Value is What You Create – Price is What You Get

tony

My favorite quote from Warren Buffett that helps me not get caught up in the hype when I invest is:

Price is what you pay.  Value is what you get.”  - Warren Buffett

I have riffed on this quote as a reminder to help me as an entrepreneur, which is:

Value is what you create.  Price is what you get.” – Jay Gould :)

In other words, create value, and you’ll get paid.  It took a few hard lessons for me to come to this realization.  Let me share one of those lessons with you below. 

In December 2006 I raised $500K from some of the very best consumer internet investors on the planet for a business called WikiYou.  Those investors included Reid Hoffman, Josh Kopelman, Raj Kapoor, and Chamath Palihapitiya.  This was Pre-AngelList, so I had to raise the money the old fashion way.  I had to generate strong interest and quickly close the financing. 

Here’s how I raised the money from those investors: 

Memorable Pitch

First, I developed a memorable pitch for investors.  The pitch was simple, relatable, understandable, and repeatable so they could pass it along if they liked it.

If MySpace is an autobiography, than WikiYou is an unauthorized biography.  Think, MySpace meets Wikipedia.”  

The pitch was quickly and easily understood.  I followed the first line by saying:

Our mission is to host the biography of every person on earth.”  

It was a lofty goal that was addressing a huge market size.  If it was correct, this could be a gigantic multi-billion dollar business. 

Address Objections:

The three most common investor objections are a proven team, market size and traction.  If you don’t address these immediately, you’re dead in the water and can’t raise money from investors.  My pitch addressed market size.  They knew I was a proven founder because I was running the second most visited video sharing site on the planet at the time (bolt.com).  Because of my track record, it was less important to the investors for me to have traction in my new idea (WikiYou) because they believed I could execute and develop traction post funding.

Quickly Close:

Finally, once I generated strong interest from investors, I needed to negotiate terms, create alignment, and quickly close the deal.  To do that, I needed to create scarcity, social proof and leverage.

I created scarcity with our initial investor, Raj Kapoor, by using my existing business as BATNA.  My existing business had tens of millions of monthly visitors and was generating millions of dollars in revenue.  Basically, Raj understood that our alternative to raising money was to incubate WikiYou at Bolt.  

Once Raj committed to invest in WikiYou, I had the much needed social proof to approach and close Josh Kopelman and Reid Hoffman.  Raj also provided introductions to Josh and Reid, which was further social proof.  Cold calling Josh and Reid would have been far less effective, if at all.   

Chase The Vision:

Chase the vision, not the money, the money will end up following you.” – Tony Hsieh

Unfortunately, I didn’t create value for WikiYou before or after that fundraising, and ultimately nobody got paid as a result.  I incorrectly chased the money, not the vision.  That fundraising is the single biggest embarrassment in my career.  Those investors are some of the most prolific investors in consumer technology, and I failed.  It still hurts.  I failed because I was chasing the money, not the vision!  

If its not clear what my mistake was, let me state it clearly:  I didn’t create value before I raised money.  

I’m sharing this story as a reminder that you MUST create value before you raise money from investors, and then everyone can get paid.  Raising money is not a victory, creating value is the victory.  You create value by chasing the vision, not the money.

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How I Avoided Paying the IRS One Million Dollars and Jail

irs

In 2007 I co-founded Yashi with my then girlfriend and now wife Caitlin.  The first decision we had to make was whether to incorporate as an LLC or a C-Corporation.

We did not seek any advice from our accountant or attorney on which type of entity we should incorporate our business as.  Rather, I did my research on this topic by Googling and reading blogs.  I read that venture capitalists don’t invest in LLC’s and LLC’s generally don’t go public.

We were super confident that every venture capitalist would eventually want to invest in our company, and we would eventually go public after our meteoric growth.  So we incorporated Yashi as a C-Corporation in the state of Delaware.

In our first year of business we generated $750,000 in sales with no employees and no investors.  We were profitable with a 50% gross profit and my wife and I made a couple hundred grand in personal income.

Woot! IPO here we come. :)

At the end of that year, we hired a local accountant that did my uncle’s businesses taxes.  The accountant asked us why we didn’t incorporate the business as an LLC.  I dismissed his questioning.  I mean, who is this yokel local accountant asking me why I’m a C-Corp vs. an LLC.  He doesn’t realize how big I’ll be someday.  I’m the next Google, baby.  Google’s not an LLC.  What does he know?

In 2009, we doubled our revenues to $1.5 million.  My wife and I made another few hundred grand in personal income that year.  I was more confident than ever that I made the right decision to incorporate as a C-Corporation.  I still believed that we would eventually raise venture capital and go public someday!

In early 2010, my accountant begins doing our 2009 taxes.  He once again questions why we didn’t incorporate the business as an LLC.  He then recommends that we convert Yashi to an LLC, but I still wasn’t listening to him.

By mid 2010, our revenue run rate for the year was trending to double sales again.  However, no VC’s were knocking down our doors, and I was beginning to think going public may not be in our future.  So if we’re not going to raise venture capital, and its unlikely we’d go public someday, maybe its not such a bad idea to convert to an LLC.

Depressed and humbled, I finally caved and filed the paperwork to convert Yashi from a C-Corporation to an LLC for the tax benefits my accountant kept telling me about.

Interestingly, at the end of 2010 we raised a $250,000 angel investment from a Wall Street hedge fund banker.  He suggested that we get our financials audited in the event that we raise venture capital or sell the business in the future.

In mid 2011, we hired a regional accounting firm to perform our first financial audit.  Prior to signing an engagement letter with the new accounting firm, they asked to review our prior tax returns.

After completing their review, they scheduled a visit to come into our office and discuss their fees and the estimated time to complete the audit.  The first question they asked was why we converted our business from a C-Corp to an LLC.

While I thought it was obvious, I explained the tax benefits of being an LLC vs. a C-Corporation.

The next question they asked was if we paid our “built-in gain” tax associated with the conversion, because they didn’t see that line item on our tax return.

“What’s a ‘built-in tax’?”, I replied.

Bam! I was about to get hit by a mac truck.

They then explained that when you convert a C-Corp to an LLC, you have to pay the IRS a tax.  The tax is based on the value of your business at the time you convert the business.  The IRS essentially views the conversion of the C-Corp as a liquidation to the shareholders based on the value of the business at that time.

The answer was no, no we didn’t pay a “built-in gain” tax to the IRS.  I then asked them how much the estimated “built-in gain tax” would be?

They explained that we needed to get a valuation performed by a third party company, but based on the fact that Yashi did just over $3 million in sales in 2010, and had estimated growth in 2011 to double again, that the value of our business could be as low as $3 million or as high as $6 million or more.  They then explained that the valuation is subjective and the IRS can contest any third party valuation that we have performed.

Finally, they explained that based on the corporate and personal tax rates and those ball park valuation figures, we owe over $1 million to the IRS.

Wow, so I just bounced back from the bankruptcy of my last startup in 2007, and now three years later I built another profitable multi-million dollar business, and I’m about to file another bankruptcy.  I can’t catch a break.

So I asked them how we proceed with filing bankruptcy.

That’s when they explained that, unfortunately, I cannot bankrupt a tax bill.  This would be a debt that must be paid back either immediately, or over time.  They also explained that I’m personally liable for the tax bill if the Company cannot pay it.

Here’s where it gets good.  They finally explained that if I cannot pay the tax, I could face jail time for tax evasion.

Wow. What is going on here? Something didn’t seem right about this scenario.

The IRS was demanding that I pay a tax from the proceeds of the value of a business that I haven’t sold.

All I did was file a document with the state at the advice of a third party accounting firm, and now I may go to jail?

You may be thinking, just sue the accountant.  Well, apparently when you file your tax returns and sign off on them, ultimately you, and only you are accountable.  Your tax preparer is not responsible.  At least that’s what our very expensive legal counsel explained to me.

So let’s recap.  I hired a third party tax expert to advise me, and he’s not responsible for his advice?  Again, something didn’t seem right.

I asked the new accounting firm if there was another way to prevent jail time.  They explained that they can file a Private Letter Ruling with the IRS.  The Private Letter Ruling would request the IRS to review our case, and to reverse our business back to a C-Corp from an LLC, as if it never happened.  We then have to amended our prior tax returns to reflect these changes.

However, they told me to keep in mind that with a Private Letter Ruling, the IRS is essentially the judge and jury.  They would review our case independently.  In their sole discretion, they can reverse it as if it never happened.

I asked our accountants, “How likely is it that we would receive a favorable ruling?” They couldn’t provide any reassurances, because by nature, Private Letter Rulings are private, with very little case law to review, and this particular case has rarely occurred.

We filed the Private Letter Ruling.

In the meantime, my wife and I were expecting our first child.  Talk about stress.  At this point we also had a team of employees and an investor.  We had to put a smile on our face as if nothing was wrong, and we had to keep growing the business.  We had to stuff this deep down and bury it as if it wasn’t happening.

We kept growing the business.  We grew the sales another 100% that year.  Less than a year later, we finally got a ruling from the IRS.

We caught a break.  The IRS ruled in our favor and allowed us to reverse the conversion as if it never happened, and I avoided paying the IRS one million dollars and jail time.

You may be wondering at this point why I even want to be an entrepreneur. That’s a long story, but the short answer is, I just want to make my mom proud.  Although I do realize that going to jail probably wouldn’t have made her very proud.

We continued to grow Yashi’s sales 64% CAGR since we founded the business in 2007.  In 2013, our sales exceeded $14 million.  We have paid a lot of taxes over the last six years, both personal and corporate.  I’m happy paying taxes now.  I’m happier not going to jail!

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I Just Want to Make My Mom Proud

momMy Mom married her high school sweetheart, got pregnant at 19 years old and had me when she was just 20 years old. She was divorced by 21 years old. She remarried when I was 4 years old. When I was five years old, my Mom and Stepdad had a baby boy, Michael. Michael died of SIDS three months later.

My mother didn’t go to college. She raised me instead. She gave up her twenties to raise me. She gave up any dreams she had as a kid to raise me. Like many mothers, she sacrificed everything for me. I didn’t understand or appreciate that more than when I had my first child at 32 years old.

I didn’t see my biological father much growing up. It was a complex situation that I didn’t understand at the time, and probably still don’t. Often my grandfather would cry with me about my feelings. He was the first man in my life that cried with me.

I was selfishly angry and depressed about my own life growing up. I reasoned that my biological father didn’t love us more than he loved himself, so I blamed him for leaving us. I felt like a loser growing up. I was an only child, from a broken home, and all of my cousins weren’t. I was too young to understand the complexities of life.

I didn’t always strive to make my Mom proud. That was especially true when I was a teenager.

Though I didn’t know it at the time, I grew up poor. Most of our town was poor. I come from a blue collar town on the Jersey Shore. I thought of us as middle class, but we were poor. My Stepdad was a union carpenter, and there were stints that he was out of work for months at a time, but he always managed to keep a roof over our heads, food on table, and a ton of presents under the tree at Christmas.

They say money doesn’t matter, but there were many times I would see my parents complain or argue about money. When you don’t have money, it matters. It causes stress.

I happened to go to the same high school as Al Leiter. When I was a kid, he would come to my elementary school to sign autographs . I remember thinking how proud his Mom must have been of him.

When I was in high school, I excelled at football. I thought if I tried hard enough, maybe I could go to the NFL someday and become a professional athlete like Al Leiter. I went on to play college football, and I worked relentlessly hard at trying accomplish that goal. That didn’t happen. But I truly believed it could. I wanted to make my Mom proud.

My Mom taught me how to overcome adversity. She taught me to never quit. She taught me that life isn’t always fair. She taught me love, compassion, and sacrifice.

I’m sure all Moms teach their kids these things, but my Mom’s different. She’s my Mom.

I recently read an article in the NY Times, titled “What Drives Success?”. They examined research of thousands of successful people and found correlations between success and personality characteristics such as a superiority complex, impulse control and deep sense of inferiority.

There’s no doubt in my mind that I have all of three of these characteristics, and its because of the way my Mom raised me.

I developed a superiority complex because my Mom always reinforced confidence that I could be great. She taught me to face adversity head on, and to never quit.

What’s interesting is that I also developed a deep sense of inferiority from the way my Mom raised me. It seems the goal of most parents should be to shelter their kids from developing a deep sense of inferiority. But because I grew up poor, in a broken home, experienced a lot of stress and depression as a child, I developed a deep sense of inferiority. I am thankful of that too because without it, I would be a complete ego maniac. It helps balance and ground me.

Finally, the last thing the researchers say successful people have is a impulse control. My parents didn’t have impulse control though. They got married young. They had kids young. They didn’t go to college. They were poor and in debt. They were the antithesis of impulse control.  So how did they teach me impulse control?

Well, not surprisingly, for a long time, I also didn’t have any impulse control. However, they did send me to college. In college, I began to reflect on my life quite a bit. I realized I needed more impulse control. That’s when I began to develop my impulse control. That’s when I began investing in my future. That’s when I began to sacrifice my short term pleasures for my long term benefits.

That’s when I realized my parents didn’t have impulse control, and that if I wanted succeed, I needed to develop it. I needed to be raised exactly the way I was or I wouldn’t have been able to succeed the way I have.

Today, I strive to make my Mom proud. Let me be very clear though, I didn’t always do that, but that’s been my goal since my early twenties.

I want my Mom to embrace my success as her own. Because my success is her success. She raised me with love, compassion, and sacrifice.

Recently one of my parents very close friends died of cancer. Just after he died, a week later another very close friend was diagnosed with cancer.

Life is short.  I wrote this post to articulate my thoughts so my Mom can see how I felt about her. I love you Mom.  You make me proud.

I now have two kids of my own and I hope that I do a better job as a parent than I did as a kid. Unfortunately for my kids, my goal is to shelter them from developing a deep sense of inferiority. According to the recent research, that means they’ll likely not become very successful. Or will they?

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Here’s What Happened When I Made My First Ten Million Dollars

scrooge

In 2005, I sold my first startup to a NYC-based company, Bolt Media, for mostly stock.  My ownership in Bolt was about 33%.

Prior to selling my startup, I was making a few hundred grand per year, for a few years.  I thought I’d be worth one hundred million dollars within 5 to 10 years. Hey, why not me?  The first thing I would do is retire my Mom and buy my parents a house.  Every son’s dream, right?

The Bolt team was badass.  These people invented homepage takeover ads, contest hubs and many other cool display sponsorship ads you’ve undoubtedly seen.

By mid 2006, I was the President of Bolt.  We grew Bolt.com from 900k monthly visitors to 20 million.  We were featured in AdAge, Mediapost, NY Times, Financial Times, and many others.

We were on top of the world; Nothing could stop us now!

What was Bolt?  We were a leading online video sharing website.  You know, like that other website, YouTube.  In fact, we actually had more traffic than YouTube for a short while.  That is until NBC sent YouTube a copyright takedown notice when a YouTube user uploaded the SNL skit “Lazy Sunday“.  The media attention that followed that copyright takedown notice sent YouTube’s traffic growth into the stratosphere.

It also made all video sharing websites the hottest thing on the planet at that time.  And Bolt was now the #2 video website on the internet, next to YouTube.

YouTube eventually sold to Google for $1.65 billion.  And my ownership in Bolt was now worth well over $10 million.

I was a paper million biatch!

A week after Google bought YouTube, Universal Music Group filed a lawsuit against MySpace, Grouper, and you guessed it, Bolt.

Shit, how much is my stock worth now?

Within a year, we signed a definitive agreement to sell Bolt for $30 million.  I would make about $10 million from the transaction.

The press covered our story, heavily.  Within days, we were contacted by and meeting with wealth management investment bankers from Goldman Sachs to JP Morgan to tell us how to invest the money we would make from the sale of the company.

Everyone I knew was congratulating me.  These investment bankers said everyone would come out of the woodwork though.  I became super skeptical and wondered, were they genuinely happy for me?  Did they resent me?  Did they want something from me?  These bankers were in my head…

Like Biggie said…

biggie

I was in my mid twenties at the time.  I thought I’d retire, buy a house on the water, and be on the boat everyday, for the rest of my life.  Could I really retire in my mid twenties though?  Is $10 million enough to live on for the rest of my life?  My grandfather kept telling me that in 30 years, I’d need a wheelbarrow of money just to buy a loaf of bread.  He’s crazy.

Wait, I’m getting ahead of myself.  We haven’t even closed the transaction yet, but what’s the likelihood that this deal doesn’t close?

A few months pass, and our buyer renegotiates the deal and now, I’m not worth $10 million anymore.

I went from thinking I’d be worth $100 million in a couple years, to being worth $10 million, to not being worth the paper the stock was printed on!

What happened?  What about Mom’s new house?  FML… “No Money, MO Problems”.

So let’s recap.  I made ten million bucks, lost it all, and had to go back to work.  Nobody was calling me now.  Pretty depressing, but that’s life.  Poor me.  So now what?

There’s a saying, “necessity is the mother of invention”.  So I started a new company called Yashi, immediately following Bolt.

Six years later, Yashi has generated tens of millions of dollars in revenue and profits since 2007.  It generated over $14 million in revenue in 2013 alone, which is up from $6.4 million in 2012.  Yashi has been profitable since inception too.  That makes my ownership in Yashi worth tens of millions of dollars on paper, but this time, I’ve made a few million bucks along the way too.

I’m now married with two kids, so my priorities have changed a bit.  I still want to retire my parents and buy them a house, but for right now, I’ve finally bought that house on the water and my dad docks his boat there.

backyard

So why haven’t I sold Yashi and retired?  Because we’ve built a really cool company and I really enjoy what we’re doing and the people I’m working with.  My co-founder is actually my wife Caitlin, and two of my best friends that I grew up with also work with me now!

Life is good.  However, for all I know, it will all evaporate again tomorrow.  Anything’s possible.

Oh yea, I also bought a wheelbarrow.

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How I’m Getting Naked for Everybody and You Can Too

hotornot2

Running a startup is like staring at yourself in the mirror completely naked. You are able to clearly identify all of your flaws that others cannot see when you’re fully clothed.  Despite any external evidence of your success over time, you’re unable to internalize your accomplishments as others see them externally.

If you’re anything like me, you may even take it one step further by dismissing your success as luck, timing or that you’re deceiving others into thinking you’re more successful than you really are.

There’s actually a name for this phenomenon, its called impostor syndrome. Research began on impostor syndrome back in 1978 with the work of psychotherapists Pauline Clance and Suzanne Imes. They studied women with notable achievements who had high levels of self-doubt and low confidence.  It’s well documented that very successful entrepreneurs struggle with this phenomenon well beyond their startup days.

When I launched Yashi with my wife in 2007, we had to “fake it ‘till we made it’.  While that helped convince our earliest customers, employees and investors to join us on our journey, I’ve never felt as though we’ve actually “made it”. That’s largely because our goals continue to expand and evolve, and we continue to compare our success with our counterparts in the online video advertising industry.

Just a few years ago I shied away from any media exposure or press.  Based on my perception of their success, I felt inadequate and insecure with our progress.  I thought I’d feel much more secure and confident once we had grown as big as they were then.

Below is an illustration that indicates the difference between the perception and reality of Yashi’s success compared to its counterparts.

2-bubble-success (2)

In 2010, I felt insecure and inadequate compared to our industry counterparts.  They were celebrating their milestones in the press, with a larger teams and revenues than we had.  However, today our team and revenue is as large as theirs in 2010.  I still feel insecure about celebrating our successes publicly because our peers have grown proportionally over the years, and as a result, they’re still larger than Yashi is today.

Another reason I have justified my feelings of inadequacy is that nearly all of the ad tech startups we are compared to have raised as little as $12 million and as high as $191 million through VC’s and/or IPO’s.

Our peers have never let the size of their counterparts get in the way of celebrating their successes publicly, and maybe that’s the learning lesson.

We really shouldn’t compare our success to our peers, at least that’s what every book and blog says. But the reality is, we all do it.

Nearly 14 years later, I’m still learning from the founders of HotOrNot.  Having inspired Mark Zuckerberg, myself and many others, these guys practically invented social media.  This time, their inspiration comes in the form of a fearless photo, taken of them standing naked and fully exposed for the world to see them as they are, holding low rating cards.

Today, there are companies like buffer, run by forwarding thinking founders Joel & Leo, that are leading the workplace transparency movement.  They write amazingly transparent investor updates on their blog, exposing their strengths and weaknesses for everyone to see.  They don’t shy away from press based on their size compared to their counterparts, in fact, its just the opposite.

We have continued to bootstrap Yashi.  To date, we have not raised a large institutional round of investment like our peers, but that doesn’t mean we shouldn’t be proud of our successes.  I believe there is too much of an emphasis and celebration on raising large rounds of institutional capital in the startup community, forcing binary outcomes.  But I digress, I’ll save that for another post.

Moving forward, I will attempt to be more transparent, fight my insecurities and try to celebrate our successes.

So here goes…

Today, Yashi is a 2x Inc 5000 company; We have a lot to be proud of.  We have had 64% revenue CAGR since 2008, with our 2013 revenue above $14 million.  We plan to keep that revenue growth rate in 2014, as we continue to grow our staff beyond the current 25 employees.  We have built a programmatic video ad platform that analyzes over 40 billion monthly video views and delivers hundreds of millions of monthly video ads.  We should be celebrating these accomplishments more, and we will.

At the end of the day, it will take a lot of courage for me to be more transparent moving forward.  I’ve been inspired by Joel & Leo of Buffer, and I believe our team deserves to be celebrated more.

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Jay Gould

Jay Gould is the co-founder at Yashi. He also invests in tech startups with his wife through their fund, Gould Ventures.