Too many shareholders can become problematic as start-ups grow.Virginia Star

When I launched my first business venture, I sought help. I didn’t have much money so I was generous with equity to investors and supporters. Five years in, I had 80 shareholders and a capitalisation (cap) table that was difficult to manage.

Everyone told me to be careful when distributing equity. But early on, I needed support and couldn’t afford to pay contractors full rate, so I subsidised payments with equity. I had to convince incoming employees to take a pay cut, so I gave them shares. And I needed capital, so I accepted investment from wherever I could find it.

Start-up law specialist Richard Prengell of Viridian Lawyers says this problem is widespread. “Minority shareholder issues are amongst the most common legal challenges we come across. It’s easy for entrepreneurs to sell the dream early on and give away equity to people who help get the business going. But two or three years later, a messy cap table can have regretful consequences.”

Potential investors

I discovered a large shareholder group made it difficult to raise capital. Larger venture investors were nervous about our ability to manage so many stakeholders. Would anyone hold the company to ransom when we needed a critical document signed?

Prengell says a full cap table may deter potential investors. “An oversized shareholder list can become a nightmare: incoming investors may wish to make decisions about issuing new stock, bringing in more investors and incentivising employees without having to get sign-off from 30 or 40 people. This can institute delays, even if no one becomes obstructive.” He also warns about dead-weight shareholders who no longer contribute to the business.

“Investors want the company to be owned by people who are doing the work now. A contractor who helped build an early version of a product but is no longer involved in the business is a drag on a cap table.”

Five years on and we’ve put measures in place to manage our large shareholder group. Fortunately, no one ever became obstructive, but I have lost weeks chasing signatures from shareholders camping in the south of France, kite-surfing in Brazil or skiing in Switzerland. The challenge should not be underestimated.

I’m now establishing a new venture and, like last time, I’m doing whatever it takes to get my vision off the ground. This will mean issuing equity to early supporters; it’s impossible not to. But I’ll set up structures to incentivise people who make a long-term contribution; ensuring early shareholders don’t put off later-stage investors. Here’s how:

Set long-term goals

In my first business, I awarded equity to the graphic designer who made our first logo, a lawyer who drew up our early agreements and so on. This time I’ll set long-term goals. Everyone will earn their compensations over four years with a one-year cliff. So, if the design firm is still supporting the business in two years, they’ll have earned half their allocation. But if they disappear in six months, they’ll get nothing. This ensures everyone is committed for the long-term and removes the risk of dead-weight shareholders.

Prengell says the best way to incentivise contractors and employees is with an option plan. “Always give equity as options rather than shares. Put an agreement in place upfront so that options can be bought back if the contractor or employee ceases to contribute to the company.”

Have the the future in mind

Richard suggests early-stage entrepreneurs take time to consider the implications of their shareholder’s agreement. “Too many founders use an off-the-shelf shareholders agreement and company constitution and don’t look at them until there’s a problem. One of the most important things to know about a shareholder’s agreement is that it can’t be changed without everyone’s agreement.”

Entrepreneurs need to turn their mind to the future of their businesses, designing agreements that will survive several capital rounds and an exit without modification. For example, don’t name board directors. A future large investor is likely to want a board seat, and if this means amending the shareholder’s agreement then 100 per cent of shareholders need to agree. This gives small shareholders a huge amount of power and is often where businesses get stuck.

Encourage investors to form a trust

Prengell advises entrepreneurs to have small investors participate in a common trust rather than as individuals. “It’s simple to set up a trust so related investors can register on the cap table as one unit. Keeping your shareholder numbers below 50 helps contain your financial reporting obligations.”
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How you apportion equity in the first year of your start-up can come back to bite you later. Marcel Aucar

As a start-up entrepreneur I’ve made lots of mistakes. But one mistake irks me the most – because it can’t be rectified. I fell into it at the beginning when, surrounded by a group of friends at a cafe, I formed my first company, Posse. Five years ago I didn’t know anything about building a technology business. I wasn’t confident the idea would work and, in the interest of spreading the risk, I asked a few friends for help. I wrote a plan and called a breakfast meeting at a local cafe. Over eggs and coffee, I scribbled on the back of a napkin who’d be responsible for what and what percentage we’d each own of the company.

Six months later, my friends had disappeared. Our idea hadn’t exploded as we hoped. They weren’t prepared for years of low-paid hard work. One decided to travel, another became a parent and needed a stable job. But five years on, they still hold significant shareholdings in the business and we’re no longer friends.

This is a common mistake. I often meet enthusiastic new entrepreneurs on the cusp of launching their company. When I ask about their ownership structure they say something like: “I own 50 per cent and the other 50 per cent is split between my friend who’s building the technology, a woman who’s doing the graphic design and a guy who’s going to run operations and raise the money.” Six months later we’ll meet again and at least one person has almost always left the team. The remaining members work hard to launch the business and waste energy and time fighting to get the quitter off the cap table. This destroys friendships and creates animosity that will haunt the life of the company.

Founder vesting

Rick Baker of Blackbird Ventures says his firm will not invest in a company where the entrepreneurs have upfront ownership. Instead, they insist on “founder vesting” – founders must earn their shares over time. “Most start-up teams will not survive the first year intact,” says Baker. “As investors, we’re backing the founders to run the business. If we invest $1 million or $2 million and someone leaves after six months but keeps all the equity, then that’s a bad situation for us and for the rest of the team. We need to make sure everyone is committed.”

A founder exiting early creates problems for the life of the company. “It’s a huge distraction early on and even worse when you get 10 years in and the company is worth a lot of money. The last thing you want is a founder who left at the start still owning 20 per cent of the company – that’s just crazy.” Baker says it can be hard to convince founders they need to plan for someone leaving. “Everyone thinks that this isn’t going to happen, but the numbers tell a different story. Even the best entrepreneurs get stuck with problematic exes – just look at Facebook.”

The standard requirement for Silicon Valley and top-tier local VCs (including Blackbird) is for founder shares to vest over four years with a one-year cliff. Team members are allocated a proportion upfront but only gain ownership of their shareholding if they remain with the company. A founder who leaves in the first 12 months gets nothing; they earn 25 per cent at the one-year mark and the rest monthly for the remaining three years. If the CTO in my earlier example was allocated 20 per cent, but left after two years, then she would leave with half her allocation. The team could part ways amicably and without lawyers.

Value people

I wish I’d put this structure in place when I started my company. At the time, I was so infatuated with the glorious future of our idea that I couldn’t imagine anyone giving up. No one wants to think about a prenuptial when they’ve just fallen in love. I also didn’t want to haggle about shareholding because it seemed silly. The company hadn’t launched so it was not worth anything. Why argue over 30 per cent of nothing? But a company does have value at the start. It’s worth the years of energy and intellect the founding team is prepared to invest. When I think of the five years of work and perseverance I’ve committed to our business, it’s clear this level of commitment was an asset at the beginning.

Many people have been involved in making our company a success, and some provided far more than their shareholding reflects. As a founder, it’s important to value people who contribute generously. There’s nothing more frustrating than wanting to reward hard-working superstars with shares but being restricted on account of a few who did very little but happened to be around at the right time. Next time I start-up, I’ll ensure everyone (including me) earns shares over time. This is a fair structure which rewards those who build the business.

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As Hey You grew, Rebekah Campbell realised her technique for managing change also needed to adapt.

Agile is the new black. Every business leader knows their company needs to innovate at speed to stay ahead; start-ups like Hey You move fast. We raise enough capital to give us a limited amount of time to win an opportunity. As an entrepreneur, I've never struggled to adapt quickly. We are aggressive and change course frequently to respond to user feedback and analytics, better ideas and competitive threats.

Early on, this was easy. But, as our business grew, I realised that my technique for managing change also needed to adapt. One or two engineers can be experimental, trialling ideas and working through the night to test what works. But a team needs structure. By mid last year, we had 30 staff. Hey You had an established profile; tens of thousands of customers used us at cafes every day. We hired smart people across a range of roles: marketing, sales, design and engineering.

Everyone had an opinion about what to do next. Team members would march in, excited about a new idea or new partner that could drive us more customers. We often wanted to get to work straight away. But, as the organisation grew, our nimble approach constrained us. What I had thought was agile was, in reality, chaos. We released features early, moving on to other ideas without testing and improving what we’d already built. Some projects were never finished; overall productivity dropped and team members became frustrated at the quality of our work.

I asked other business leaders for advice; everyone had encountered the same challenge. Managing teams that innovate nimbly is difficult. I enlisted the help of an agile coaching group called Pragmateam and learned that an agile team needs rigorous structure to be effective. We involved the whole company and, in three months, established a process that enabled us to make good decisions and build quality product and campaigns at speed.

Here are the most important principles we put in place:

1. A healthy heartbeat

We began to run the company on six-weekly cycles we called increments. We set two to four goals at the start of each increment and workshopped what each team could commit to in order to support the objectives. We then divided the increment into three two-weekly sprints. Every day we held a full-team stand-up where team members reported on their progress towards the goal of the sprint. Each person would rank from 1 – 10 their confidence on reaching the increment goals. At the end of each fortnightly sprint, everyone presented their achievements and committed to what they planned to accomplish in the following two weeks.

New ideas and opportunities still poured in at mid-increment. At first, I tried to squeeze in a couple of extra projects but found this derailed the whole process. “We couldn’t finish X like we said because of these extra tasks.” I developed the discipline of putting new ideas to one side until the end of the increment.

2. Visualisation of progress

We created a story wall on one side of our office, posting the increment goals for everyone to see, and then used tape to create project streams. So, one increment goal was: launch Hey You gift vouchers for Christmas.

Each team member created coloured cards for the different tasks they had to complete to meet the goal. They owned it and put their photograph to their cards. Design and development would build different parts of the product, sales and marketing would put in place a process to launch to customers. Each day the team member responsible moved their card across the wall from ‘To do’ to ‘Doing’ to ‘Testing’ to ‘Complete’. The wall gave us an end-to-end company view on every project, and it was fun to watch cards migrate from one side to the other.

3. Step back to the balcony

Our agile coach suggested our leadership team take time off the dance-floor to stand on the balcony. We needed to get into a habit of observing and planning. Prior to each increment, we took one full day to reflect on our progress, digest data and user feedback, review our strategy and plan the next six weeks. We set goals that were two to four steps ahead of the team workshop. At first, I worried that a shift from no structure to a rigorous process might deflate morale, but the opposite occurred. Team members chose their own tasks, made public commitments, communicated their progress daily and presented back to the team each fortnight.

We operated as one team rather than a collection of departments. Progress was clear and we started gaining momentum. I knew we’d succeeded when I came back to the office after dinner to find our whole team eating pizza at 9pm, working to finish the sprint. Many businesses strive for a start-up culture, misinterpreting this as scrappy and unstructured. I’ve learned that an agile team works best with a rhythmic process of planning, implementation and feedback. 

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I don’t really enjoy working with lawyers, yet every time I start a new relationship with one I’m filled with hope. They seem impressive in their fancy suits and expensive offices. They woo me with flattery and nice cups of tea and biscuits. I find myself thinking: These guys are cool. I’m going to work with them forever.

I brief them on what we’re looking to achieve. We meet another couple of times, we agree to move forward and then I ask for the cost estimate. But in seemingly no time at all, it turns out I’ve run up a bill I wasn’t expecting and can’t afford to pay.

When I’m looking for a lawyer, it’s usually because there’s a job I need to get done. By the time I’ve had a couple of getting-to-know-you meetings and I’m ready to engage the lawyer’s services, a few weeks have passed. The not-so-urgent job has become urgent and so the lawyer gets started.

I’ve learned to ask for a quote and a cost agreement, but in an effort to move quickly the lawyers often move ahead before I realize it. For some reason they’re much quicker at getting started with work than they are at costing out the work I need done. And before I have a chance to mention that my company is a poor start-up, I’ve been sent a bill for $20,000.

But I’m learning. I think that the trick is to be upfront about our company’s financial position: We’re a start-up! We can’t afford to pay big, unexpected bills. We must agree in writing on a maximum quote for any piece of work; any addition to the quote must be approved by me, also in writing. Lawyers who start work before a quote is agreed upon do so at their own risk.

I tried this approach recently. We agreed in writing to a maximum charge, and we agreed that any additions to the bill must be approved in advance. When the invoice arrived, for far more than the quote, I had an email trail. The lawyers grumbled about the amount of extra time they had spent, but there was no real argument. They reissued the invoice for the original quote.

Sometimes we start-ups need to use expensive lawyers with good reputations. If we’re negotiating with large investors or corporations, they expect to deal with firms they know. These big firms want to work with us — not because we pay big fees but because there’s a chance we’ll be able to do so in the future. If you find yourself in this position, where you need to engage one of these firms, here are some of the things I’ve learned to be especially clear about. Specifically, I’m not paying for:

1. Sales meetings

Introductory meetings where the lawyers are selling their services should not be charged. And we need to know precisely when we leave the courtship stage.

2. Reading irrelevant documents

Often a new lawyer will ask for all company documents to be sent through — even if they’re not at all relevant to the job at hand. Recently, I was asked to send through a bunch of documents ahead of an introductory meeting so the lawyer could scope and cost out our job. I questioned why the documents were required and was told they were needed as background. When I received a bill for $3,000 for “reading” the documents, I disputed it — and won.

3. Briefing internal colleagues

Once, I was working with a partner at a top firm in the city. Attempting to keep costs down, I was careful to keep my meetings with the partner short. This partner was the only lawyer I dealt with at the firm, but when I received the bill, I’d been charged for tens of hours of work by someone else I’d never met. I was charged for one hour of the partner’s time for each meeting and then another hour for the partner to brief a colleague and yet another hour for the equally expensive colleague to receive the briefing. I disputed this on the grounds that if someone else was going to do the work, I shouldn’t have to pay for this new person to be briefed internally. I later heard that other chief executives negotiate a no-charge-for-internal-briefing clause, and I now specify upfront that I won’t be paying for this.

4. Making things unnecessarily complicated

Sometimes legal deals and documents can be complicated and need a lot of tweaking, negotiating and explaining. But often they’re quite simple. Recently we undertook a friendly transaction with another business. Our lawyer drew up the contract and we had to show it to the other party’s lawyer for sign-off. It was a friendly, straightforward deal, and everyone involved just wanted the other lawyer to say it was O.K. or flag any issues. Instead, the lawyer took two weeks and sent back a document that was almost completely reworded but said exactly the same thing. Of course, we also got a hefty legal bill.

We then had to show the changes to the original lawyer, who charged again to review it and changed some of the wording back because he thought his version was clearer. Both agreed the changes were substantially meaningless but both seemed to think they had to show they were doing a good job by suggesting improvements. All we wanted was to move quickly at low cost, which was the opposite of what we got.

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A lot of people want to tell me how to run Posse.

At the moment we’re deciding whether to raise a large capital round and go for growth or keep things tight and focused. Both approaches have merit, and I respect all who have offered their guidance. But people are passionate about their opinions, and that can prove confusing. When I started my business four years ago, I was hungry for advice. I’d never worked in technology and had no experience raising capital or building a product. I cast my net as far as I could and sought help from people who seemed to know what they were doing.

Finding support was easy. Everyone I approached liked my idea; many wanted to be involved. I created an advisory board and handed out shares as if they were candy. I surrounded myself with impressive names, and they all had friends they wanted me to meet. Before I knew it, I had 50 shareholders, and we were all on a sugar high. Everyone had ideas and opinions, and they all wanted to meet with me. Many gave me books to read and research to do. I sipped coffee after coffee and read deep into the night. I wanted to appear grateful for the support, so I reported back on how I’d benefited from the advice and emailed notes on what I’d learned from each book.

All of the advice appeared valid, but much was contradictory. I didn’t want to give offense by ignoring well-intentioned suggestions, and I burned up time holding meetings and keeping up with my reading list. I couldn’t make decisions and had no time to focus on getting work done. But I was confident that my roster of advisers would pay off by impressing potential investors when I went to raise my first round of capital. Surely they would boost my credibility.

Not exactly. During pitches, every time the adviser section of my deck came up, I got the same response: “I’m impressed you got X and Y involved. Have they invested?” Well, no, they had not, which led to a follow-up question: “If experts in the field hadn’t committed to investing despite knowing all of the company’s details, why should we?” Once I realized that these big name advisers who hadn’t invested were having a negative impact on my ability to raise capital, I removed all references to noninvestors from my presentation.

Now I’m four years in, and I still crave advice. I think being a sole founder increases my need for reassurance that I’m on the right track. I always find that having a wide range of discussions, as we often do during fund-raising, helps me refine my strategy. But I’ve also found that too much advice can be a distraction and that advisers who want equity but aren’t willing to back the company are not always the best people to have involved. Now the company is moving on to the next phase of growth. We’ve been a start-up valued at less than $10 million with good prospects but with a small team and with very little revenue. As we start to become a serious business with significant revenue, I’m beginning to move in a different world, one where I need new advice.

I’m also at the next phase in my own growth. I used to see myself as inexperienced and in need of help. Now I make my own judgments rather than deferring to people I see as experts. I still ask people I respect for their opinions and ideas, but I’ve developed a strong sense of whom to trust. I’ve learned a big difference exists between people who enjoy giving advice and those who really care about me and the business. There’s also a big difference between people who think they know how to build a company like ours and those who have actually done it.

I can think of four people who have helped me at Posse and without whom we would have failed. But the new phase we are entering requires a new group of advisers. Here is some of what I’m looking for:

1. Previous success in similar fields

Some of the people I enlisted to my early advisory board sounded impressive. They’d held high-level positions at big corporate companies. When we suffered some early start-up bumps, though, they were unprepared. Their knowledge of how a start-up should grow was based on watching “The Social Network.” When we didn’t hit it big straight out the gate, they became concerned. I learned to look for people who had built a similar company from the ground up.

2. Focus on the granular

Many people who want to give me advice start with a discussion about the potential size of the exit and how quickly we’ll be able to get there. This always creates distractions such as attending to the setting up of complicated corporate structures to minimize future tax or setting up big sales deals ahead of building a product. I’ve found that the best advisers are the ones who drill me on what we have to achieve in the next three months. They’re interested in the granular metrics of the business, how we can improve them and how we can create replicable processes.

Good start-ups are rarely short of willing advisers. Maybe these people are looking for involvement in something that looks like fun; maybe they seek a slice of a big exit. But I’ve developed a keen radar for time wasters. I spend as much time as possible getting to know someone before inviting them to become involved. I do thorough reference checks and never give away shares in the company without a vesting period.

When I do find someone who’s right, I recognize that the relationship has value. Such people are usually in high demand; they’re giving up other opportunities to take a risk and help me. Time is their most valuable asset, so I make sure I’m prepared for meetings and I check in regularly to make sure that they’re happy with our progress and that they enjoy being involved.

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In a start-up, there’s always too much to do and not enough time or money to do it. There are never enough people to fix what’s broken and never enough resources to develop the next strategic phase. For the first 12 months of Posse, I felt as if I was swimming as hard as I could, trying to avoid drowning. But I knew that if we were going to succeed I had to develop a rhythm to our development.

Then I read an article in the Harvard Business Review about the “closed management loop.” Briefly, here’s the loop: Strategize, develop targets, plan operations, carry out, monitor, learn, test and start all over again. The article suggests that companies go through the process, which you can find in any systems development textbook (although the texts disagree on details). I’m sure the one-year cycle works for big companies with resources, but I wondered if it could be modified for cash-starved start-ups so they can learn faster.

We needed to run and test our strategy at regular intervals. We all work around the clock, and with so many competing priorities, I had to bring order to the chaos to maintain focus and measure our progress. I introduced the concept of closed-loop management systems at our team off site last year, and since then we’ve spun through a strategy iteration cycle every four months.

We start the cycle with an off-site meeting of the full team. We all go to a beach house for a few days to discuss what we’ve learned from the last few months, what concerns we have and what ideas we can bring to improving our strategy. We look at what our competitors are doing, reviewing the ideas they have that work and the features that distinguish our product from theirs. Within each cycle, we have four monthly development and marketing “sprints” — a defined list of work for the month that we commit to completing. If we all reach our goals, we go out to lunch to celebrate at the end of the month. No one wants to let down the team.

Now, as I write it down, the system sounds more formal than it feels. The benefits are that we all agree on a clear path from strategy through plan to execution, and we can focus on this plan for a set period, knowing that it may change in the next cycle. We also recognize that success will ultimately come from advancing through the process, not necessarily by having a perfect strategy every time. The goal is to sustain enthusiasm when people are working hard, often late at night and on weekends, to release a product they will probably have to redo repeatedly until it’s right.

Followers of Lean Startup methodology will recognize this principle as the “feedback loop.” It makes sense, but is very hard to execute. Those who have been reading my posts will know that I’m no expert, and I’m still learning as I go, but here are a few things I’ve figured out about making the feedback loop spin effectively.

1. Get the team to buy into the process

I take our team away for a few days every four months in between cycles. This creates a clear end to one phase and starts the next one. It gives everyone a chance to reflect on progress, feel good about our achievements, review our metrics, dream up ideas, ramp up for the next cycle and bond as a team. Two weeks ago, I took our team of nine to the country for three days, and the whole exercise cost just over $2,000. We rented a house and we cooked and shopped together for groceries and drinks. We played board games until late at night, rode horses on the last day and returned bubbling with ideas.

2. Listen to everyone and take time to think

As a founder, I’m naturally optimistic and believe we’re building a successful company. I’ve learned to balance this optimism by testing our ideas with users — not just the big ones but every feature. For a technology company like Posse, this means making mock-ups of designs through which people can click. How do they see a new feature working, and what would they use it for? I also have a number of advisers, and I discuss all of our plans with them — looking especially for pessimists who can pick holes in my strategy. The process can be painful, and at first, I felt it was unnecessary, because I was so sure of being on the right track. Now I always discover insights that lead to better approaches.

After I’ve listened to as many people as possible, I sneak away and spend time thinking by myself. This may entail an overseas trip by myself, or a series of walks. It feels as though everyone’s ideas float around in my head for a while, and the change of scenery helps catalyze a logical path. Through this process, I build a strategy. Then I take it back to the team and test the ideas. If the strategy is good, everyone gets excited; if it’s bad, everyone argues, and I know it needs work.

3. Face problems head on

One of my mentors in the music business gave me a great piece of advice: “If you think there’s a problem, there’s a problem.” As an entrepreneur, you live and breathe the company and can sense when something isn’t working. When we first introduced our retail application, we were successful at selling it to shops, but I sensed it wouldn’t resonate with shoppers. Knowing we needed both shops and shoppers on the platform for Posse to be successful, we ran a few tests that indicated I was right. We restarted the development process, spent three months redesigning the strategy and introduced our new product. As a result, we succeeded in showing some traction before the money ran out. Many start-ups that I’ve seen fail knew of the fatal flaw that killed them long before they died.

4. Move fast

With limited time and resources, we have only a certain number of spins to fix the product. We’re not quite there ourselves, although our user engagement metrics suggest that we’re getting closer. Our chances of success rise as we accelerate the execution and testing of a new product.

5. Be disciplined

It’s natural to react to every small problem, fix every bug and make countless incremental improvements. That’s what we did last year, and weeks passed without any major advances. As a team, we’ve learned to focus on fixing the big things rather than making sure everything is perfect.

We’re at the start of another four-month loop now. Our strategy has fermented for the last month and was uncorked at our latest off site. This week, we’ll break the work down into four monthly sprints. Our two main objectives are to build our user base and to get our shop owners more engaged. In four months, we will assess what worked and what didn’t and set our new objectives — and then we will start all over again.

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In my first post this year, “The Start-Up Vortex of Doom,” I wrote about how I scrounged for cash in 2013, trying to build a company and keep the team motivated. We often came perilously close to running out of money. At one point, I lent the company, Posse, money from my personal savings to make payroll. Other times, I raised $50,000 or $100,000 — enough to stay alive for a couple of months but not enough to plan for the future. Those were not easy times.

At my lowest point, one of our directors, Bill Tai, wrote a long email telling me his own vortex of doom story. He founded a company called iAsiaWorks and raised one of the largest rounds of investment financing that year — and then the Asian economic crisis hit. Asian currencies fell as much as 80 percent against the dollar, wiping out much of the capital he had just raised. Revenue collapsed, and he ended up laying off most of his staff and shutting several offices.

Many people would have given up at this point. But after 18 months, with $2 million left in the bank and a model that wasn’t working, Mr. Tai recruited a new management team and bid $42 million to acquire an Internet business in Hong Kong from AT&T. He won and raised $85 million to finance the purchase and build data centers in Asia. The company continued to grow and was eventually listed on Nasdaq. He signed off his email to me by saying, “Think BIG and drive it hard.”

I was baffled: Here I was, running a company that was surviving hand-to-mouth, struggling to raise small amounts each month just to stay alive. Raising $85 million to buy out another business and get listed on a stock exchange seemed like fantasy, not at all relevant to my situation. But as I thought more deeply, I decided Mr. Tai was right: I would never escape my vortex by focusing on day-to-day issues. I had to think bigger. I was also tired of scrounging for money, supporting a business that was growing so slowly. For the sake of my own career, it was time to make a bigger play.

Within a month, I figured out what I needed. Posse is a recommendation app that helps people find commercial places near them that they might like to visit. We do it well, and we’ve built one of the largest networks of shop owners and shoppers. But in its current form, Posse would always be a “nice to have” app rather than a vital utility that people would need every day. I assessed the market and looked at what other companies were offering. What if we started acquiring or merging with businesses that needed access to a network like ours? If we combined our scale with other services, what could we achieve? The answer was obvious: We could become the Amazon of offline shopping.

This time, when I began our investment road show, I felt more confident. I was pitching a transformative business with a path to success. Still, breaking out of my old habits remained a challenge. One of our investment bankers helped by introducing us to several clients. After one of the pitches, the banker pulled me aside and said, “You have to focus on selling the dream. These guys don’t care if you can turn their $100,000 into $1 million — they spend that on their Christmas party.” Even though I thought I was creating a big vision, I was directing my presentation toward conservative assumptions, showing how the company would survive in a worst-case scenario.

After that, I focused every meeting on Posse’s enormous potential. At first, I felt a combination of nerves and excitement. I do believe my message, and with every presentation, my passion for ensuring that every investor engaged with it increased. By the end of my road show of meetings, I was enjoying a 100 percent success rate.

If you’re reading this, thinking that it doesn’t apply to you and your business, I would urge you to set aside your assumptions for a moment. It’s not easy to do — the daily grind of business commands the attention of any entrepreneur. Perhaps, like me, you already believe you’re chasing a big opportunity. I now realize that I placed a lid on what I believed was possible for our business. By acknowledging the lid and stepping beyond, I discovered a bigger opportunity, one with the potential to change my life and that of our company.

I’m happy to report that last week we closed our round successfully. I’ve written about my adjustment of pitching techniques and body language when selling Posse to these new investors. This did raise my confidence, but another factor was a shift in my own perspective. I was thinking and planning on a larger scale than I had previously.

In the past, I had raised most of our money from angel investors, and most of that came from speaking at pitch competitions. This time, I approached professional investors and brokerage firms. We hope to take the company public one day, and I’d like to involve these people now so they will help us when we get to that stage.

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I believe I’m a good salesperson. I’m good at getting meetings with the right people and getting them excited, but I suffer from recurring attacks of what I call First Meeting Syndrome. My first meeting is red hot, but I struggle to get a follow-up; time passes and the deal goes cold. I’m a great door-opener, but I’m not so good at closing the deal.

Earlier this year, I pitched a partnership for Posse to the chief operating officer of a major media company. Once again, our initial meeting was excellent. I managed to score a follow-up with a few of the executive’s colleagues; again, my presentation seemed to go well, and the  group seemed receptive to my ideas. But as weeks slipped by and email communication slowed, I started to worry. Had I blown another opportunity by not being able to seal the deal? Over the past year, I’ve wondered: What am I doing wrong? How come I’m so good at initial meetings but so lousy at following through? I asked mentors for advice, and I tracked folks who are killer salespeople in order to learn what their magic was at meetings.

And I discovered that I was making some fundamental mistakes. It’s always tough for a small company to close a deal with a big company. For one thing, few people have even heard of a start-up like mine, so there are no kudos awaiting the corporate executive who strikes a deal with me. Instead, there’s a high level of risk, working with a product of unknown quality. Because that deal I mentioned was a potential game changer for Posse, one I needed to make happen, I decided to try a few of the techniques I learned from my mentors. And I’m proud to report that last week we closed a partnership that will give Posse lots of exposure in the coming months.

Here are a few of the things I learned:

1. Get the other company to do the talking

I used to spend a lot of time preparing for meetings. I’d research the company, come up with a range of suggestions and try to impress them with my presentation. I’d talk for 80 percent of the meeting. One mentor suggested that I make my first meeting all about them. Rather than arriving with a fully developed proposal, spend most of the time asking about their strategy. Then describe what Posse does and try to generate partnership ideas together.

When I managed to get back in to see the media company, I asked about its objectives. To my surprise, one of the lead executives said that her performance was measured by the amount of traffic she could drive to her company’s website. It became obvious that search engine optimization was crucial.

After I mentioned that Posse collected many reviews that were relevant to pages on the media company’s platform, this executive suggested that if we fed the reviews relevant to their store pages through an A.P.I., that would improve their ranking in Google search and drive more traffic to their site. Now she was interested. This was not an idea I had considered when I delivered my first presentation to the company, but it was exactly what I needed to get an important person on board with the proposal.

2. It’s all about the person

I used to get excited about the prospect of doing a deal with a big brand. When I planned my presentation, I thought it through as though I were pitching to Visa, Coke or the like, and structured it according to my expectations of what Coke wanted to achieve. But in reality, there is no such thing as pitching to a company; I can only pitch to one or two people who happen to work for that company. I have to sell to them.

Most people who work for big corporations have two concerns in these situations: How do I make myself look good? And how do I avoid making myself look bad? They will always be wary of doing a deal with a start-up if they’re not sure it can deliver. I’ve learned to draw attention to our high-profile investors in order to borrow their halo of credibility, and I stress that I will personally lead the project to ensure it succeeds. I try to show how working with us will make the big brand seem innovative, attracting positive media coverage — and make the employees look good in the process.

3. Deal with the most senior person

Senior executives are generally more prepared to take a risk while their juniors tend to worry about making mistakes. I’ve wasted a lot of time presenting to juniors who don’t have the clout or the nerve to make something happen. In my negotiations with the media company, the deal started to falter when it was passed down to middle management. To get back on track, I had to get back to the chief operating officer and get him excited again.

4. Leave a written presentation

I’ve always presented using PowerPoint on a laptop or iPad. But the advisory group that helped run our recent round of fund-raising meetings insisted that I print and bind a copy of my presentation to leave with clients. At first, I thought this was a waste of paper, but I was surprised to discover that it worked. It is easier to visualize a product when there’s a tangible booklet to flip though. I also learned that after the meetings people would pass the presentation around to colleagues. And many of the people I meet with are in their 50s or older and may be more comfortable with paper presentations. This may change with time, but from now on, I plan to print my material and leave it behind.

5. Create time pressure

Daily deal sites like Groupon and Living Social were successful initially because of the scarcity principle, the concept that consumers want now what they fear may not be available tomorrow. The same is true if you are trying to sell some kind of deal or partnership. People are unlikely to say yes today if they think can say yes next week. As a start-up founder, I have found it hard to create a sense of scarcity. Everyone knows that my company is small and needs a partner; the executives at the big companies don’t need me. They are always in control.

But I’ve learned that without a sense of urgency I’ll never close a negotiation, so I have to create it. In the case of my recent media relationship, I had to make them want the deal, and I had to give them a deadline to make a decision. I had to say that, if the deadline passed, we would have to reallocate our limited resources to another opportunity, which was quite true.

6. Be persistent

I never used to be sure how hard to push people when following up. If I emailed a couple of times and they didn’t respond, I figured they were not interested. I didn’t want to be annoying. Then, a couple of months ago, a sales person approached me offering to sell an email marketing system for Posse. I met him over coffee and said I’d think about it. He called me the next morning and afternoon and then constantly, until I gave in. As soon as I said yes, he told me he’d be at our office that afternoon to present a welcome gift and to collect the paperwork. Of course, I wanted the gift, which turned out to be a $10 cake, and he got his paperwork signed.

This made me think: Why can’t I be more like that? After a meeting, I used to send a follow-up email, but many of the people I meet with are too busy to respond to nonurgent emails from start-ups; they hit delete and consign my missive to the bit bucket. Now, I go straight to the phone. I feel uncomfortable making the call, but when I reach people, they’re always pleasant. As the founder of a tiny start-up, I learned that I needed all of these tricks to close my media partnership deal. I worked on the most senior person in the organization, asked executives about their strategy, let them come up with the ideas, showed how the project would make them look innovative and reduced the level of risk by guaranteeing that I would make sure it succeeded.

I’m hoping that I have finally shaken First Meeting Syndrome for good.

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Before starting my technology company, Posse, I built a music management company in Australia. With each new artist, we would start from scratch with no profile, no fan base and no money to spend on marketing. I’d work out how to develop a brand and how to reach the right community of early adopters. Most bands give up before they reach 10,000 fans. After a while, I learned that if I developed a fan base of 10,000 and the music appealed to a wide market, the next several hundred thousand fans were relatively easy to come by. During eight years in music, I helped develop the careers of 11 artists. All were unsigned when I took them on, nine reached gold sales and four of them reached platinum.

Here are a few tricks I learned building fan bases for bands that I also used to build a community for Posse:

1. Don’t underestimate the value of passionate fans

The best way to experience a new band is in a small venue crammed with screaming fans. These taste makers become the first to discover a new talent, and they will later say, “I saw them at X with 200 other people, and now they’re playing stadiums.” But how do you find this first group of fans?

In the music business, I won over these critical people by engaging them one-on-one, a slow process that required lots of hard work. In 2009, my management company, Scorpio, signed a young musician called Matt Corby. No record company was interested in signing him, so we built his fan base without any budget. Matt had friends who were fans, and they had their own friends. We started putting on free concerts in people’s backyards, and soon we had requests for Matt to play in gardens all over the country. Our hosts started covering his travel expenses, and at each one, we sold CDs and collected email addresses.

After plodding around every weekend for two years, we released his music on iTunes, and he started with a small but committed fan base. These fans had seen Matt play in a backyard, and they felt they had discovered him, that they were responsible for his success — which they were, for those early fans became Matt’s evangelists. His iTunes single “Brother” sold more than 200,000 copies and won him a recording contract with Atlantic Records. In the same way, tech communities can often take years to develop. When Twitter was introduced in 2006, it attracted a small but passionate user base before really taking off in 2009. Pinterest began in 2009, inviting a few designers to use the platform, and each receiving invitations to give to friends. Ben Silbermann, Pinterest’s co-founder, has spoken of his difficulties raising money from venture capitalists because the site’s early growth curve wasn’t steep enough, which seems laughable today. But it was not until 2012 that Pinterest really took off.

Posse’s strategy for building that initial base involves a student adviser program. We advertise on free student job boards all over the world, seeking advisers to intern from home. They commit to completing two activities a week during a four-week program, and in exchange we provide them with a letter for their résumé. The activities include running user-experience tests, writing up product feedback and suggestions, recruiting friends to join Posse, promoting Posse to retailers in their area with stickers for the store windows, and writing blog posts about the best places in their town. We run the program every four weeks and aim to sign up 150 advisers.

We recently introduced Posse in Singapore and ran the adviser program for three months before promoting the platform to the public. So, when people in Singapore joined the app there was already an active user base and lots of content on the platform. The program has proved an effective, low-cost way to build communities of engaged evangelists. The advisers report that they learn a lot and use the reference letter to gain entry to university courses. Many wish to stay involved with us as brand ambassadors.

2. Leverage other people’s fan bases

In music, the easiest way to build a fan base is by landing a support slot with a major artist. When the band performs as an opening act, thousands of music lovers get to see them.

At Posse, we feature high-profile people on our blog in the hope that we will attract their followers. We publish two or three blog posts every day from celebrities, highlighting their lists of favorite spots to eat, drink and shop in their hometowns. For example, here’s the list of places to visit in Los Angeles posted by Hillary Kerr, co-founder of WhoWhatWear. It’s easy to ask a chef, fashion designer, musician, actor or politician for their favorite places; people love to share their recommendations.

Our community manager Chris writes up the blogs and encourages our featured celebrities to share them on Facebook and Twitter, which they usually do, often to hundreds of thousands of followers. He also reaches out to each of the featured stores, and they all post and tweet the link. Everyone is looking for content to post on social media, and the blog posts generate a huge amount of traffic for Posse.

3. Make sure the product has natural momentum

One of my early clients in music was a band called The Hampdens. The female lead singer had a powerful, ethereal voice, and I fell in love with the music. I paid for the band to record a CD that we released independently, and I used my contacts to get the group onto tours opening for major artists. But the CD didn’t sell. I was baffled. I believed in the band blindly and spent two years and more than $100,000 promoting it. The group was never able to attract passionate fans, its audience didn’t grow and the members became disheartened and gave up.

By contrast, I promoted another band called George. Again, we recorded and released an independent CD and hit the road. Every time George played, people bought CDs and T-shirts. Our independent CD sold more than 30,000 copies, and every tour would double the numbers of the previous one. In 2002, we released an album, “Polyserena,” and it was an instant hit.

When I started Posse, I thought our initial version of the product was great — but it didn’t gain momentum. People didn’t share it with friends, and users would drop off right after signing up. I remembered my discovery from music management: If people don’t love the product, and it doesn’t grow organically, no amount of marketing will save it. I have spent two years improving Posse, and it’s now reached a monthly growth rate in new users of 15 percent, without marketing. We’re almost at the point where I’ll be confident enough to start spending marketing money.

There’s a graveyard for businesses that fail to commit the time and effort to build a community of fans. Many spend a fortune on marketing too early – before the product has gained natural momentum and before there are committed customers. No one wants to watch a band in an empty room. Finding the right first 10,000 fans takes careful thought, hard work and patience. There are few examples of bands or companies that just take off without a coherent community strategy.

If you have any strategies to share, we would love to hear them.

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The Posse team during its morning stand-up meeting. Credit Posse.

Twelve months ago, we introduced Posse, a “social search engine” that helps users get recommendations for products, places and services from their friends. I prepared for this by attending every start-up conference I could, by reading books and learning concepts. But nothing prepared me for the challenges I have faced in the past year. Everything about starting this company has been hard: raising the first money; hiring, then unhiring several people and services; building the first product; figuring out that our planned strategy wouldn’t work; running out of money; raising money again. Now, it finally feels as if we have the right model and the right team, and we are not about to run out of cash — not quite, anyway. But there is no letup. I have yet to discover a point at which life becomes easier.

Conference speakers often discuss start-ups as if they were projects created in a university lab. The basic concept of “The Lean Startup,” for example, is that teams design, build and introduce a minimally viable product, one that tests customer interaction. Next come design improvements and a second version, then another test and more design improvements, and so on. This makes a lot of sense but can be difficult and frustrating. The team members want to be proud of the product they release, so they invest too much effort in designing for perfection. But it is impossible to predict how many times we may have to rebuild something, and no one likes developing the same code over and over. Everyone becomes disheartened when improvements don’t work.

My job as a founder has been to manage the storm as best I can, guiding my ship toward shore without running out of oxygen, hitting the rocks or being overwhelmed by a wave. Along the way, there is a constant battle between producing quality work and rushing to test. We know that time is a luxury few start-ups can enjoy. The team could run out of energy, the cash pool could dry up, investors could lose enthusiasm, a bigger fish could swim along and gobble the market. While balancing these issues over the past 12 months has been tough, we have continued to develop our product. We now have more than 40,000 merchants on the platform, with a weekly engagement that is improving all of the time. Posse hasn’t taken off, but we believe it is on the runway.

Here are some things I’ve learned.

1. Work Fast

We have an excellent team of engineers who like to test everything thoroughly — as they should. Yet, in our case, it’s more critical to introduce new features so we can learn and evolve than it is to produce perfect code with no bugs. Although we have no idea how long it will take to get the product right, we have a limited amount of money and time. Speed is imperative.

2. Focus on Things That Move the Needle

Everyone wants to fix the things that annoy them most, but those things may not have the biggest impact on users. With time and resources limited, it’s vital that every team member focus on the things that make the biggest impact. Right now, we have three engineers building the Android app because at present we are iOS only, which limits our growth. Two more engineers are working to open the iOS app so users do not need to log in to use it. This is essential: We know that only one in three people who download our app creates an account.

Five more engineers continue to develop the user-facing website and to upgrade our merchant dashboard so we can start charging stores, which is important so we can stay in business. Right now, I’m working on our next round of fund-raising to ensure we survive. I’m confident everyone is working to capacity and attending to the right things. But it’s a constant struggle because we are always aware of the many things we have not yet gotten to.

3. Look for Breakout Opportunities

The road map of features we would like to add would take our current team more than a year to complete. It’s easy to become bogged down trying to accomplish everything, but I’ve learned that it is essential to keep searching for new ideas. Every three months I take the team away to a beach house, and we try to look at Posse with a fresh perspective. We analyze what has created the breakout success of other products, like Airbnb or Candy Crush. They are very different products from Posse, but the makers of most of these products spend years trying different things until one change sparks rapid growth. We think through our users’ objectives and look for breakout ideas that could catapult Posse into the stratosphere. Each session results in fresh ideas and a rewrite of our road map.

4. Test and Measure Everything

Start-up founders know they should run regular user tests and can obsess about the analytics of their products. Yet, with so many issues to think about, testing can become something that slips. I’ve spoken to other founders, and many admit privately to doing far less measuring than they should.

Building a product without good analytics is like staggering around in the dark. We have made several time-wasting mistakes by building features that early testing would have revealed were never going to work. Now, I try to complete a user test every week, and we have hired a university student for two days each week to attend to the collection and analysis of data from our products. Having someone focused on this means that it will not be bumped in favor of work on more features.

5. Meditate

I find it easy to run on adrenaline, and I enjoy it. When we first introduced our product at the South By Southwest festival last March I was traveling and working, day and night, and I continued that regimen when I came home. During this period I achieved a lot, but after a while I noticed that I was not on my game. Ideas were not flowing the way they normally did. I became frustrated easily, impatient when things did not work the way I had hoped. Not sleeping properly, I was permanently tired.

I learned to meditate several years ago and started practicing again twice a day. I went back to yoga, and at first, all of the problems of our site streamed through my head like a freight train. Remarkably, I required only a few days to return to normal. Everyone has their own methods of relieving stress. Yoga and meditation are mine — but they are always the first things to go when I’m under pressure.

Introducing a tech product like Posse is hard going. When you use an app that works, like Airbnb, it is tempting to imagine that the product came together seamlessly. But when you read the back story, you generally find out that the start-up endured years of sweat and uncertainty before it took off. Right now, we’re in that phase, with a finite amount of time and energy to get it right. It’s scary.

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