Seth Levine from Foundry Group touched off a debate on which is the best way to raise startup financing: convertible debt or equity. Paul Graham (intentionally or not) actually started things with a tweet, “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”

Fred Wilson joined the conversation, as did Mark Suster. All prominent and successful investors. And generally, they’re not fans of convertible debt. But oftentimes, entrepreneurs are attracted to convertible debt, and clearly with Y Combinator, the trend is moving strongly in that direction.

The two main reasons why entrepreneurs are attracted to convertible debt are:

• It’s supposed to be easier; and,
• It delays pricing the round.

Pricing a round and the value of a startup is hard. It can be an uncomfortable conversation to have with investors, and it can turn into a bit of a stand-off, where no one wants to be the first one to name a price. So I understand why delaying it sounds appealing. But the truth is that a convertible debenture doesn’t really delay pricing, especially when you set a cap on the conversion in the next round.

Let’s say I’m going to raise $500,000. And I’d like the pre-money value to be $1.5M. The post money-value would be $2M and the $500k is worth 25% of the company. That’s the way you would price it for equity. When you raise the next round, they would of course get diluted.

With a convertible debenture you’ll get $500,000 (and there’s interest payments to be made too.) When you raise the next round, the initial investors convert their debt into equity, but typically at a discount. Let’s say 20%. So in the Series A, when you now want to raise $2M and the pre-money valuation is $6M, the $500k is measured against a pre-money valuation of $4.8M. They would own 10.4% instead of 6.25%. (Not including interest in the calculation.)

But there’s also the issue of a cap. The cap is put in place by investors with a convertible debenture to peg the value of their debt (with the discount), regardless of what you raise the Series A at. So, let’s say the cap is $5M. Now when you apply the 20% discount, the first investors’ money converts in at $4M. They now own 12.5% instead of 10.4%.

Investors will peg the cap amount at what they think you’ll raise the Series A value at. If you raise a lower Series A they still have the discount and own a bigger piece of the company. If you raise a killer Series A at an astronomical value, the cap protects them.

When raising financing with a cap, you’re basically negotiating the price of the deal, it’s just the mechanisms you’re using (% discount and cap) are different than company valuation.

I’ve raised money as convertible debt. And I’ve spoken to others that have done so (and others that have raised money through equity.)

In my experience, it wasn’t any easier to raise financing through convertible debt. It didn’t take any less time, and it wasn’t that much less expensive. It might seem easier because it avoids the big question about “the price of your startup”, but it’s really not doing that. Remember: Investors know how much of your company they want to own, and whether they price the deal upfront or delay it through convertible debt, they’re likely (and you’re likely) going to end up pretty much in the same place.

Generally, I expect (and have seen) fairly common standards for early stage companies. So I would bet that most convertible debt deals are being done around the same % discount and cap numbers. The same is true when pricing deals (angels and investors have told me, “When we see an early stage deal, it’s always in this range…”) That might be less true these days with the market being as frothy as it would appear to be (in Silicon Valley) but I don’t think there’s a whole lot of mystery around the value of early stage companies. Assume that’s true, and the stress of “pricing a deal” is lowered.

For entrepreneurs, here are the important things to ask yourself:

• How can I get a deal done as quickly as possible?
• But without sacrificing value-add for speed (Yes, I do believe in “smart money”)?
• How can I make sure interests are truly aligned (as best as possible!) between me and investors?
• Being more blunt, can I stomach working with these investors for the next 3-10 years of my life?
• What deal is the least likely to bite me in the ass later and make my life miserable?
• Do I really understand all the math at play and the various scenarios (not just the good ones!)?
• How does taking this money really impact the strategy and focus of my startup?

Where a convertible debenture can be very valuable to entrepreneurs is for early exits that don’t require follow-on financing. If that’s the case, when a company is acquired (let’s say for $10M), it’s likely the debt will convert at the same price as was agreed upon if the company was to raise a Series A. So the initial investors get a smaller piece of the pie and the founders get more (compare 12.5% to 25%, because there’s no further dilution.) For a lot of web startups and founders, this is appealing. Raise a bit of money and see if you can exit before raising too much. And I think that’s a perfectly legitimate strategy.

Overall, the debate is an interesting one, especially because it helps shed light on how investors are thinking and educates entrepreneurs on the different investment mechanisms and strategies that exist. But I certainly don’t believe that a convertible debt structure is a slam dunk win for entrepreneurs when raising early stage financing.

Every so often I get drawn into the debate about startup employees and how much they should work. Should you hire workaholics? Is it expected that startup employees work 100+ hours per week? Should they be online all the time, constantly available and ready to go?

It depends. And it’s up to you. If you expect employees to work 20 hours / day that’s your choice. If you find people willing to accept those jobs that’s great. I don’t have any issues with that, because when you recruit someone it’s a relationship between two people. If two people mutually agree on something that’s good enough for me. There’s rarely any arm twisting during an employee offer. If they don’t agree, the employee quits or they’re fired. Such is life.

But it got me thinking…

One of the big problems I’m seeing with a startup’s expectations for “hours worked” is that they use it as a metric of employee quality and success. Likely because it’s one of the easiest metrics to track. If someone works 80+ hours in a week they must be kicking ass! Whoever works the most is the best! But clearly that’s not always going to be the case. “Hours worked” is a poor measurement of almost everything, except for “hours worked.” I’m not even sure it’s a great measurement of passion (which is an essential quality you need to look for in startup employees.) It could just be that the guy is slow, so he works more hours.

We need to think about other measurable indicators of an employee’s quality and value. Just like “years of experience” on a resume is a shoddy measure of expertise and quality, the same holds true for “hours worked”.

I’m not arguing against a startup’s need to move insanely fast. Startup jobs aren’t (and never will be) “9 to 5 gigs.” And I agree that oftentimes startups do feel out of control and insane, and that’s part of the appeal. Startups are roller coasters. Don’t think of them any other way. But at the same time if you look at how you evaluate the quality and value of an employee and you’re saying, “Well, he’s not putting in 20 hours per day…”, just stop and ask yourself whether that’s a true measure of value or not.

image courtesy of shutterstock

In a recent conversation with a friend (and fellow entrepreneur) we were discussing a couple of his bootstrapped initiatives. He’s struggling with the pace at which things are going, partially because he has to “pay the bills” through consulting. That time away from his startup and startup projects is hugely distracting. I know the feeling, since I’m in the middle of bootstrapping a couple initiatives and doing consulting work as well.

But this was my comment: “Money doesn’t always accelerate things.”

Correction: Money does accelerate things, but not always in the right way.

One of my favorite posts about funding (that I wrote) is this one: What Does Your Brain on Funding Look Like? For starters, the visuals still crack me up (yes, I can laugh at myself plenty.) And it’s still so damn true.

So money does accelerate things. You spend more money, things feel like they’re moving faster. But is that necessarily real and useful progress?

The minute you have money you start doing things that you otherwise wouldn’t do. You hire people. You get an office. You create (or are forced to deal with) administrative overhead. You buy fancy business cards. You do more stuff but “stuff” doesn’t equal “success”.

While bootstrappers struggle to juggle their startups (typically non-paying at the start) and paying work, funded companies are juggling a whole bunch of other issues. Probably more issues. And they can also get lulled into a false sense of security because they now have “runway.” Runway is almost a meaningless concept unless you know where you’re going. A runway ends somewhere, and if it’s ending at a cliff, who cares that you had money to spend all the way?

Funding does accelerate things. It automatically creates a sense of urgency, but not a sense of focus. It doesn’t automatically make your product better. It doesn’t guarantee anything … except that you’ll spend more money.

Job postings suck. We all know it. It’s been said many, many times. And it doesn’t seem like complaining about it is helping. I’m experimenting on NextMontreal with a job board hack, but I’ve also been thinking about practical advice I can provide on how to improve job postings. Instead of getting people to completely change how they write job postings from scratch, I thought it would be more effective to focus on how people edit them. So after you’ve written a job posting, walk through these steps, and let’s see if it comes out better!

1. Read out loud what you’ve written. Make note of anywhere that it sounds funny, awkward or sentences run-on forever. Attempt to fix those things.
2. Count the bullet points. If there are more than 5 in any list, take some out. Force yourself to prioritize. Find a way of replacing bullet points with paragraphs (but don’t go crazy with long paragraphs either!)
3. Take out anything that’s absurdly obvious. The worst offenders are usually in the “Skills” area. For example: Must be an excellent communicator (both verbal and written.) Duh! Other common offenders: Great attitude, like to work in teams, ability to work in a fast-paced environment, a quick learner, works well without supervision, ability to work in a high-pressure environment, detail oriented, goal oriented, proficient computer skills.
4. Pretend you’re looking for a job and read it. Does it speak to you at all? Does it interest you? Does it encourage you? Does it answer the questions you might have?
5. On that note, write down a list of questions you think a potential candidate would have about the job opportunity. Now go back and read the job posting again. Are the answers in there? Do you know what matters to potential candidates?
6. Count how many times the word “we” is there. Compare that to the word “you”. Hhhm…
7. The company description should be short. And it should be centered around why someone would want to work there, not around all the awesome awards you’ve won, or how much money the company makes. What matters to job seekers? Focus on those things.
8. Look at the number of years experience you’ve listed for various skills. Usually these are written as hard and fast rules: “Must have X years experience in Y.” Really? Are you sure? Why? Have you looked at other team members to see what number of years experience they have, and how successful they’ve been? What happens if someone has 4 years experience instead of 5? And does the number of years experience matter as much as the number of projects worked on? Think about ways to gauge experience differently. For example, you could say, “You know the difference between A and B.” A and B could be very specific things that typically would only be understood by a senior person. When someone applies, they should make note of the difference between A and B in their cover letter so they stand out. If they don’t, ask ‘em about it.
9. Take out your company name and replace it with a competitor’s. Can you tell the difference? Does it matter? If not, imagine how a job seeker feels.

The road to high-quality, meaningful and useful job postings is a long, painful one. Perhaps too painful. But we’ll keep trying anyway…

I’m not a huge fan of job boards. Their efficacy as a source of talent has deteriorated over the years and most of them have been unable to innovate quickly enough to maintain their value. Niche job boards have emerged as stronger players because they focus on particular areas of interest and can drive a more narrowly focused audience of job seekers. And big aggregators (like Indeed and SimplyHired) have done a good job as a meta-layer on top of everyone else. But the big, broad job boards in the middle of the two have really suffered.

There are lots of problems with job boards (too many to go into), but without a doubt the job board industry attracts a lot of attention from startups — the job market on a whole does — it’s huge (billions spent on recruitment each year) and it’s almost impossible to find anyone that’s happy with the results. I hope we see more and more innovation in the job market (and specifically targeting job boards): we need it.

I’m not quite ready to tackle that monumental task, but for NextMontreal I did want to experiment a little bit. For starters, we do have a job board. It’s not as sophisticated as I’d like, but it’s a start. And unfortunately I couldn’t find a WordPress plugin that did what I wanted, so I simplified and stuck to the basics.

Secondly, I decided to charge for job postings. Some will argue that all job postings should be free — maybe — but I don’t completely agree. Advertising in other contexts isn’t generally free, so why should job ads cost zero? The fact that most of them suck, job boards can’t typically provide detailed analytics on traffic, and very few companies are measuring the efficacy of job postings aside … when you advertise (anywhere) you usually pay. But this is where I wanted to hack around a bit and experiment.

On NextMontreal’s job board there are two options — post for $49 (for 60 days) or post for FREE. So you can post for free! What’s the difference between a paid and free listing? Simple: A paid listing is a typical job posting that we see all over the Web. The form to fill out is quite standard with the fields you’d expect – Job Title, Job Description, etc. You can even upload a Word document or other file for us to post the job.

The form for submitting a free job posting is much more extensive. It’s asking employers to fill out a lot more and be much more creative. For example, it asks: “What’s a ‘day in the life’ of the new employee going to be like?” And: “How will the new employee’s performance be measured? What are the specific goals for the job?” And: “What are the top reasons someone should work at your company?”

If you’re willing to take the time, be creative and fill out a more extensive, meaningful form — you can post for free. That’s the hack (for now!)

What I’d like to see are higher quality job ads. We want employers to think about what’s important to the candidates? And if they do that, they can post for free.

A few people have already told me that they’re working on writing better job postings so they can post for free, and that the job board was encouraging them to make the effort. That’s a great start!

In some ways this is a reverse freemium model. More people will pay (most likely!) and they’re in some way subsidizing the few that make the effort. But the few that make the effort are in turn (most likely!) going to get more attention, because their job postings will stand out as unique and meaningful. And so the employers will stand out. Their brand will increase in the eyes’ of job seekers. That’s a good thing. Now if that means more and more employers start posting free job postings because they want the same benefits, so be it … and I’ve in turn killed the business model of paid job ads (at least for NextMontreal). If we could actually get to that stage, I then see a whole variety of other hacks that can be executed on to really start creating much more value around job ads than employers are currently getting. Here’s how I hope it goes down:

1. Most people pay $49 for a 60-day job posting. A few post for free.
2. Those that post for free get better results (it will be hard to measure right now though, a lot of this will be done through customer interviews by me).
3. The employers that pay stop paying because they write better job postings and want to get the same attention as others.
4. NextMontreal loses money (Sometimes you have to cannibalize an existing source of revenue if you know it’s not the future!)
5. But the value of the job board increases and we move the needle (at least in a small way!) on the quality and importance of job postings.
6. We do “other stuff” to improve the value of NextMontreal’s job board, and commercialize those truly valuable additions.

A small, but hopefully interesting job board hack.

On April 6, 2010 I wrote a blog post about resurrecting a Montreal tech news site. And today, it’s launched.

Please visit NextMontreal >>

Along with the NextMontreal team (and in particular, Patrick Tanguay!) we’ve been working a ton to get the site ready. I’m very pleased with what we’ve accomplished in such a short time.

The goal of NextMontreal is to serve as a news and opinion hub for everything related to tech in Montreal. We’re broadening the focus to include big companies as much as startups, and other tech sectors like life sciences and gaming, just as much as those we spend our time working in, namely Web and mobile. Providing a primary hub for all tech news in Montreal is going to add a lot of value in terms of increasing awareness (inside and outside Montreal), cross-pollination of ideas across sectors and more.

Even before launching, we’ve brought on some fantastic sponsors: Beyond the Rack, Microsoft, Bridgescale and d’Astous Groupe Conseil. These people recognized the importance of what we’re trying to do and were willing to support us on day one. Thank you.

We’ve put together a great team of Featured Columnists. And more will join us. These are folks that are pushing Montreal forward in the world of tech, locally, but even more importantly, abroad. No city can survive on its own. Our markets are not local, they’re global. Some stories are local, and we hope to create real meaning at a local level, but we need folks on the outside – acquirers, big companies, talent, investors, etc. – looking in and paying attention. That’s part of NextMontreal’s mission.

I’m excited to keep pushing Montreal forward and using NextMontreal as a community platform for doing so. I hope you enjoy the site, read through the great content that’s already published, and stay tuned for much more.

Visit NextMontreal now!

A lot of startups come into existence when the founders work to solve their own problems. They “scratch their own itch” and (hopefully!) find that lots of other people are itchy too. But there are significant risks as well.

These days a lot of startups are launched quickly with a couple of technical co-founders. That means there’s quite a bit of similarity in founding teams with respect to experience, domain knowledge and the markets they fit into as individuals. If we all go scratch our own itch, eventually (and maybe very quickly!) we’re all scratching in the same places and targeting the same markets with very similar products.

Focusing on our own problems doesn’t necessarily mean we’re solving other people’s problems, or solving problems that matter at scale. And a certain amount of tunnel vision is almost inevitable when entrepreneurs focus on their own problems. The realization that the market may not be right (for any number of reasons) can come too late. And the tunnel vision makes it much harder to expand one’s view in search of other, more opportunistic markets to jump into.

I do believe that a certain amount of domain knowledge is important. It can lead to an unfair advantage. I see more and more startups launching into spaces where the founders don’t have domain expertise (especially in the Recruitment / HR space where I made that mistake!) They’re really not scratching their own itch. At the same time, there are many startups that are clearly launched because the founders wanted to solve their own problems. They may now have some domain knowledge and some personal brand within a specific industry or area they can leverage. But how unique are those things? And does anyone really care?

Marc-Andre Cournoyer says it very nicely, “Scratching your own itch is the most fun, but being too passionate about something might blind you from real business opportunities.”

Your own problems are your own problems. Of course, they may be shared by lots of other people as well, but don’t forego a rigorous process of analyzing the market, assessing the opportunity, figuring out the model, etc. just because you’re itchy. If you’re itchy, scratch. But don’t assume everyone else will want you to scratch them too.

Photo courtesy of shutterstock.

When looking for work (whether actively or just nosing around), what’s most important to you when looking into the company?

I’m interested in your priorities about the specific job as well, but just as interested in your priorities around the company.

What would you like to ask an interviewer given the chance?

What would you LOVE to see in a job posting (but don’t ever expect to, or have very rarely seen)?

Please comment below. Or tweet a response with the hashtag #jobdescs

When starting out a project we know how important it is to get out of the building, talk to prospects and figure out whether our idea holds any merit. That’s the basis of Customer Development. And the goal is to get to Product-Market Fit, where the product is validated and built for a specific market, and there’s a specific (validated) business model.

After all, you don’t just start building the product, launch it and then hope to heck that it works, right? But this happens a lot. We don’t always get to start at Step 1. In some cases there’s a functioning product, a bit of traction, but no clear direction and no scalable opportunities (at least not plainly in sight). So when this happens, what can you do?

Steve Blank talks about this in Four Steps to the Epiphany. Instinctually you may think it makes sense to keep building more features or radically change the product. But if the Product-Market Fit isn’t right, more features isn’t likely to solve the problem. And investing in rebuilding the technology is going to take a long time, cost a lot of money and not necessarily guarantee any additional success. Instead, Steve recommends finding a market for the product you have. Take the product, point it at a different market and see what happens. Rinse and repeat.

In my mind that’s Market-Product Fit — finding a market to fit an existing product (vs. building a product to fit an existing market).

For many startups this is what they need to do because they’ve got a product but no market. Find a market. In some respects this is a slight handcuff – you’re not starting from scratch and the product can feel like “baggage” – but before throwing your product in the garbage and starting anew, it’s worth looking for a market where there is a fit. Incidentally, the same holds true for a business model. You may have a product but the wrong business model. You don’t scrap the product, you change the model. That’s very much Market-Product Fit.

So how can we find a market and business model for our product?

This is far from a rigorous step-by-step process, but here are some thoughts nonetheless:

1. Review your existing assumptions. Start with the existing assumptions you had when you first built the product. If you didn’t have any, now’s the time to look at that. This is a combination of hindsight / post-mortem and looking to the future. What market were you going after? Why didn’t it work? What pain point are you solving (or trying to?) What ancillary markets have those pains? Etc. Write all of this down.
2. Process of elimination. It’s quite easy to eliminate markets and business models. For a freemium model, for example, you need a huge base of prospective customers (great presentation from Lincoln Murphy). In the millions. Without that, freemium math just doesn’t work. So you can start triangulating on markets (based on size) and the most appropriate business models. In reviewing your assumptions, talking to existing customers/prospects (yes, we’re still getting out of the office!), brainstorming and talking to others (potential partners, colleagues, etc.) it’s likely you’ll discover other prospective markets worth investigating.
3. Deep dive. When you’ve identified potential new markets (and the prospective business models) it’s worth doing a deep dive. Identify 50-100 targets in each market and get in touch with them. You’re essentially taking a sledgehammer and pounding through the opportunities as aggressively and quickly as you can to identify potential (or eliminate it.)
4. Find similarities. When looking at a market at this stage, I think it’s important to get very specific. Size of company isn’t good enough. You need to look for similarities across companies to help define a market. Industry is obvious. But here are some other ideas:
   • Geography
   • How they typically purchase products (like yours)
   • What they’ve bought recently
   • Their budgets
   • Whether the industry is trending successfully or not
   • The decision-makers within the organizations

   All of these factors can help define the market.

5. Pitch the product you have, but… don’t feel obligated to pitch it exactly as it exists today. Simultaneous to your efforts in finding the right market and business model, you need to be envisioning what I would call “product+”. This isn’t a complete rebuild of your existing product that will take huge development time, but there’s no reason you can’t pitch a modified/extended version of your existing product as you’re discovering the appropriate market, business model and that market’s product requirements. As you’re collecting feedback, and plowing through prospective prospects, you should gain significant clarity on what product+ will look like. That will help you iterate quickly on the product development front. But sell what you have now.

It’s not easy to find a market for an existing product. And the reality is that there may not be a market for the product you have and it will require significant changes or a complete overhaul. (Or it’s time to get into a new business.) But before you get to that stage, stop, pull back and look for a customer base that will pay for what you’re selling. It’s still about following a rigorous Customer Development process, but starting partway through and trying to go back, without going completely back. Think of it as Market-Product Fit.

The Art of Marketing is a conference being held in Montreal on September 30th. They’ve got a star-studded lineup, including:

• Seth Godin on Leadership & Creativity
• Jeffrey Gitomer on Customer Loyalty & Sales
• Avinash Kaushik on Brand Measurement & Analytics
• Mitch Joel on Digital Marketing & Social Media
• Max Lenderman on Experiential Marketing
• Andy Nulman on Strategy & Innovation

It’s rare to get all of these folks (even the Montrealers in the group!) in Montreal at one time, so if you’re interested in marketing, social media, analytics, etc. it’s worth checking out.

Two important notes:

1. Get a discount! Click this link to get $50 off the regular admission price. Cost will be $349 to sign up.
2. Wait for the contest! The folks at Art of Marketing have agreed to do a contest with NextMontreal.com (when we launch) to offer 2 FREE tickets.. We’re working on the contest and it will get launched immediately after the site is launched (which will be at some point in August, to allow for enough time before the conference).

You can learn more about the conference and the speakers at The Art of Marketing.