though is that Facebook has created this informal and awesome platform for conversations and communities among friends, it has glossed over the immense positive fallout that could occur as a result of these interactions. And that is the development and enhancement of knowledge, collaboration, cultural play, encourage a diversity of thought, philanthropy, crowd sourcing scientific and artistic breakthroughs, etc. In other words, the objective has been met for the most part. Thank you Mark! Now Facebook needs to usher in a renaissance in the courtyard. Facebook needs to find a way out of the advertising morass that has shed darkness over all the product extensions and launches that have taken place over the last 2 years: Facebook can force a point of inflection to quadruple its impact on the course of history and knowledge. And the revenue will follow!

Why Jugglestars? How will this benefit you?

Consider this. Your professional career is a series of projects. Employers look for accountability and performance, and they measure you by how you fare on your projects. Everything else, for the most part, is white noise. The projects you work on establish your skill set and before long – your career trajectory.  However, all the great stuff that you have done at work is for the most part hidden from other people in your company or your professional colleagues. You may get a recommendation on LinkedIn, which is fairly high-level, or you may receive endorsements for your skills, which is awesome. But the Endorsements on LinkedIn seem a little random, don’t they?  Wouldn’t it be just awesome to recognize, or be recognized by, your colleagues for projects that you have worked on. We are sure that there are projects that you have worked on that involves third-party vendors, consultants, service providers, clients, etc. – well, now you have a forum to send and receive recognition, in a beautiful form factor, that you can choose to display across your networks.

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Imagine an employee review. You must have spent some time thinking through all the great stuff that you have done that you want to attach to your review form. And you may have, in your haste, forgotten some of the great stuff that you have done and been recognized for informally. So how cool would it be to print or email all the projects that you’ve worked on and the recognition you’ve received to your manager? How cool would it be to send all the people that you have recognized for their phenomenal work? For in the act of participating in the recognition ecosystem that our application provides you – you are an engaged and prized employee that any company would want to retain, nurture and develop.

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Now imagine you are looking for a job. You have a resume. That is nice. And then the potential employer or recruiter is redirected to your professional networks and they have a glimpse of your recommendations and skill sets. That is nice too! But seriously…wouldn’t it be better for the hiring manager or recruiter to have a deeper insight into some of the projects that you have done and the recognition that you have received? Wouldn’t it be nice for them to see how active you are in recognizing great work of your other colleagues and project co-workers?  Now they would have a more comprehensive idea of who you are and what makes you tick.

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We help you build your professional brand and convey your accomplishments. That translates into greater internal development opportunities in your company, promotion, increase in pay, and it also makes you more marketable.  We help you connect to high-achievers and forever manage your digital portfolio of achievements that can, at your request, exist in an open environment.  JuggleStars.com is a great career management tool.

Check out www.jugglestars.com

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JuggleStars launched! Great Application for Employee Recognition.

About JuggleStars  www.jugglestars.com

Please support Jugglestars. This is an Alpha Release. Use the application in your organization. The Jugglestars team will be adding in more features over the next few months. Give them your feedback. They are an awesome team with great ideas.  Please click on www.jugglestars.com and you can open an account, go to Account Settings and setup your profile and then you are pretty much ready to go to recognize your team and your colleagues at a project level.

Founded in 2012, JuggleStars provides professionals the ability to share and recognize success and broadcast recognition at varying levels of granularity across a wide array of social platforms. We enable the professionals to manage their brand and maintain and grow their digital portfolio of achievements. Our vision is to make all of the active professionals in our network become lighthouses in the global talent marketplace.
To that end, we believe that there are four tightly intertwined components in play to make this possible.
1.    Rich User Experience: It is important for us to create a rich user experience to encourage users to use our application and reward their bosses, subordinates, peers and third-party vendors – all of the folk who make the life of the professional just a little easier and better. To that end, we have adopted some of the common social networking principles, user experience and general interactivity to allow quicker adoption and integration of users into the JuggleStars community. We will continue to hone and sharpen our focus, while being more inclined toward minimalism that advances the core value proposition to the user.
2.   Tools: We will provide tools integrated into the rich user experience. Being bootstrapped has afforded us very little headroom to give you all that we think you would really find helpful, but our goal is to do our best to give you the tools to be able to manage your brand better. With your support and generosity, we can certainly accelerate what we can provide to you, and we hope that we can demonstrate the power of the web together to create a meaningful and impactful solution via a set of tools that will endure and stand the test of time.
3.    Fun: We are a team that wants to introduce fun in the application. We have as a team worked together to integrate HR, Gaming, Recognition, Open Platform in a manner such that we introduce a healthy spirit of competition and fun while you use our application. Trust us! We are also trying to figure out ways in which you may not have to use our application. We have left you wondering now, haven’t we? Well, stay tuned.
4.    Social Good: Great people do great things. They are the lighthouses for talent. They are the anchors in an organization. They fuel positivity and engagement and al’esprit de corps. They set the standards of excellence. They are the power brokers. They are the gateways that have achieved thresholds of excellence. They are the switch hitters; You can count on them to be the last ones standing. They face adversity with a smile. And most importantly, they are humble and they do not forget that they belong to a much larger community and they want to give back …if not for themselves, for the future generations. They are the lighthouses that look beyond the ocean and we are committed to provide tools to help them advance their aspirational and ideal motives that make a difference. We are with you all the way.
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