StartupNorth

  • Q&A with RedFlagDeals

    I had the opportunity to ask Derek and Ryan of Clear Sky Media a few questions about the YPG acquisition.

    When did YPG approach you to buy RedFlagDeals.com/Clear Sky Media?

    Derek: We had spoken with YPG over the years about syndicating/sharing data, but things really started to gain momentum in the fall.  Clear Sky Media had traditionally been very focused on national and online offers, but we all recognized the opportunity with local deals and coupons and helping consumers make better buying decisions more broadly. Things moved very swiftly from there and we completed the deal in early February.  YPG is serious about expanding their online presence and they have a scale that will allow us to broaden our reach nationally and at the same time tackle the local space that would have been impossible for us otherwise.

    What is the plan for RedFlagDeals.com and other properties in the YPG portfolio?

    Ryan: As Derek mentioned, the deal makes a lot of sense for both parties.  Local is an area we had always been interested in, but as successful as we had been, we were nowhere near the scale to properly address it.  YPG has over 1000 sales people and direct relationships with about 385,000 businesses in Canada.  Now that we have the scale and the resources, we’re staying on to see how big we can make this.

    It was only four and a half years ago that it was just Derek and I working in a 200sqft office above an Internet café.  It’s very exciting.

    Derek: Beyond local, we’re also looking at what we can do in the shopping search space with PriceCanada.com and we’ll continue to invest heavily and accelerate the growth of RedFlagDeals.com and Scarlett Lounge – more to come!

    What are you going to do next?

    Derek: In the short term there’s a lot of work to do.  We’re keeping our downtown Toronto office and our entire team, but we’ll be expanding rapidly.  Longer term, I think we have an opportunity here to create something that is much greater than the sum of its parts.  No one has really figured out local search and shopping yet.  It’s a challenge, but it’s one that we’re now in a place to take on directly.

    What is one thing would you tell other startups about the acquisition process?

    Derek: Even though this was, in many ways, a very streamlined acquisition, it was very time consuming and sometimes very frustrating.  There is a lot of back and forth on seemingly minor items, but it’s a necessary part of the process. Having lawyers and accountants that you trust who have worked through it before is huge.

    What is one thing you would do differently?

    Derek: Because of the timeline we were working on, it might not have been possible in our specific case, but before the Letter Of Intent was signed, I would have had a more detailed discussion about what exactly the due diligence required and what we would need to do to close.  In our case, we had a short period for all of this and in hindsight, I would have given ourselves more time.

    Ryan: The timeline also meant that the initial transition has been a bit bumpy.  If we had had more time, I would have liked to have had our accounting, HR, and PR processes in line.  All things considered, it’s gone well, but we could have saved ourselves time and headaches with a better fleshed out transition plan.

    Final thoughts?

    Ryan: We’re really proud to have been involved in the Canadian startup scene over the past 5 years.  It’s not always easy being a Canadian startup; really, it’s a pain in the ass a lot of the time, but you can be successful in Canada.  In the areas where Canada is behind the US, there are opportunities.  Plus, you have one of the most supportive communities I’ve seen anywhere rooting for you.  It’s been awesome.  Thanks everyone!

  • Week in Review

  • RedFlagDeals acquired

    RedFlagDeals.com acquired by YPG

    Congratulations to everyone at ClearSky Media & RedFlagDeals!

    The team at RedFlagDeals announced this morning that they have been acquired by the Yellow Pages Group.

    Just as our community has blossomed, so has Canadian ecommerce. It’s my belief that Canadian retailers are ready to take the next step that bridges online shopping and in-store shopping. We want to be involved in that evolution, but it requires us to take a step forward as well. That’s why I’m happy to announce that RedFlagDeals.com has found a partner that understands what we do, what we want to achieve, and can help us do that. RedFlagDeals.com has been purchased by a company that has been working to connect retailers and consumers for over one hundred years: Yellow Pages Group.

    Like us, Yellow Pages Group is focused on helping Canadians make smarter buying decisions every day. YPG has relationships with over 385,000 businesses in Canada. With their reach and resources we’ll be able to share coupons and deals on a scale that would have been impossible in any other situation. Rather than watching ecommerce develop from the sidelines, we will now be able to actively help it evolve while passing on the values that RedFlagDeals.com has always had: respecting consumers and helping them save money while doing it!

    Derek, Ryan, Kaitlyn and the entire team have been participants and strong supporters of the community in Toronto. They have been participating since the very beginning (yes, Derek & Ryan were attendees at the first DemoCamp). They have built a true online media business in Canada, driving traffic, advertising and engagement among their users. comScore has listed them #4 in reach in 2009 for Canadian startups. They are the real deal.

    My prediction is that 2010 is the year of acquisitions in Canada. We’ll start to see a larger number startups across Canada getting acquired by both Canadian and US companies. I hope 2010 will bring more stories like RedFlagDeals.

  • Week in Review

  • Acceptance is the last thing you really need

    We’ve made progress as a startup community in Canada. I don’t have to tell you that a lot of things have changed in the last few years and there is now a supportive and powerful set of networks across the country that have made building a startup sexy again. David has chronicled some of it recently.

    It’s nice to feel loved.

    We all like to feel that we are in the company of unjudgemental an accepting friends. Those who take us as we come and don’t ask questions.

    As an entrepreneur, that’s the last thing you need.

    To put it simply: nothing is easy about being a startup. If it was easy, then everyone would be doing it, and more people would be successful at it. It’s hard and it’s like that for a reason. People who try to make it look easy don’t get it. Those who make their stories of success sound easy are hiding some part of the truth.

    The next time that your idea or product is celebrated without reproach or question, then you should be suspicious. Those who celebrate you just because you are a startup, or a smart entrepreneur, have an ulterior motive. Something else is going on. Sometimes that is ok, but you can’t live in that world all the time.

    Put yourself in the company of those who will tell you that you are wrong, foolish, and naive. Make sure that you are sent back to the drawing board and told to come back fighting.

    Make sure that you come back better every time.

    Even if your idea is the best one anyone has heard in years, those who really want you to succeed will help you find the holes and to figure out where to go next.

    I’m not advocating a negative view of startups, but I will promise you that criticism and analysis will get your further in this world than pandering.

    So, the next time you are at a startup event, or having coffee with someone you’ve just met, don’t be afraid to say what needs to be said or ask the questions that need to be asked.

    The art of knowing when, and who, to ask for feedback is a critical skill in building a startup. Like all aspects of building a startup, smart timing is the most important part of getting what you need.

  • Week in Review

  • The Mark secures Angel financing

    The Mark NewsThe Mark, a community contributed online op-ed magazine, has secured a round of angel financing from David Ceolin, former CEO of Digital Cement; Jordan Banks, former CEO of JumpTV and former managing director of eBay Canada; and Arlene Dickinson, CEO of Venture Communications and co-host of CBC’s The Dragon’s Den.

    This all-star line up of angel investors have provided capital so the Toronto based startup can add hundreds of new contributors, further develop the platform, and build content distribution partnerships. The company was founded by Jeff Anders, who saw the news media landscape in Canada being redrawn and launched the site to provide Canadians with a forum for news, commentary, and debate.

    The Mark is founded on the idea that thousands of credible Canadians have important things to say but cannot reach a national audience. Many want to publish their ideas but have no forum in which to do so. Two million Canadians live abroad and have a deep understanding of the countries and organizations within which they live and work, and yet no publication collects and shares their insights. For these great Canadians, here and abroad, The Mark will be their platform.

    At its core The Mark is a national movement to record Canadian ideas and propel the people behind them. It is a collection of thoughts and a tool for facilitating interdisciplinary dialogue and debate between outstanding Canadians.

    The Mark recruits contributors using two criteria: professional credibility and a connection to Canada. We do not select contributors based on how they vote, where they live, or what language they prefer, and we certainly don’t dictate what they write. The result is a community of thinkers and doers that reflects all points of view on politics, business, science and technology, and the arts. Though we encourage contributors to express their bias, The Mark is not anchored to any one ideology itself. You think, we curate.

    Instead of focusing on facts, The Mark emphasizes analysis. What are the implications of the facts? What trends are emerging? Who are the personalities behind the headlines? What should be done? The Mark’s expert contributors are on the ground making the decisions that ultimately become news; they are in a better position than anyone to answer these questions. The value is in the analysis: it’s not what you know, it’s what you think about what you know.

    The Mark is a library that sheds light on the dusty old question of what it means to be Canadian. It reveals an underplayed side of the Canadian identity: innovative, creative, opinionated and proud to express it, ambitious, and driven to the far corners of the earth to make a difference.

    While obvious comparisons could be made to Now Public or The Huffington Post, since The Mark is focused on reaching Canadians, to size the market opportunity perhaps the closest analogues are sites operated by the likes of The Globe and Mail and The National Post.

    To compete with these established brands The Mark is focusing on amassing a collection of influential individuals to contribute opinion pieces. Compared to major newspapers, The Mark has a far more efficient system for creating and delivering content, having cut out cost centers like labour (35% of revenue) and newsprint (25% of revenue). And so the assault on newspapers continues.

    This financing provides further proof capital is coming back online in 2010. It is shaping up to be an exciting year with plenty of room for commentary on… The Mark.

  • Week in Review

  • New Coworking Space in Toronto – Camaraderie

    Coworking in Toronto

    Rachel and Wayne have done it. Out of the ashes of the Indoor Playground, they have found a space and announced that they are opening Camaraderie. This is fantastic news for Toronto startups, freelancers, independents and others that need shared office space in the downtown core. It’s located at  102 Adelaide St E, 2nd Floor [Maps: Bing, Google]. The space has a free preview from February 15-28, 2010. And then memberships details are as follows:

    • memberships will be $300/mo for unlimited use during business hours
    • we’ll work out keys later, but for now the space will be open 9:00am-6:00pm (or later)
    • free wifi, coffee, tea, and hot chocolate every day

    Pictures

    The Building - 102 Adelaide St E, Toronto, ONBoard RoomKitchen AreaOpen Workspace

    Full details about the space and the neighbourhood.

    Congratulations Rachel and Wayne. We’re looking forward to Toronto rejoining the likes of Montreal and Vancouver with a real coworking space again.

  • Startup compensation in Canada

    Compensation can be a tough thing. It is particularly difficult in startups. How much should you pay founders? How much should you pay early employees? There are legal, tax, financial, retention, and emotional issues tied up in paying your employees. Given that founders/early employees are a critical factor in the success of an emerging company, it is important to understand that attracting and retaining rockstars can help make or break the early success of a startup.

    “As a founder, set your pay to mirror what the company can afford. It is not about what you need, what you want, what is market, what is fair, etc.  It is about the company. 

    Don’t work for nothing, don’t give away your equity and do the right thing for the company are the three pillars that you should based the discussions around.”  – Rick Segal

    Dharmesh argues that founder compensation is usually part of 1 of 2 schools of thought:

    1. Founders get no pay. (“Salaries, we can’t afford no stinkin’ salaries…”)
    2. Founders get paid close to fair market value. (“We raised outside capital so we could reduce our risk, might as well pay ourselves…”)

    He provides a great summary of why it is important to pay founders and early employees. And that there are a number of factors that influence how much these critical employees should be paid. Cash flow and the ability to pay salaries is a critical first step, whether this is through founder loans, early customers, or outside investment. Without money in the bank, it is all deferred compensation. Other critical factors include:

    • available cash,
    • tax optimization (within the law)
    • fair market value (FMV)

    But it still doesn’t answer the question of what should I pay myself, my co-founders or my developers?

    “All of this distracts from the core question of paying value for value. It doesn’t matter what somebody made at their last job.  It doesn’t matter what their expectation is now.  What matters is the value a firm places on the productive capability of an employee.” – Bradford Cross On Wages

    I’ve talked about founders and early employees and their equity stakes in the past. I like the model that Paul Graham provides a model for calculating the amount of equity that can be used for equity grants for key hires (early employees, executives, etc.). The model calculates the value of company with the new employee.

    n = (i – 1)/i where
    n = percentage of the company
    i = average percentage increase in startup value

    The example provided states, that if you add a hacker to the company and you feel they will increase the value of the company by 20%, then you will break even offering them approximately 16.67% of the company. n = 16.7% =  (1.2-1)/1.2. However, this calculation does not include salary and overhead costs. There is some discussion about converting salary and overhead into stock, but the number used is 1.5. The formula uses the Net Present Value of the company, plus the proposed salary, and the expected impact the potential employee will have on value. In the examples provided, Graham uses a recent post money valuation of $2M and a cash compensation of $60,000, and builds in a 50% profit on employee activities in favor of the company. The logic behind the calculation is, if an employee will add 20% value to the company the maximum amount of equity you should provide is 16.67%. However, this number is discounted n = ((1.2-1)/1.2)/(1+0.5)) = 11.13% against the employer generating 50% profit on the efforts of the employee. And is again further discounted against the cash compensation (FMV) and overhead costs (50% of cash compensation), calculated against their equity percentage using the NPV at time of hire, ($60,000*1.5)/$2.000,000 =  4.5%. The total compensation is a mix of cash and equity, i.e., a total compensation of 11.13% of the NPV of the company split into 6.63% equity plus $60,000 in salary.

    • n = percentage equity
    • i = average percentage increase in corporate value of new employee
    • p = profit percentage
    • NPV = Net Present Value of the company
    • FMV = Fair Market Value of employee compensation
    • EOC = Employee Overhead Costs

    n = ((i-1)/(i+p)) - (FMV*(1+EOC)/NPV)

    Yikes, this is getting complicated. The good news is that we can fix some of the parameters.

    • i = 20% (if every employee adds 20% value to the company, you’re should see fantastic growth, adjust this as necessary)
    • p = 50% (assuming you want to make approximately 50% profit on the efforts of every employee)
    • EOC = 50% (approximately 50% overhead on salary costs)

    Hopefully as the early founders, you can figure out NPV but this can be difficult for companies that haven’t closed funding rounds. We’ll assume that this data is available or that the funding round was recently.

    Fair Market Value

    The open parameter is Fair Market Value. How much should you pay a developer? a designer? a senior executive?

    Monster.ca and Salary.com have put together the Salary Wizard. It includes job descriptions and salary ranges based on local geographies. The data is a great starting point for assembling an overview of the fair market value for salaries and cash compensation. Here is a spreadsheet of Toronto Developer salaries (no bonuses). I’ve included job descriptions ranging from entry level programmers to CIOs.

    Plugging in the 5oth percentile salary for a entry-level program into our equation above we get:

    n = ((i-1)/(i+p)) - (FMV*EOC/NPV) = (1.2-1)/(1.2 + 0.5)-((49,830+24,915)/(2,000,000)) = ~8%

    This should not be considered gospel, but it’s a good starting point for figuring out either the rough compensation for early employees including both equity and salary. It also provides a model for helping employees understand why it is so important to take as much of their compensation as equity, i.e., not cash. This provides a starting model for understanding potential compensation discussions. Both Rick & Dharmesh suggest that FMV for early employees may not be the right compensation metric, and that “creating value in ownership” is a much more important number. At HubSpot early employees salaries are 25-50% FMV based on cashflows and the rest is deferred. There are very real taxation issues with deferred comnpensation, and I am not an expert.

    Before you decide on a compensation plan, it’s best to talk to your accountant, your lawyer and your board.  

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