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Founder Control

Written By: admin - May• 23•12

Someone we funded is talking to VCs now, and asked me how common it was for a startup’s founders to retain control of the board after a series A round. He said VCs told him this almost never happened.

Ten years ago that was true. In the past, founders rarely kept control of the board through a series A. The traditional series A board consisted of two founders, two VCs, and one independent member. More recently the recipe is often one founder, one VC, and one independent. In either case the founders lose their majority.

But not always. Mark Zuckerberg kept control of Facebook’s board through the series A and still has it today. Mark Pincus has kept control of Zynga’s too. But are these just outliers? How common is it for founders to keep control after an A round? I’d heard of several cases among the companies we’ve funded, but I wasn’t sure how many there were, so I emailed the ycfounders list.

The replies surprised me. In a dozen companies we’ve funded, the founders still had a majority of the board seats after the series A round.

I feel like we’re at a tipping point here. A lot of VCs still act as if founders retaining board control after a series A is unheard-of. A lot of them try to make you feel bad if you even ask—as if you’re a noob or a control freak for wanting such a thing. But the founders I heard from aren’t noobs or control freaks. Or if they are, they are, like Mark Zuckerberg, the kind of noobs and control freaks VCs should be trying to fund more of.

Founders retaining control after a series A is clearly heard-of. And barring financial catastrophe, I think in the coming year it will become the norm.

The Patent Pledge

Written By: admin - May• 23•12

I realized recently that we may be able to solve part of the patent problem without waiting for the government.

I’ve never been 100% sure whether patents help or hinder technological progress. When I was a kid I thought they helped. I thought they protected inventors from having their ideas stolen by big companies. Maybe that was truer in the past, when more things were physical. But regardless of whether patents are in general a good thing, there do seem to be bad ways of using them. And since bad uses of patents seem to be increasing, there is an increasing call for patent reform.

The problem with patent reform is that it has to go through the government. That tends to be slow. But recently I realized we can also attack the problem downstream. As well as pinching off the stream of patents at the point where they’re issued, we may in some cases be able to pinch it off at the point where they’re used.

One way of using patents that clearly does not encourage innovation is when established companies with bad products use patents to suppress small competitors with good products. This is the type of abuse we may be able to decrease without having to go through the government.

The way to do it is to get the companies that are above pulling this sort of trick to pledge publicly not to. Then the ones that won’t make such a pledge will be very conspicuous. Potential employees won’t want to work for them. And investors, too, will be able to see that they’re the sort of company that competes by litigation rather than by making good products.

Schlep Blindness

Written By: admin - May• 23•12

There are great startup ideas lying around unexploited right under our noses. One reason we don’t see them is a phenomenon I call schlep blindness. Schlep was originally a Yiddish word but has passed into general use in the US. It means a tedious, unpleasant task.

No one likes schleps, but hackers especially dislike them. Most hackers who start startups wish they could do it by just writing some clever software, putting it on a server somewhere, and watching the money roll in—without ever having to talk to users, or negotiate with other companies, or deal with other people’s broken code. Maybe that’s possible, but I haven’t seen it.

One of the many things we do at Y Combinator is teach hackers about the inevitability of schleps. No, you can’t start a startup by just writing code. I remember going through this realization myself. There was a point in 1995 when I was still trying to convince myself I could start a company by just writing code. But I soon learned from experience that schleps are not merely inevitable, but pretty much what business consists of. A company is defined by the schleps it will undertake. And schleps should be dealt with the same way you’d deal with a cold swimming pool: just jump in. Which is not to say you should seek out unpleasant work per se, but that you should never shrink from it if it’s on the path to something great.

The most dangerous thing about our dislike of schleps is that much of it is unconscious. Your unconscious won’t even let you see ideas that involve painful schleps. That’s schlep blindness.

The phenomenon isn’t limited to startups. Most people don’t consciously decide not to be in as good physical shape as Olympic athletes, for example. Their unconscious mind decides for them, shrinking from the work involved.

The most striking example I know of schlep blindness is Stripe, or rather Stripe’s idea. For over a decade, every hacker who’d ever had to process payments online knew how painful the experience was. Thousands of people must have known about this problem. And yet when they started startups, they decided to build recipe sites, or aggregators for local events. Why? Why work on problems few care much about and no one will pay for, when you could fix one of the most important components of the world’s infrastructure? Because schlep blindness prevented people from even considering the idea of fixing payments.

Defining Property

Written By: admin - May• 23•12

As a child I read a book of stories about a famous judge in eighteenth century Japan called Ooka Tadasuke. One of the cases he decided was brought by the owner of a food shop. A poor student who could afford only rice was eating his rice while enjoying the delicious cooking smells coming from the food shop. The owner wanted the student to pay for the smells he was enjoying. The student was stealing his smells!

This story often comes to mind when I hear the RIAA and MPAA accusing people of stealing music and movies.

It sounds ridiculous to us to treat smells as property. But I can imagine scenarios in which one could charge for smells. Imagine we were living on a moon base where we had to buy air by the liter. I could imagine air suppliers adding scents at an extra charge.

The reason it seems ridiculous to us to treat smells as property is that it wouldn’t work to. It would work on a moon base, though.

What counts as property depends on what works to treat as property. And that not only can change, but has changed. Humans may always (for some definition of human and always) have treated small items carried on one’s person as property. But hunter gatherers didn’t treat land, for example, as property in the way we do. [1]

The reason so many people think of property as having a single unchanging definition is that its definition changes very slowly. [2] But we are in the midst of such a change now. The record labels and movie studios used to distribute what they made like air shipped through tubes on a moon base. But with the arrival of networks, it’s as if we’ve moved to a planet with a breathable atmosphere. Data moves like smells now. And through a combination of wishful thinking and short-term greed, the labels and studios have put themselves in the position of the food shop owner, accusing us all of stealing their smells.

(The reason I say short-term greed is that the underlying problem with the labels and studios is that the people who run them are driven by bonuses rather than equity. If they were driven by equity they’d be looking for ways to take advantage of technological change instead of fighting it. But building new things takes too long. Their bonuses depend on this year’s revenues, and the best way to increase those is to extract more money from stuff they do already.)

So what does this mean? Should people not be able to charge for content? There’s not a single yes or no answer to that question. People should be able to charge for content when it works to charge for content.

But by “works” I mean something more subtle than “when they can get away with it.” I mean when people can charge for content without warping society in order to do it. After all, the companies selling smells on the moon base could continue to sell them on the Earth, if they lobbied successfully for laws requiring us all to continue to breathe through tubes down here too, even though we no longer needed to.

The crazy legal measures that the labels and studios have been taking have a lot of that flavor. Newspapers and magazines are just as screwed, but they are at least declining gracefully. The RIAA and MPAA would make us breathe through tubes if they could.

Ultimately it comes down to common sense. When you’re abusing the legal system by trying to use mass lawsuits against randomly chosen people as a form of exemplary punishment, or lobbying for laws that would break the Internet if they passed, that’s ipso facto evidence you’re using a definition of property that doesn’t work.