martin zeman's blog

I had a great colleague – she is excellent at work but not enjoying it that much, often feeling bored. On the other hand she always lights up when she is talking about her nights out, what and how much she drank, how smashed she got and how awful she felt the following day. It seems to me like all she talks about is drinking .

It seemed ridiculous to me and to tease her I declared a launch of a global campaign called “Drinking is not cool”. Our marketing strategy relies purely on word-of-mouth and although it creates a great buzz – the number of active members remains stable – i.e. one (update: I wrote this article a couple of months ago and now it actually seems like there are some new comers to the club – welcome Rachel, Samson and James).

The original strategy was not to drink any alcohol for a month. But – firstly, it has been scientifically proven that small amount of alcohol is healthy, and secondly I was just about to attend my high school reunion. So I modified the strategy – instead of no alcohol I set a maximum of two drinks a night and to make up for that I changed the one month period to indefinite one.

It’s been over six months now and I must say that I can not speak highly enough of it – I used to have really severe hangovers on the days following my nights out. I used to wake up around noon feeling sick for the rest of the day. That’s gone now and that’s the biggest reward for me. People often muse about the money I must have saved but for me that’s just a small bonus. I hadn’t been spending too much on drinking before anyway, avoiding shots and preferring to get home by tube rather than by taxi.

Warning: Reducing drinking is not for everyone, it can lead to a sharp conflict with the reality with far-reaching consequences. The less you drink, the less fun you seem to have in pubs. Others are discussing things you don’t find interesting and they are laughing at stuff you don’t find funny. Are you wondering how come I haven’t returned to drinking because of this? Well, I can’t go back – my brain is convinced that what happens under the influence of alcohol is not a true reality and however nice it looks, it’s fake – it seems like I live my own personal Matrix from which there is no way back – the red pill has absorbed long ago.

PS: As for the rules I am not too strict about them, sometimes when I have a really good time I even have three beers. A small flexibility makes a big difference when aiming for consistency.

I have been describing to a friend how we distribute equity in elexu and I thought it might be interesting for others as well so I decided to share it here.

what’s the problem?
Imagine you have a great idea for a web startup and you realise you can’t do it on your own. You start looking for a co-worker. You obviously start with a person you need the most – if you are a business/marketing person you search for a developer and vice versa. As you don’t have money to pay them right away you reward them with equity. But how much do you give them?

Let’s say you believe it’s a really great idea and the person’s contribution won’t be worth more than 10% but your first coworker will very likely see it differently – she will see that there are two of you, both spending roughly the same amount of time so from her perspective it should be more like 50-50 or at least 75-25. You agree with that and start working.

It all goes well until you realise you need more human resources. So you find new people and offer them equity but that means that both you and your first colleague have to give up a part of your equity which as you can imagine usually doesn’t go down well. You can easily end up arguing about whether you need new people at all and why you have to give them so much equity. And this gets worse with every new person coming on board as you have more people with a stake in the company whose share you want to dilute.

how we do it in elexu?
We work for sweat equity which means that the salary we would have earned is converted into equity. Each of us has a set salary level. As we don’t pay ourselves any cash at the moment we can afford to set the salary levels relatively generously. Rather than setting the salary based on previous experience of a person we can look at it from the future perspective – either elexu achieved success which in itself justifies the higher salaries (we had to be quite good to suceed) or it didn’t achieve success in which case the higher salaries are irellevant as the equity is worth nothing.

Great feature we use is a deferred payment bonus – in order to make up for the fact that money are not being paid out immediatelly we put a premium of 50% on top the basic salary. The beauty of this is that we can use the same approach for external collaborators (contractors, key advisors, etc.) – if they are willing to postpone their reward until the company can afford it (i.e. after the first investment round) they will get a 50% bonus.

The key ingredient to all of this is the valuation of the company. This is the value stakeholders (founder, employees, investors) believe the company has at a certain point in time. A typical startup doesn’t set their valuation until a meeting with the first investor. That’s too late. It gives too much power to the investor to impose a valuation benefitial for her (as low as possible). What you as a founder should do is set a valuation of your company yourself on the first day you start working on it and then review it with after every major event (e.g. team expansion, demo version created, product launched, first paying customers, etc.)

Here are some ideas how to evaluate an early stage startup:

• Ask yourself: “If an investor would come today and wanted 20% of my business how much would she have to pay me?” Take into account the current stage of the startup.
• Or you could be more scientific about it and calculate it from bottom up. Estimate how much work (in monetary terms) has to be done by your employees before they will stop earning sweat equity and start being paid normal salary (e.g. first investment round). Set a sufficient buffer for unexpected circumstances. Decide what percentage of shares you want to own at the time you will start paying your employees (the rest will be owned by your employees). And now just calculate the valuation as (work to be done + buffer) / % to be owned by employees.

It is important to set the valuation right. You have to be able to justify the valuation in front of your colleagues and investors, if the valuation is too high they won’t work with you. On the other hand if the valuation is too low you might run out of equity for distribution before you reach your goal.

Now, going back to sweat equity – the salary gets converted into the percentage stake in the company by using the valuation of the company at the time the money was earned. I created a simple illustration.

The table shows an employee who worked two days a week (40% of a work week) between July and September, when the company had valuation of $1 million. And jumped on board full time since October when the odds of success increased (which is demonstrated in a higher valuation). Although the employee worked for only two days a week in the first three months she earned a bigger stake (1.2%) than in the second period (0.6%). The monetary value of the sweat equity from the first period copied the increase of the valuation so the $12k worth of sweat equity from the first three months are now worth five times more, i.e. $60k.

what are the benefits?
The key benefit of this method is that founder doesn’t have to give equity away cheaply. By operating with real monetary figures (as opposed to using only percentages) it’s easier for coworkers to see the value of their stake.
This gives the founder higher flexibility to get more people involved which subsequently inreases the likelihood of success of the startup.
There is one more perspective I’d like to mention. This approach sends a strong message to your potential investors. It demonstrates that you really value your equity. In other words, if you’ve just given 30% to a developer for 3 months worth of work, why should an investor pay hundreds of thousands of dollars for 20%?

I really like this approach, it is transparent, easy to understand, it increases the chances of success and reduces chances of internal arguments about shares and allows people to focus on what really matters – getting work done.

what do you think?
Please let me know what you think. Do you see some key aspect I have overlooked? Do you have any ideas how to further improve this? Have you successfully used a different approach? Was the article helpful or at least interesting?

The past is not dead, it is living in us, and will be alive in the future which we are now helping to make. (William Morris)

When I look back at year 2011 there are two things that stand out.

Firstly a decision to leave my employment career and join David at elexu – an ambitious startup that aims to help people achieve their dreams. When I joined elexu I thought we would launch in a couple of months but those were very naive and unrealistic expectations. Although it went slower than I had hoped we have been moving forward. Our main activities involved clarifying elexu’s concept and specifications, networking and strengthening our team.

What I found personally quite distracting was working part time in Cogent Law, even though it was only for two days a week – an undivided focus is extremely important. So I left Cogent Law before Christmas and now I am fully focused on elexu as is the rest of our team. January and February will really show what we are made of – I am very enthusiastic and optimistic about elexu right now.

Secondly the year 2011 was a year of learning for me. Apart of learning a lot about the world of startups, especially from David, I’ve read a fair amount of books. I’ve read mainly business books and books about personal development (I maintain my reading list on Linkedin). The book of the year for me was Awaken the Giant Within by Anthony Robbins.

Probably the most valuable experience for me last year was recruiting an analyst, my replacement, for Cogent Law. The lessons I’ve learned will definitely come handy.

Looking forward to 2012 I have one goal – launch elexu. I expect an eventful year full of new experiences and learning on the go. I will surely meet a lot of new people and probably go through some emotionally challenging times but I am sure it won’t be a boring year – I am looking forward to the adventure.

‘Build it and they will come’ is a dangerous assumption for a startup.

Why Startups fail?
I am reading The Four Steps to the Epiphany by Steven Gary Blank (retired serial entrepreneur teaching enterpreneurship at several major universities). The book starts by describing a scenario of an ambitious startup which raises a lot of money, prepares everything (product, advertising and PR) for a glamorous launch only to find out they are significantly missing their revenue targets. In an attempt to attract new customers the startup starts burning through the cash ever quicker ultimately ending up in a bankruptcy. According to Steven this is a very common scenario.

Steven suggests that startups don’t fail because of bad products but because they don’t allow enough time for learning and discovery about their respective markets and customers. He suggests a typical startup needs two or three attempts to figure out their market to get it right but most of the startups don’t plan for that. Instead believing they will get it right the first time they follow a very risky path of all-or-nothing, scale up their operations prematurely and end up in a disaster because simply ‘Build it and they will come’ is a myth.

Market Type
Steven stresses the big difference between introducing a new product to an existing market (this is what mature companies do) and introducing a new product to a new market or a resegmented market (this is what most of the startups do). In the first case customers and their behaviour are fairly well known and that’s why mature companies often succeed with new introductions. On the other hand in case of resegmented markets (introducing niche or low cost products) and especially in case of new markets the reaction of customers is unknown or at least very uncertain.

The two types of markets respond completely differently to the same impulses. This has very sound practical consequences and requires a special consideration when hiring staff for startups. Steve argues that people always tend to apply successful strategies from their past but should the majority of their experience be from mature companies operating in existing markets, their actions applied in a startup will not yield the expected results, in fact the actions can seriously endanger the new company.

Another great insight that’s vital for startups to understand is the process of technology adoption by a market. Startups need to realise that customers differ based on their product needs and buying habits, they can generally be divided into early adopters (customers eager or willing to try a new technology and products) and late adopters. In the first phase of a startup the available market for a startup consists only of the innovators and early adopters which is circa 16% of the size of the overall envisioned market. This needs to be reflected in the financial forecasts otherwise a startup won’t be able to hit their revenue targets.

Customer Development Plan
The book provides an easy to follow guide on how to avoid the fate of the company from the aformentioned scenario. The approach is quite simple, it says that in addition to Product Development Plan a startup needs to prepare and follow a Customer Development Plan. The goal of Customer Development Plan is to understand in detail customer problems and needs, discover a market for the envisioned product, develop a sales model which can be easily replicated, create and drive end user demand and then transition the organisation from one focused on learning and discovery to one focused on execution.

Although I have only read the first part of the book it has significantly boosted my confidence in success of elexu. I have always been a strong believer in elexu as a product I could see very clearly how it will work and what value it will deliver but I used to feel a bit uneasy as I couldn’t picture clearly the process of customer adoption. I could see elexu before the launch (beta version) and I could see elexu three years after the launch but the period in between was covered in a haze for me – it is not any more – thanks to Steve Blank and The Fours Steps to the Epiphany.

Now it’s time to start working on the Customer Development Plan, I can’t wait.

Working on elexu gives me a great opportunity to discover some great organisations with a similar mission to ours – empowering people. I am often speechless when I see what amazing things are going on that I (and majority of people) don’t know about.

Old Vic New Voices is a programme of a popular London theatre Old Vic (you will surely know Kevin Spacey who is an Artistic Director there).

The mission of New Voices is to support emerging theatre talent and to open theatre to new and diverse audiences. One of their most exciting projects are The 24 Hours Plays. I got a chance to experience it live.

To explain the New Voices 24 Hours Plays in one sentence I would say it’s an X-Factor for young theatre artists. Actors, playwrights, directors and producers go through an auditioning process hoping to get selected among circa 50 artists to take part in the actual 24 hours experience. 24 hours doesn’t mean anything else than to write, cast, rehearse and perform a play within 24 hours (actually there are seven plays as the artists get split into teams of 7-8 and each play is about 10 minutes long). It is impressive that Steve Winter, who is heading the project, personally watches auditions of all the candidates which means some 1500 monologues within two weeks.

The following video shows perfectly the atmosphere of those 24 hours. This one is from 2010 but on the night of the plays we got to see a similar video for the actual year. The video had been shot and edited in the 24 hours prior to that moment which is a great achievement considering there were some shots from the late afternoon rehearsals. I really liked the combination of film followed by a live performance.

24 Hour Plays: Old Vic New Voices 2010 from Old Vic New Voices on Vimeo.

I think the whole concept is just amazing – the time constraint adds nicely to the excitement – if they only had 24 hours anything could happen. Also the fact that audience comprises mainly of friends and family (the theatre was absolutely packed) creates a very special and warm atmosphere.

The best testament of the project’s impact are the achievements of the past participants – many of them has gone on to work in West End shows or in television. One could argue that when they chose the most talented artists there is no wonder they are successful but then look at X-Factor, how many finalists survive a following season? The 24 Hours event is one of many steps on those artists’ journeys but it’s a big one.

Eleven years ago, young and talented team Spectrum Praha got promoted to the top softball competition in Czech Republic. The first few years they were fighting hard against relegation, then came several long years (I think four of them) when they always ended up in the fourth place. For the first time it was a success but with every other fourth place the feeling of disappointment from missing out on a medal grew.

Then there came another leap and a period when Spectrum kept occupying the second place. Once again it was a great success for the first time but gradually it became more and more frustrating. This year the team finally won the desired title after beating its nemesis from Chomutov in just three matches in best-out-of-five-matches finals.

What I found interesting were comments from softball community – people said: “What a surprise” but they meant it sarcastically, they said it was quite clear in advance Spectrum would win. While Spectrum was the strongest team on the paper this year, you could have said that about them for the last couple of years. In my eyes, and I am sure neither in the eyes of the players from Spectrum, it makes the victory any smaller – it is a huge victory and great success. And do you know what was the main cause for the vitory?

Determination and perseverance. The commitment of the players and coaches. To commiting most of their free time to softball year after year. Even after not that successful seasons throwing themselves into yet another season with the same passion and vigour.

Players came and went. There were probably over fifty players in the team over the ten years (I was lucky enough to be one of them) but only three of them made it through the whole ten-year journey. For them the victory surely is the sweetest of all. However, I believe the biggest share of success came from the commitment of the manager of the first team and a manager of the youth team, thanks to which the first team had a steady supply of talented young players. To motivate yourself and everyone around you for another season, especially if the one just gone hadn’t been that successful, is a very difficult task.

So what is my point? Success doesn’t happen over night – it is the determination and perseverance that build success. And that’s true in all areas of our lives not just in sports.

Another great example of this from a recent past is the Occupy Wall Street movement. Determination and perseverance rule the world of succes.

A few weeks back I had another short period of feeling a bit down and stuck. I thought about it and spotted an interesting thing. I noticed that I had been behaving quite seriously lately – at elexu, at Cogent Law, even at home or when outside with friends.

I assume it’s caused by elexu, feeling the pressure and trying to prove to everyone that it is a serious business. But it’s not the seriousness of employees that makes business serious (I wonder how I will translate this into Czech ).

Actually humour and fun were the most powerful tools of the best managers I have had the opportunity to work with and they have been achieving some serious results with those tools.

Following their example, I am going to have fun – entrepreneurship is a game, life is a game – time to play!

Lately I have been re-thinking my personal social media strategy. What the …? You know: blog, Linkedin, Facebook, Twitter, Google+, etc. It’s not that I wouldn’t have anything else to do but it has started to become a bit of a pain. With me recently picking up twitter it got a bit overwhelming and I realised I wasn’t really clear on what I had been trying to achieve with those tools while at the same time realising their importance and usefulness if handled well.

Blog martinzeman.cz

I got a bit confused as to who I write this blog for. Is it my friends and family? Is it potential elexu investors or future elexu users? On a related note – what should be my topics? I have read an advice that in order to have a successful blog you should only have one main topic. I thought about it and realised that having a successful blog is not really my primary aim. What I want is to have a freedom to write about anything I find interesting or important.
And that’s how it’s going to be: this blog will be a reflection of my thoughts through times.
At the same time I want to use this blog to shape my views and opinions through discussions with you – I am really really grateful for all your comments and emails I love to hear your views and stories and find them very interesting. I often learn a lot so please keep talking I am listening.

Linkedin

Linkedin used to be my favourite social network, I found it to be the most useful one. But after I quit full time employment a perceived value of Linkedin has dramatically dropped for me. I still see Linkedin useful just not as much as I used to before. I think it can provide the most value to full time employees and particularly job seekers. Maybe the next time I will use it it will from the side of an employer to find people to join us in elexu, who knows?

Twitter

I am a late follower to the twitter game, until recently I haven’t felt a need to use it. I am still figuring out how to best utilise it but at the moment I am enjoying it as a dynamic RSS feed, discovering interesting articles.
Also it seems to be a simple and unobtrusive way to connect with interesting strangers. Anyway it’s definitely a tool which you can’t understand without actually using it.

Facebook

I haven’t been a regular visitor to Facebook – there has been too much information and it was too time consuming to find pieces I would be really interested in. However FB now offers ways to filter a lot of that noise out so I am planning to give it another shot, tweak my settigs and become a bit more active there.
I have synchronised FB with Tweetdeck which is an excellent tool that enables me monitor both FB and Twitter at the same time without explicitly logging into those sites – love it.

Google+

While I like many Google services particularly Gmail, Maps, Calendar and Picasa, I don’t see Google with their Plus succeeding as a social network. I don’t plan to be too active there.

I have always felt that saying something obvious is a waste of time and that it’s perceived as a stupid show-off.

And? That’s obvious, why are you telling us?

Well I am not so sure it’s true anymore. Check out this awesome video from Derek Sivers.

Obvious to you. Amazing to others. from Derek Sivers on Vimeo.

It happens to me often. I spend a long time thinking about a problem finding out a simple and elegant solution – from the past point of view it would have looked amazing but to my present self it is obvious – just a common sense.
Another great example is when I read books – something that looks like the greatest revelation at the moment of reading it seems obvious a minute later.

The challenge is that we often need to communicate to people who don’t have the knowledge we have, for them some things don’t look obvious so if we want them to understand us we need to state what seems obvious to us. The difficult part is to identify what is obvious to us and not obvious to others – this problem is called Curse of Knowledge (very well described in Made to Stick).

I guess it’s safer to state more rather than less. I need to practice that it’s not intuitive to me.

What do you think? Does it happen to you? Do you feel bored or offended when someone states something obvious? How would you go about distinguishing between what’s obvious to everyone and what’s obvious only to you?

We all want other people see the world as we see it. That’s the root of all arguments. We all want to feel being right.

I have learned that changing someone else’s view is extremely difficult often even impossible. People don’t like to change their opinions – it means admitting they were wrong in the first place. Some people are capable of the change, some people are not whatsoever, but no one really likes it.

The only person whose view you can easily change is you. Trying to change others is often just a wasted effort.

So how do you make people around you see the world as you do? Find people that already see the world the same way as you and spend more time with them. There are plenty of people like that out there – find them and you will feel much better understood and you will be happier.

Plus if you aspire to make the world a better place you are much more likely to get support and encouragement from these people. They understand how what you are doing it’s going to improve the world. It make sense to them because their world and your world are the same.