by AVC

One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, “it’s just another way to lower the price”.

I’ll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I’ll explain.

But first, let me lay out a few things for those who aren’t well versed in these matters. The pre-money valuation is the value of the company before the money comes in. Let’s say we call it $4mm. And let’s say the financing is $1mm. Then the post-money valuation is $5mm and the $1mm round is 20% dilutive ($1mm/$5mm).

But to the entrepreneur it might be a lot more dilutive due to the inclusion of the option pool in the pre-money valuation. Let’s say that the VC’s term sheet says that a 15% “fully diluted post money” option pool needs to be in the pre-money valuation. What that means is that the investor wants 15% of the company, after the financing is closed, to be in an option pool that has not been granted to anyone.

In the case of the $5mm post money valuation, that means there needs to be $750,000 worth of options in the pre-money valuation. If the pre-money valuation is $4mm, then that means the true pre-money valuation to the entreprenuer is $3.25mm. And therein lies Mark’s critique that the option pool is just another way to lower the price.

I am sure I lost a few of you on all of that math. If you want to drill down on it, please leave a comment and we’ll help you figure this out. It is very important you understand all of this if you are or want to be an entrepreneur who raises venture capital.

The bottom line is the deal I described leaves the entrepreneur and his/her shareholders with 65% of the company after the financing, the VC investor will own 20%, and there will be an option pool representing 15% of the company that has not been issued yet. The $1mm financing was not 20% dilutive, it was 35% dilutive.

So it is not surprising that entrepreneurs hate this provision and fight about it every time. And like most terms, VCs have been abusing it for years by asking for excessive option pools making the provision hated more than it needs to be.

The first point I’ll make is that VCs should be upfront about this provision and the fact that it is simply about price. In the example above, I’d be happy to pay $3.25mm pre-money with no option pool. Or I’ll pay $4mm pre-money with one. They are the same thing to me. What an entrepreneur needs to do is find out what the market price for their company is with and without an option pool in the number. Once they do that, the negotiation over this point is a lot less contentious.

The second point I’ll make is that the option pool request needs to be reasonable and based on some kind of budget. I generally ask the entrepreneur to put enough options into the “pre-money pool” to fund the hiring and retention needs of the company until the next financing. My thinking on this is that I don’t want to get diluted between financings. So I like to see a headcount based hiring plan with expected options against each hire combined with a retention plan for all current employees who will need additional option grants.

In most of the early stage financings I’ve done in the past few years this work on the option pool has shown a need for around 10% in unissued options. I’ve seen it as big as 15% but that is rare. I’ve also seen it as low as 5%, but that is even more rare. But the point is this; don’t guess or negotiate this number. Do the work, figure it out, and put it in the pre-money and then negotiate price.

I’ll wrap with a true story about this provision. When Mark and I were negotiating the first round of financing for Zynga, we got into a real tussle about this provision. He did not want an option pool in the pre-money valuation. I did. Once we agreed that it was just a fight about price, the conversation got easier. I got him to give me an estimate of the pool he would need. We added it to the valuation we had agreed to. He got an increase in price, I got an option pool. And I got one of the best investments I’ve ever made.

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By: Charles Sizemore

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By: SUE SHELLENBARGER/The Wall Street Journal

By economic yardsticks, Roger the Plumber should be feeling pretty low. Roger Peugeot, owner of the 14-employee Overland Park, Kan., plumbing company that bears his name, is part of a sector hit hard by shrunken credit and slumping sales. He has been forced to reduce staff and is battling new competition from other plumbers fleeing the construction industry.

So why is Mr. Peugeot so happy? He genuinely likes fixing plumbing messes, for one thing, and despite the worst recession he has seen, “I’m still excited to get up and go to work every day,” he says. He relishes running into people at the local hardware store whom he has helped in the past. And in hard times, he says, his fate is in his own hands, rather than those of a manager. “Even when things get tough, I’m still in control,” he says.

In the broadest, most-comprehensive survey yet of how occupation affects happiness, business owners outrank 10 other occupational groups in overall well-being, based on the landmark survey of 100,826 working adults set for release today. Defined as self-employed store or factory owners, plumbers and so on, business owners surpassed 10 other occupational groups on a composite measure of six criteria of contentment, including emotional and physical health, job satisfaction, healthy behavior, access to basic needs and self-reports of overall life quality.

This puts Roger the Plumber well ahead of movers and shakers typically regarded as the top of the heap in society—professionals such as doctors or lawyers, who ranked second, and executives and managers in corporations or government, who came in third—according to the Gallup-Healthways Well-Being Index, a collaboration between Gallup and Healthways, a Franklin, Tenn., health-management concern. This is despite business owners ranking below those more-prestigious occupations in physical health and access to basic needs, such as health care.

The findings, psychologists say, reflect the importance of being free to choose the work you do and how you do it, the way you manage your time, and the way you respond to adversity. Regardless of occupational field, the survey suggests that seeking out enjoyable work and finding a way to do it on your own terms, with some control over both the process and the outcome, is likely for most people to fuel satisfaction and contentment.

“Despite the recession, it still pays to be your own boss,” says Frank Newport, editor in chief of the Gallup Poll. The survey, adds John Howard, director of the National Institute for Occupational Safety and Health, “reaffirms my view that the more control you have over your work, the happier you are.”

Smaller studies have shown links between certain kinds of stress and particular job roles or employment groups. But the huge size of the Gallup-Healthways project, which conducts 1,000 telephone surveys a day, makes it possible to draw detailed, reliable distinctions among a large number of occupational groups. “I know of no other survey of this size” on the subject, says Humphrey Taylor, chairman of the Harris Poll, a competitor. The 11 occupational categories surveyed also include farmers and sales, clerical, construction, installation and service workers.

Unlikely Winners

Business owners may seem unlikely winners. About half of the nation’s full-time small businesses typically fail within five years of start-up, and the rate has risen in the recession, says William Dennis, a senior research fellow with the National Federation of Independent Business Research Foundation. They are more likely to work extremely long hours than people in any other occupation group, other Gallup research shows.

The findings likely reflect declining quality-of-life in some professions, Dr. Howard says. Rising cost controls in medicine, for example, and mounting pressure to chalk up billable hours in law, have curtailed doctors’ and lawyers’ flexibility to control their work.

“Where professionals may have had greater freedom 20 or 30 years ago, many are now experiencing loss of control, erosion of satisfaction and increased stress,” Dr. Howard says.

At the bottom of the heap, transportation and manufacturing workers scored lowest on well-being. These occupations tend to foster conditions Niosh has identified as contributors to unhealthy stress: lack of control or participation in decision-making, conflicting or unclear job expectations, and hectic tasks with little inherent meaning.

Management and executive jobs have gotten tougher, too, during the period the Gallup-Healthways data were gathered, the first eight months of this year. Beset by cost cuts and layoffs, corporate bosses at all levels now share more of these stress-inducing conditions.

Business owners stand in stark contrast. Even in tough times, “you do your own thinking and no one can tell you you’re wrong,” says Edwin Locke, an industrial psychologist and professor emeritus of leadership and motivation at the Robert H. Smith School of Business at the University of Maryland. “You make your own decisions, and if you’re wrong, reality gives you the feedback,” he says.

Staying in Control

As a business owner, Mr. Peugeot says, “even when things are out of your control, as they are with this economy, you’re still in control of your relationships” with customers. Corporate managers and executives may “sit and wonder if they’re going to be laid off, or get frustrated with the inabilities of management,” he says. “If you’re the owner, you may have to say, ‘I screwed up,’ but it’s a lot better than saying, ‘I didn’t deserve that.’ ”

Other patterns among the self-employed help explain their psychological well-being. Entrepreneurs tend by nature to be optimistic, evidenced in their willingness to strike out on their own, psychologists say. Laura Street, of Pleasanton, Calif., isn’t making a profit in the handmade-jewelry business, Ampersand Designs, which she co-founded last year. But to her, the glass is half full: She says sales are rising, she expects to turn a profit soon, and she loves her work.

“Yes, the economy is bad. But we aren’t coming into a workplace wondering, ‘Are we going to get fired today?’ ” she says. “If you control your destiny, the well-being is something that just comes naturally.”

The freedom business owners have to control their schedules enables them to adhere more closely to their personal priorities, says Amy Neftzger, an organizational psychologist for Healthways. They have the flexibility to “make it to a child’s play, or spend time with family,” she says.

Golfing With the Mayor

Many also have community ties that feed a sense of well-being. James Barnard, chief financial officer of his family’s business, Barnard Manufacturing in St. Johns, Mich., didn’t have a great summer. He and his cousin Gary Barnard, president of the heavy-equipment parts maker, stopped drawing paychecks to help the company through a steep sales drop. They agonized over a decision to lay off dozens of workers, and Gary sat nearly alone in the plant for several weeks, answering phones.

But their company has a good image in the community, and “it’s a big deal to us to keep that going,” James says. He takes part in civic groups and enjoys golfing with the mayor and police chief. Pressed to describe the rewards of running a family business, he says, “It’s pride. Definitely pride.”

Another surprise from the survey: Farmers and other outdoor workers, from farmhands to forestry workers, scored No. 1 among all groups in “emotional health,” as measured mainly by the amount of smiling, laughter, enjoyment and happiness they report experiencing the previous day—despite the fact that farmers ranked near the bottom in access to basic needs.

Steve Swenka, a Tiffin, Iowa, farmer, had just finished mowing two fields of hay when I reached him by phone last week to discuss the poll. The results didn’t surprise him. Farm work, he says, is pretty trying. “When you’re out there in the heat and the dust, sweating, you may feel miserable,” he says. But over time, “you can see the progress, the fruits of your labor.

“And when the day is over and you see the loads of hay stacked, there’s something fulfilling about hard manual labor like that,” he says. “You forget your little troubles, and start to see the bigger picture.”

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By: Unknown author

Medford, N.J. — Local computer expert Anthony Mongeluzo’s company grew 414.8 percent in the last three years even after the start of one of the worst recessions on record, making it the 88th fastest growing IT company in the United States, Inc. magazine announced.

Pro Computer Service (www.procomputerservice.com), which provides both onsite and remote IT support for residential and business clients, also placed as the 11th fastest growing company in Pennsylvania, New Jersey, Delaware and Maryland, according to Inc.

It placed 667 nationally, among the 5,000 finalists. Inc. magazine charts the growth of the fastest-growing privately held companies in the United States.

“This award confirmed for all of us at Pro Computer Service that working together in a culture of energy and enthusiasm could only produce great results,” says Mongeluzo, company president. “I knew the only way to greater success for my company was to empower my employees with decision making on the job and provide an exciting work environment and an employment package that is among the most comprehensive in the industry.”

Pro Computer Service experienced a 414.8 percent growth rate between 2005 and 2008. Annual revenue was $404,000 in 2005 and climbed to $2.1 million in 2009. The average industry growth rate during this three-year period was about 50 percent, and the median growth rate among the Inc. 5,000 list was about 150 percent, according to Sageworks, a research firm.

Mongeluzo credits his company’s growth to the company’s ability to show the benefits of outsourcing IT functions. “We’re able to show companies outsourcing benefits they never think about, including support by qualified personnel, a team approach that eliminates sick or vacation issues and access to wider IT experience,” he said. “At a time when companies were cutting jobs, we were adding them.”

Mongeluzo started Pro Computer Service in his parents’ home at the age of 22, in 2002. Today, he has four locations and 17 employees and operates in New Jersey, Pennsylvania, Delaware and Maryland. His company has won numerous awards for being among the fastest-growing companies in the Delaware Valley during the past two years.

“The list represents the most comprehensive look at the most important segment of the economy — America’s independent-minded entrepreneurs,” according to Inc. magazine. “Consumer electronics maker Vizio, Internet giant GoDaddy, rental car service Zipcar, and beverage maker Honest Tea are among the prominent brands featured on this year’s list.”

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By: Ron Dalby

Every country, every state and every region of the world offers some sort of rags-to-riches story, but only Alaska can claim the indomitable Walter Hickel.

He stepped off the boat in Alaska in 1940 with 37 cents in his pocket and is now one of the most influential and wealthiest people in the state, detouring along the way to serve as both the second and eighth governors of Alaska and the U.S. Secretary of the Interior.

How he got here is a tale of youthful naiveté mixed with a lot of luck, grit, integrity and the history of construction in southcentral Alaska.

After winning the Golden Gloves boxing tournament in his home state of Kansas, he fought his way west, eventually beating the California champion. Afterward, he decided he wanted to go to Australia and went to see a travel agent. When asked for his passport, Hickel said, “Where do I buy one?” After it was explained that he had to apply for one and it would take some time, he asked where he could go without one. Among nearly a dozen options were the Panama Canal Zone, Hawaii and Alaska. He chose Alaska.

“I didn’t have any money,” Hickel said. So he ended up sleeping in a hammock in the engine room of a steamer bound for Alaska. Seven days out of Seattle he looked outside and saw Prince William Sound. He then looked up at the great Wrangell Mountains and said, “You take care of me, and I’ll take care of you.”

Ashore, “one guy gave me a sleeping bag,” explaining that it was cold at night. Another, who didn’t speak English, handed him $10. That was enough to buy breakfast and rail passage to Anchorage. The following year on a street in Anchorage, Hickel ran into the fellow who gave him the money and pressed a $20 bill into his hands.

Hickel did not simply leap into the construction business in Alaska. It was winter in Alaska, he was broke, and the first job he could find was washing dishes at Richmond’s Café for $4 a day. Later a newfound friend found him a position as the helper to the head boilermaker at the Alaska Railroad. In those days he slept on the floor of an empty cabin on 5th Avenue in what is now downtown Anchorage.

Construction
His first construction project was building a house for himself and his wife, Ermalee, on 15th and E in Anchorage. That went well enough that he built five more houses behind what is now Chilkoot Charlie’s, launching his career in construction.

Hickel believes you “win with ideas,” and he had to be pretty creative in finding the means to build the five houses. The land owner wanted $500 each for the lots, and Hickel agreed to the price, but only if the land owner would allow the houses to be built before being paid. “After I had the houses built, I could get a mortgage,” he said, and that’s how he put together the deal that launched his career.

He would later go on to build 250 or more houses in the Turnagain subdivision using the same means of financing the land purchases.

According to Hickel, “You’ve got to have a vision beyond tomorrow. Vision is more powerful than money.

“I’ve always believed that,” Hickel continued. “That’s why I built the Hotel Captain Cook after the earthquake.”

The decision to build the Captain Cook and its subsequent construction remain Hickel’s most cherished memory. As he tells it, after the earthquake there was total confusion bordering on panic in Anchorage, and people were running around hastily making plans to move the entire city. A couple of days after the earthquake, Hickel called a press conference in downtown Anchorage where the hotel now stands and stepped up to the microphone.

“I came down here without a plan and announced that I was going to build tower number one of the Captain Cook Hotel, and it will open in June of next year,” Hickel said. “And I built it, and that’s all there is to that story.”

Actually there’s a whole lot more to the story. His vision and willingness to risk his reputation on Anchorage’s first high-rise hotel in the days immediately following the earthquake settled things down a lot. The city stayed in place and rebuilt itself bigger and better than before.

Beyond that, Hickel also notes that people everywhere were willing to help him after he got going on the construction of the first tower. “I got started that summer and the world helped me out,” is how he describes it. “If I needed something, they helped me.” 

Politics
Within two years, his hat was in the ring for governor of the state on the Republican ticket. He would replace his longtime friend, Democrat Bill Egan, in Juneau in late 1966.

Describing why he ran for governor, Hickel noted that, “Alaska is a unique country.” He outlines how the state’s constitutional convention thought so and provided the governor with more power than any other state in the union. He believes he used that power for the betterment of the state and its people.

“I ran and got elected, and that’s how I got the owner state going,” he said.

All of the oil companies had abandoned the Slope, except Atlantic Richfield, by the time Hickel took office. The new governor flew to Prudhoe Bay with Harry Jamison, Atlantic Richfield’s chief exploration geologist. When Jamison said that his company, too, was going to leave the Slope, Hickel threatened him, “You drill or I will.” This got the attention of Robert O. Anderson, president of the company, and the drilling proceeded. That well hit the largest oil province in North America.

Halfway through Hickel’s first term term as governor, newly elected President Richard Nixon persuaded Hickel to become Secretary of the Interior by telling him he would never get the oil pipeline otherwise. In just under two years, Hickel launched dozens of programs to improve the national energy picture and address the awakening environmental movement. These programs were detailed in his national bestseller “Who Owns America?” He also laid the groundwork for the pipeline legislation that was ultimately signed into law in 1973. Construction of the trans-Alaska oil pipeline began in earnest the following year.

Commons
These days Hickel tends to direct his thinking at a more global level. He sees the resources of the world as held more in common than by individuals or businesses. He uses the term commons to say that most of the world, 84 percent by his calculations, is not owned by individuals or business entities but by governments, the political extensions of the people.

“Our economy should be developed for the region’s people,” Hickel says. “The whole Arctic is rich, but the reason they [business and industry] don’t want to develop it is that they don’t own it.”

In Hickel’s view, Russia and China “get it” because they view resources for the benefit of the whole, not for the health of a single company.

“If you manage the commons for the benefit of the region’s people,” he says, “you can eliminate poverty from this earth. The reality of who owns the world is in the commons, but the United States doesn’t understand it yet.”

In typical Hickel fashion, which almost always manages to upset some people, he also supports what Russia did a few months back when his friend Arthur Chilingarov planted a flag on the floor of the Arctic Ocean and claimed the land for itself. To his way of thinking, this woke up the world to the riches in the Arctic.

Hickel has never been too concerned that others might find his ideas a little strange, and he has on more than one occasion given his detractors cause to eat their words.

Not slowing down
Now 89, Hickel still bubbles over with ideas and energy … and a lot of frustration with the press because they “don’t get it,” and with the United States’ attitude toward business and the economy.

“I like business. I’ve made money in business,” Hickel said, “but you’ve got to understand the limits of business.” Here again he dives back into his belief in the commons and the actual ownership of the earth’s resources. He carries this thinking about the commons even farther and applies it to outer space as well.

He presents this view of the world at meetings of Commonwealth North, the organization he and the late Bill Egan founded decades ago to promote northern resources and ideas around the world. As governor, he also founded the Northern Forum in which membership is extended to people from any country with lands north of the 60th parallel of latitude. Hickel has a polar projection map on his wall highlighting that part of the world and is perhaps most animated when he discusses the potential of the resources in the Arctic.

As for himself and looking ahead to the next 20 years, Hickel says, “When I get to heaven, I’m going to tell St. Peter, ‘if you don’t have a spot for me, send me back. I’m not through yet.’”

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By: Tomohiro Ohsumi/Bloomberg News, NP

So far, we have examined how energy efficiency can cut costs and drive bottom-line profitability. But going green can also drive top-line revenue with explosive markets, committed green consumers and value-driven employees.

Companies are going green to position themselves as leaders in rapidly expanding markets. HSBC became the first major bank to become carbon neutral in 2005. In 2007, HSBC committed $90-million over five years to increase its energy efficiency. Along with the payback and it being the right thing to do, HSBC wants to be a significant player in green energy financing estimated to be worth $2-trillion by 2030. Installed wind power has been growing at a rate of more than 30% compounded annually for more than a decade, while for solar it’s more than 40%.

Following HSBC’s lead, Barclays Bank became carbon neutral in the U.K. in 2007. Why? Barclays wants a significant share of the carbon trading market, estimated to hit $2-trillion by 2030. The carbon market, at $8-billion globally in 2005, exploded to $125-billion in 2008 — a compounded annual growth rate of 100%.

Legendary Silicon Valley venture capitalist John Doerr sees green technology as the “biggest economic opportunity of the 21st century.” Leading by example is key if companies want a share of green markets.

Companies are going green to attract green consumers: The Natural Marketing Institute studies a segment of consumers who are committed to lifestyles of health and sustainability, a $209-billion market in 2008 that is predicted to grow to $845-billion by 2015. That’s a CAGR of 32%. Just how many markets are expanding this rapidly during this recession?

Four of five North Americans say they want to buy green products and services from green companies. But beneath the politically correct answer, commitment varies widely.

A composite picture of North American consumers, aggregated from half a dozen leading research firms’ findings: Alarmed about environmental state of the world, about 20% are committed. They buy green products and services and are willing to pay a premium of up to 20%. Committed consumers are active campaigners, whether in an environmental group or in their community. About 30% are concerned about environmental issues, will pay a smaller premium compared with the committed green products and don’t campaign. About 20% are cautious; they don’t feel any urgency around green issues and don’t feel that their lives will be affected. Disengaged, doubtful and dismissive segments each are about 10%; these segments are not motivated to buy green products unless they cost less.

Here’s the point: 20% are hard-core committed green consumers who buy products and services from leading green companies and continually promote their choices to family and friends. Beware if your company is a green laggard; this group will generate negative word of mouth for your products and services.

Committed and concerned consumers make up half of North Americans. Few companies can afford to ignore such a segment that has grown so quickly and is so large.

Companies are going green to attract employees. Here are staggering findings: MBA grads are willing to sacrifice US$13,700 annually to work for a socially responsible company (according to a Stanford University study) and more than 80% of entry level hires are looking to work for an environmentally friendly company.

The question is: Can your company afford to ignore trillion-dollar markets, explosive growth markets, committed customers who campaign for leaders and against laggards, and attracting and retaining dedicated employees?

Jim Harris is author of Blindsided!, a No. 1 international bestseller, and a Toronto-based management consultant. His new book, A Crisis is a Terrible Thing to Waste, will be published in 2010. You can reach him at jimh@jimharris.com.

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By: Daniel Gross

Now that the recession is most likely over, it’s time to start looking at which companies, institutions, and individuals thrived during this grim period. In the harsh downturn that began in December 2007, success was redefined—flat became the new up, and muddling through became a triumph. In a recession that hit all rungs of the income ladder and ravaged the wealthiest consumer markets—the United States, Europe, Japan—there were very few safe havens. But some countries, such as Peru, managed to grow right through the global recession. And some companies arranged their business so that they resisted the contraction and benefited from trends affecting their industry. Some even managed to make decisions during the trough that brought in more business.

Chief among the Great Recession’s winners is McDonald’s. McDonald’s sales growth in 2008 was greater than in 2006 and 2007. While many restaurants scaled back, it opened nearly 600 stores in 2008. And the chain has notched same-store-sales growth in each of 2009′s first seven months.

In late 2007, an age of trading up, spreading food-snobbery, and rising health-consciousness, it was easy to write off the Golden Arches. Greasy, downscale, industrialized, aggressively unhealthy, McDonald’s was a ripe target for popular-culture agitators, such as Eric Schlosser (Fast Food Nation) and Morgan Spurlock (Supersize Me). One couldn’t imagine Barack Obama stopping in for coffee and a Quarter Pounder, the way Bill Clinton used to after a jog. And yet, McDonald’s has done quite well in a very difficult period for large corporations. Over the last three years, its stock has handily outperformed the S&P 500, and the company’s investor-relations site proclaims that it is “firing on all cylinders.” McDonald’s success can be chalked up to a combination of luck—which is the residue of smart planning—and savvy moves.

In 2008, after a decade of relentlessly trading up to higher quality (read: more expensive) consumer goods and services, Americans began to trade down with a vengeance. McDonald’s, which has 44 percent of its 32,000 stores in the United States, was set up to profit from trading down in two ways. First, in a recession, people eat out less and at home more frequently. And when they eat out, they eat at cheaper places. McDonald’s is so cheap, efficient, pervasive, and convenient that it was a viable alternative to casual restaurants like Ruby Tuesday and to cooking at home. As this stock chart shows, investors, like diners, angled toward McDonald’s and away from Ruby Tuesday during the recession.

When discretionary spending plummets rapidly, as it did during the recession, firms slash prices—and hence margins—to keep customers coming through the doors. McDonald’s ran plenty of bargains and distributed gazillions of coupons. But it also spent money promoting a higher-margin good that could appeal to a new class of trading-down consumers: coffee. As consumers jettisoned their $4-a-day latte habits, Starbucks retrenched. But McDonald’s expanded its java offerings. The McCafé line may not be attracting coffee snobs (the real ones eschew Starbucks for Stumptown anyway), but it has impressed some, including Slate‘s tasters. In its 2009 second-quarter earnings release, McDonald’s cited the “national launch of the McCafe premium coffee line-up” as a contributor to solid results. Over the past two years, McDonald’s stock has ground Starbucks into a fine powder.

McDonald’s has also performed well outside the United States. In Europe, where stressed consumers are still pulling back, McDonald’s notched 6.9 percent same-store-sales growth in 2009′s second quarter. “McDonald’s Europe delivered strong second quarter comparable sales led by performance in the U.K., France and Russia,” the company said. The Financial Times Tuesday cited the company’s “tiered menu—which offers cheap, middling and expensive options.”

But the global story isn’t only about trading down. In the United States, McDonald’s may be a cheap source of calories and comfort food. In other parts of the world—parts where billions of people live—McDonald’s is an aspirational brand, identified with middle-class, Westernized consumerism. Much of the world—places such as China, India, Indonesia—remains virgin territory for the Golden Arches. Coincidentally, these are economies that have continued to grow during the global recession. While it faces operational challenges in emerging markets, McDonald’s has benefitted from a weakening dollar and rising incomes in Asia. The Wall Street Journal reported Tuesday that McDonald’s “has opened 286 units abroad so far this year, compared with just 53 domestically.” The company plans to add 150 stores to its current total of 1,000 in China.

The question now for investors is whether McDonald’s can survive the recovery. When people feel more flush, will they still stop by? The growth in same-store sales in the United States has moderated a little in recent months—up only 2.6 percent in the United States in July compared with 6.1 percent in April. And there’s a rising chunk of the population that has grown accustomed to eating healthier and better; my 10-year-old won’t touch a McDonald’s burger. Going forward, McDonald’s may face larger cultural barriers in the United States than in China.

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By: Forbes/ Kevin Woo

In 2003, three Brown University undergraduates, Eric Shashoua, Ben Rubin and Jason Donahue, sat in a school cafeteria and mused about their grogginess after an all-night study session. They knew that the stress of exams played a role, but they started wondering about the science of their exhaustion.

Little did they imagine that their discussion would eventually lead to the founding of Zeo, maker of the first direct-to-consumer sleep device that analyzes nighttime sleep patterns. Zeo’s product, the Personal Sleep Coach, uses a soft headband loaded with sensors to monitor brain waves. The data are sent wirelessly to a small device on a nightstand; from there they can be uploaded to the MyZeo.com Web site. MyZeo.com then analyzes the data and e-mails back a strategy and suggestions for improving the next night’s sleep.

However, once these three would-be entrepreneurs decided to create a science-based aid for the estimated 70 million Americans suffering from chronic sleep disorders, they realized they were lacking a key ingredient: an investor–or several–to fund their research and development.

Initial fundraising began in the cafeterias at Brown. “We literally went table-to-table to talk about our innovation and get people interested in contributing,” Shashoua recalls. Those discussions led to introductions to wealthy Brown alumni, experts in sleep research and so-called “angel investors.”

Angel investors are individual entrepreneurs who provide start-up capital to other entrepreneurs to get businesses off the ground. Their investments are often the bridge between self-funding and venture capital investment. The term comes from Broadway, where producers have long sought investors to help cover theater production costs. Today, angels support a wide variety of industries, including high-tech, biotech, movies and restaurants. Their levels of investment typically range from $150,000 to $1.5 million, and they commonly expect a five-year return rate of at least 30%. About a third of all angel investments result in a capital loss.

A growing body of angel investors pool their capital and share research information to make their investment decisions. They form what are known as “angel networks.” Members of an angel network can invest as a group or as individuals. The highest concentration of them can be found in Silicon Valley and Boston. Their funding levels are similar to those of individuals, multiplied by the number of people involved.

In the first three years, Zeo’s founders met with more than 400 potential angel investors and got money from 50 of them. But identifying those potential investors proved to be a lot easier than getting meetings with them.

“I called a director of one major company in sleep technology every other month for more than a year,” Shashoua recalls. “He wouldn’t return calls, and his secretary turned me down each time, but I would call back when I had news to share. Eventually he agreed to talk to me and became one of our most valued investors.”

There are more than 260,000 angel investors in the U.S. According to the Center for Venture Research at the University of New Hampshire, these helpers invested $19.2 billion in 55,480 companies in 2008, down 26% from the year before. Venture capitalists, by comparison, invested $28.1 billion in 3,630 companies, down just 10% from 2007.

Budding companies shouldn’t always take angel money, Shashoua warns. He says if your company has a vision that doesn’t fit with a potential investor, it’s better to not accept the dollars.

Benjamin Wayne, chief executive officer of Fliqz, a provider of video solutions for Web sites, agrees. Wayne, who has founded four companies since 1995, divides potential angel investors into two categories, amateurs and professionals. Wayne says the amateurs tend to invest based on what feeds their egos and become mercurial about their investments. “Angels often make emotional decisions based on very little data,” he says, “which would be almost funny if they didn’t have the ability to wield enormous influence over the management teams of their start-ups. It can truly be a case of the inmates running the asylum.”

Professional angels, on the other hand, are often people with serious operating experience. They can be very good at guiding early-stage companies through their initial growing pains, providing management experience, brokering early partnerships and mentoring first-time executive teams.

When you work with an angel network, you can worry much less about individual idiosyncrasies, says Stephen Viscusi, CEO of the Viscusi Group, an executive search firm. “Individual angels romanticize why they are making the investment. They have a passion for an industry they never had the guts to go into themselves; now they’re rich and can dabble in it. I always think people should call angel investments ‘devil money.’ In most cases, when angels don’t see a fast return on their investment, they turn into devils. They want the soul of the CEO.”

To avoid fracturing relations between entrepreneur and investor, you need to make sure your backers have realistic expectations. Explain all the risks, and undersell the likely return on investment. “Not all ventures go the way you want them to. That is the nature of the beast,” says Jon Black, CEO of the medical Web site CheckMD.com. “If you see red flags with a potential investor early on, pull the plug and move on to the next opportunity. If a current investor is unreasonable or is otherwise draining energy from the company after you’ve done everything you can to resolve his concerns, seek a way to end the relationship.”

Having the courage to walk away from a potential investor isn’t always easy, but Dewey Gaedcke, CEO of Minggl.com, agrees that some angel money is best left on the table. “We’ve avoided and refused money from all moral-agenda based groups such as right-wing Christians and pro-life enthusiasts, anyone who might want to control rather than empower users of the social Web,” he says

Minggl (pronounced “mingle”) enables social Web site users to manage multiple accounts through a single sign-on. When potential angel investors aren’t familiar with new technologies, or in Minggl’s case with Facebook and Twitter and the like, Gaedcke advises them to bring along technology experts when they come to meetings. Those experts can help them evaluate market opportunities, explain the space and impartially observe progress.

Such technology experts often end up serving on the board and acting as interpreters between the founders, who might be very technically minded, and investors, who might not. Vinit Nijhawan, executive-in-residence at Boston University, observes, “Many of the strategic decisions made during board meetings require an understanding of the market. The investors on a board can have a healthy skepticism of the CEO’s position but be likely to accept an independent-industry expert board member’s views.”

Independent expertise is critical in the early stages, when strategy and market focus can gyrate wildly. Seymour Duncker, CEO of iCharts, recommends that as soon as you’ve got your money you focus on building up your investors’ trust in you. “You earn it by delivering on their expectation that you will take things to the next level and that you will earn them a decent return on their investment. The scenario that all angel investors dread is that the first time they hear from you after investing, you show up, hat in hand, telling them you need more or your company will go under.”

In the six years since those first table-to-table chats with Brown University classmates, Shashoua, Rubin and Donahue have raised $3.5 million from angels and an additional $10.5 million from venture capitalists. The Zeo Sleep Coach debuted on June 18, 2009. It sells for $400. An early review in The New York Times says, “The Zeo does make you a better sleeper.”

Stay tuned to see if it repays its angel investors.

Kevin Woo is a freelance writer in San Francisco.

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By: Leigh Buchanan

What was Clayton Christopher’s worst decision about making tea? The decision to make tea. “We should have outsourced production a lot sooner,” says Christopher, whose company, Sweet Leaf Tea, brewed its own for four years. “We would have been three times the size we are now.” Perhaps. But such a practical course would have deprived this start-up tale of its folksy moonshiner charm.

The son of a serial entrepreneur, Christopher worked for three years in his father’s medical-supply company in Beaumont, Texas, then lit out for Florida, where he captained a charter boat. During his travels, he met a tea merchant who regaled him with tales of the glories of the industry. Tea, decided Christopher, was the business for him. “There are so many channels you can go into: supermarkets, convenience stores, restaurants,” he says.

With just $15,000 in savings and a $10,000 investment from his family, Christopher had resourcefulness thrust upon him. Obeying the Texas health department’s demand that production take place in an enclosed area, he built an 800-square-foot wooden “tea hut” inside his father’s warehouse and installed drains, a water line, and a carbon filter cartridge to extract the chlorine from treated city water. Then he furnished the hut with state-of-the-scrap-yard equipment. A used air-conditioning unit cooled the water inside 50-gallon crawfish pots. King-size pillowcases served as industrial-strength tea bags. Christopher filled the bottles himself — two at a time — using a couple of garden hoses. To screw on the bottle caps, he used a Black & Decker drill.

If production was jury-rigged, the product itself was carefully crafted. Christopher spent five months sourcing tea leaves from all over the world. He tried 500 individual teas and another 500 blends before settling on a combination of 60 percent Hunan province and 40 percent Indian. Choosing a brewing process was easier. He used his granny’s. “She would brew a really strong tea for not more than five minutes,” says Christopher. “Then pour it over ice to stop the brewing process and lock in the flavor.”

As for market research: “It was just running around stores and buying different flavors of Snapple, Lipton, AriZona, Nestea,” says Christopher. “I knew they spent lots of money on market research and probably knew a thing or two.”

Flavor was Sweet Leaf’s competitive advantage — its only one. Christopher, who had taken on his boyhood friend David Smith as a partner, could not afford the fees markets charge for placement on store shelves. They were lucky to get their bottles, dressed in unattractive labels designed on Microsoft Word, onto the bottom shelves of convenience stores. “I’d dust off the cobwebs, set up the bottles, come back a week later, and one had sold,” he recalls. A breakthrough finally happened when Christopher persuaded 10 stores to let him place metal washtubs filled with ice and bottles of his tea near the checkout area. People started to notice — and buy.

Sweet Leaf’s first major customer was the Texas-based Market Basket chain. “They didn’t see a whole lot of products from Beaumont,” says Christopher. Other supermarkets followed, though it would be five years before Christopher and Smith nailed Whole Foods, which put Sweet Leaf on the map. “We called Whole Foods for about a year and sent samples but never heard from them,” says Christopher. “Finally, David got a postcard. You could tell the buyers had stacks of them in their drawers. It said, ‘Thank you. We are…’ then there was a line, and someone had written ‘NOT…interested in your product at this time.’ David was like, ‘Look! We got something from them.’ We laughed and slapped high-fives. At least they knew we existed.”

The partners hired college students to brew and bottle while they made deliveries in a refrigerated Otis Spunkmeyer van with 280,000 miles on it. They spent weekends in grocery stores, talking tea to shoppers and passing out samples. “At least 90 percent of our marketing went to free samples,” says Christopher. “You’ve got to get the product past people’s lips.”

But the partners’ homegrown plant couldn’t manufacture a shelf-stable product, which prevented Sweet Leaf from contracting with a beverage distributor. Instead, the two were forced to work through egg and milk distributors, who know their way around perishable goods but not around competitive, branded products. In 2002, the pair finally shut down their plant and signed up with a bottling company that pasteurized the tea, extending its shelf life.

Though Sweet Leaf is national now, some things haven’t changed. Free samples — at live music events as well as stores — remain the chief mode of marketing. The company spends about 8 percent of sales on freebies. And the Sweet Leaf staff still creates all the flavors. “Lots of beverage companies outsource their R&D,” says Christopher. “But the flavor is the most important part of the equation. No one cares more about your flavor than you do.”

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Maureen Farrell, 06.29.09, 7:10 PM ET

Steve Rosenbaum was ecstatic. Three years ago, the former Hollywood TV producer nabbed a chance to pitch his start-up, Magnify.net, a user-generated video-sharing Web site, to a group of interested investors.

The group shook hands and loosened up by sharing stories of mutual acquaintances. They chatted about baseball, New York and their kids. Eventually, Rosenbaum launched into his presentation.

Minutes later, one of the investors looked at his watch: Rosenbaum’s time was up. The partners rose, summarily shook his hand again and left. “I blew it,” says Rosenbaum. “You get one hour. They might not tell you that, but that’s all you have.” (All wasn’t lost: Rosenbaum managed to bag $750,000 in venture financing last year.)

In Pictures: Nine Money-Raising Mistakes

In Pictures: Six Ways To Raise Cash–Now

In Pictures: 28 Public Speaking Tips From The Pros

In this continuously credit-starved environment, you need a killer idea, a strong management team and the green shoots of a track record to even be considered for financing–that is, if you don’t botch your pitch. Not minding the clock is just one of many ways entrepreneurs trip up when trying to raise money. Try–or rather, avoid–some of these:

Pitching to the Wrong Crowd

Nearly all venture and angel funds clearly state their investment parameters, usually on their Web sites. (For those that don’t, TheFunded.com is a good resource.) Stick to the firms that focus on companies in your industry and at your stage of development. A biotech fund won’t look at your consumer product company, and a growth-stage venture fund with a taste for companies with sales north of $10 million won’t touch your early-stage venture.

Once you find the firms that match your company’s profile, make sure you approach the right partner. Many focus on one industry, or a niche within it (check the partner biographies, normally posted at their sites). For extra conversational grease, have a working knowledge of the funds’ current holdings.

Spending Too Much Time On The Product

Passion for your product is a good thing; so is having a deep knowledge of all the nuts and bolts. But investors want to know one thing: How will your nifty device or service translate into a sizable return on their investment?

If you’re slated to give an hour-long presentation, putting the product through its paces should eat up no more than 10 minutes (in Powerpoint-speak, a few slides). More important to cover are the size of the market (with some solid backup for your claims), the competitive landscape and how your company will stand out from the crowd.

Beware, too, of live product demonstrations, especially with regard to computer-related technology. “The live demo is death,” says Rosenbaum. “You’d be stunned how many venture firms have firewalls that won’t let your [software] operate properly.”

Relying on Enthusiasm Over Experience

Christopher McDemus, partner at law firm Florio Perrucci Steinhardt & Fader and adviser to early-stage companies, says that entrepreneurs often assume their passion will be so intoxicating that investors will forget how little experience they might have at running a company. Trust us, they won’t. Your management team need not be thoroughly seasoned, but you should at least boast a board of advisers or directors with significant experience. Highlight them in your pitch. Says McDemus: “Investors don’t want you learning on their nickel.”

Playing Fast and Loose With Numbers (Especially Market Size)

Smart investors are masters at massaging numbers–which means they’ll know when you’re doing it too. “People often talk about market size at too macro a level [so they can throw around big numbers],” says Amish Jani, managing director at FirstMark Capital, a New York venture fund. “We want to see a more granular analysis that’s relevant to the product you’re building. [For example], skip the size of the online advertising market, and outline the size of the network-management, cloud-based slice based on the number of people adopting XYZ.” In short: Keep it real.

Calling Your Exit

Everyone loves a payday, be it selling their company to a larger acquirer at a rich price or raising hundreds of millions of dollars in an initial public offering. But predicting an “exit” with any certainty is folly; worse, it makes you sound naive. “You don’t see it often, but it really bugs me,” says Jani. “More times than not, this comes back to bite entrepreneurs.”

In Pictures: Nine Money-Raising Mistakes

http://www.forbes.com/2009/06/29/venture-capital-presentation-entrepreneurs-finance-mistakes_print.html

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