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This is an anonymous guest post from a well known startup executive:

When we split the atom, Einstein remarked that everything changed but our way of thinking. You could make the same argument about acquisitions and option pools.

As Mark Suster recently noted, employees will never see a big payday at most startups unless the company shoots for the moon. This is probably why investors’ case for a company to sell early focuses exclusively on the founder: in most early-stage acquisitions, the liquidation preferences and deal-sweeteners only work for investors and founders.

Back when some companies sold at $50 million and others went public at $250 million, we could all agree that this was just how the cookie crumbled. But now that we live in a world where early-stage acquisitions are the only outcome to which most startups aspire, we have to re-allocate this smaller cookie.

The elephant in the room is that that founders and CEOs take almost all of it for themselves. I’ve looked at three or four deals recently as an adviser; in every case, the founder or CEO was taking more than half the company for himself, and leaving 10% for everyone else. Why aren’t we surprised when three months later that company can’t hire enough engineers?

Even when the company succeeds, the big-shot with the big payday may regret it. The difference between $10 million and $20 million in practical terms — whom you can date, where you can go, what you drive — is zero. But if you give an extra $10 million to the folks who fought shoulder to shoulder with you, everyone will feel better about what you accomplished together. You want your startup to end like Trading Places, with Eddie Murphy, Dan Aykroyd and their butler sipping drinks on the beach.

This has always been true, but now that more startups are being bought, it has become less common. Consider the proceeds of a $50-million acquisition for a 100-person company that has raised $14 million with a typical liquidation preference:

• Because of the liquidation preference, the investors get $14 million right off the top. The remaining $36 million is divided according to equity ownership.
• Investors own 50%, and get $18 million, split between two firms
• The two founders own 33%, and split $12 million
• The 3-person executive team, including a CEO if one was hired, owns 10%, and splits $3.6 million. The team gets another $3 million as a severance payment or an earn-out, to sweeten the acquisition offer.
• The remaining 95 employees split 7%, each earning $27,000. Unlike the founders, the employees have to wait until their grants vest, working at a company no longer of their choosing for two years.

Now consider what would happen if the same company raises another $10 million, expands the employee option pool to hire more executives and to support 300 people. It is worth $250 million at the time of a public offering.

• There is no liquidation preference, severance payment or earn out. Everyone is paid according to the number of shares he owns.
• Investors by now own 60%, or $167 million, split between three firms
• The two founders own 20%, and split $50 million
• The executive team still gets 10%, but now splits it among 5 people. Each executive gets $5 million.
• The remaining 290 employees own 10%, with the first 100 employees hired getting the lion’s share, of say $200,000 each.

The point is not that this is a better outcome for all. Any fool would take the higher price if he knew he could get it, but you don’t know when or whether you ever will. The point is that employees at least stand a chance at a nice gain when a company is built to last, whereas founders benefit disproportionately from a quick flip.

So in a world of more quick flips, we need to increase the size of options pools, eliminate liquidation preferences – which just get picked up in subsequent rounds of financing by new investors, who screw the old ones — and provide better acceleration for everyone.

Otherwise, nobody will want to work for a startup. But the reverse is happening. VCs want their pound of flesh, and entrepreneurs do too. In fact, the 20% of company ownership that was once considered the standard allocation for executives and other employees is now more likely to be at 10%.

If we’re all a little less greedy now, we’ll build bigger companies later and everyone will make more money, and feel better about it too.

Editor’s note: Guest writer Glenn Kelman is the CEO of Redfin, an online real estate broker that seeks to give consumers the information and tools once limited to real estate agents. Previously, he was a co-founder of Plumtree Software, which had a public offering in 2002 but is now part of Oracle.  Below he shares the best questions from investors during a recent fund raising.

For startups, Christmas comes in November. Partners come back from vacation in September and deals start closing a few months later; since the credit crisis deferred fund-raising for most of the past year, November 2009 will probably end up being especially busy.

Redfin is one of the companies that just closed a round. Already the process has resulted in a huge shift in our mindset: from just surviving to building a juggernaut. That shift is one every startup can try on for size, whether it needs capital or not, by asking itself the same basic questions that VCs asked us.

VCs are good at asking questions. They are unimplicated in your dumb decisions, unmoved by your original sense of mission and far less concerned than you that a blunder could bankrupt you. They re-imagine your business in terms of all the other businesses they’ve seen, pulling the arms off one doll and the head off another to create a perfect money-making Frankenstein. And since the stakes are high, the whole philosophical exercise tends to result in action.

Here are the questions VCs asked Redfin that changed how we think about our business.

1. What’s your deadly sin?
Sequoia’s Roelof Botha said he only invests in companies that let consumers indulge in one of the seven deadly sins. He rattled them off with alarming familiarity. “You don’t want to be the site that people should use,” Roelof said. “You want to be the site they can’t stop using.”

2. Where’s the real money?
Venture capitalists’ focus on the size of our company’s addressable market made us realize that half of our potential revenues lay in the eight markets we’ve already opened. “What’s the rush to open Orlando,” a VC asked us, “when you still haven’t cracked 1% share here in Silicon Valley?”

Good question. A startup with 18 months of cash is like Val Kilmer in the opening stick-up scene of Heat, with only 80 seconds to get the bearer-bonds from an armored car; as a detective on the scene later marvels, “they ignored the loose cash.” That’s the way to be about your addressable market: not just greedy, but disciplined. Time is short.

3. What are your unit economics?
The financial statements we look at every month don’t tell us what a small business will look like when it grows up: sure we need to account for all sorts of fixed costs like how much we spend on engineers or maps, but what really matters is whether we make more money from a customer than it costs us to get and serve that customer. So to see if a business works on a large scale, VCs first want to understand it on the smallest scale.

For us, this meant explaining what Redfin made this summer on a single home purchase, with a per-transaction account of what we spent on marketing to get customers ($27), on local data ($153), on customer service ($2,906) and so on. We also calculated how much annual revenue we got for every monthly unique visitor.

We knew our margin before, but hadn’t broken the numbers down into their most easily handled form. This is important. Numbers are just numbers if they aren’t simple enough to act on; a linebacker with a simple playbook can react rather than think during the game. Knowing that the big number is how much we spend on our customer-service team refocused us on making sure we hired the right team and invested in its happiness.

4. What are the explanatory events?
A money-raising deck mostly consists of graphs with lines going up and to the right, scrunched two to a page to make the lines look steeper. The only reaction we expected to our version of these slides was awe. But Roelof asked us to annotate each graph with what statisticians call an explanatory event. What change in our business had caused revenues to shoot up? We claimed that publishing agent reviews had sent conversion through the roof. But when we dug into the numbers, we found the real explanatory event was a change in our service a month before – unlimited home tours. Making a simple picture of a business trend and then correlating that with a big decision helps you understand what levers really move your business. When there are no explanatory events, you’re just getting lucky.

5. Why can’t you grow faster?
The most important question venture capitalists ask is what prevents your company from growing faster. At first, I thought it was a demand disguised as a rhetorical question, asking Redfin to raise projections beyond what we could deliver. But when I got testy, Greylock’s David Sze said, “We’re not asking you to lie.” He just really wanted to know what the rate-limiting factor was.

We cycled through a few lame answers: “We prioritized margins over growth.” “We wanted to be realistic.” Then Redfin’s Sasha Aickin quietly pointed at the headcount line of our projections and said our rate-limiting factor is probably how quickly we can hire top-notch real estate agents. Everyone nodded. We got back from that meeting and began thinking about scaling agent hiring.

6. What are the accelerating effects?
It’s easy to grow 300% in your first year or two, when you’re starting with nothing, and people first hear about your service. What separates a potential colossus from other businesses is the capacity to keep growing at that rate in years four, five and beyond. When Reid Hoffman looked at Redfin, his primary question was whether there were “accelerating effects,” where growth begets more growth. For Amazon, the product reviews and personalization history it captured from its first users accelerated its second stage of growth. For Facebook and Twitter, the community itself constantly recruits new users. For companies like Zappos and hopefully Redfin, it’s word-of-mouth about our customer service. This line of thinking made Redfin focus on our most sustainable competitive advantages: not the usability of the site itself, but the data we gather from visitors to that site, and the rave reviews we get from those visitors who become clients.

7. What’s your secret sauce?
One of the godfathers of venture capital is, we were told, obsessed with secret sauce; the man apparently hasn’t put mayo on a ham sandwich in 20 years. So in preparing for a meeting with him, we tried to think of technology that only we could build. Previously I’d always thought this challenge was silly. Grinders like me believe in the lunch-meat not the sauce; we just try to focus on the right problems, and run faster than our competitors. In this view even Google, if it stopped coding for a year or two, would be caught. But while Redfin has gotten far by being relentlessly incremental—letting users filter property searches by pools or parking spaces—the pressure on us to do something proprietary helped us prioritize game-changing features that we’d put off in the past. We hope to come up with Something Big in 2010.

8. How do you win?
Thinking constantly about world domination can give you a little vertigo. The way I usually get through my day is by limiting my horizon to serving the next few customers, or increasing revenues in the next few months. Which means that even though the story of how we win should be etched on the inside of my eyelids, it’s more often at the back of my mind, as a nagging doubt that I’m focused on the wrong thing.

But the essential job of a CEO is to tell that story, to everyone who will listen, making it better all the time. If you are raising venture capital, that story is by definition highly improbable, involving such an absurd overthrow of the order of things that it’s almost embarrassing to say out loud. Rehearsing the whole narrative naturally focuses you on the holes in the plot.

Just try, for example, to say with a straight face how Redfin wins: we get the best data, and build the best real estate website (maybe). We hire our own real estate agents and pay them to focus on customer satisfaction, not sales (that’s a little weird but sure, why not?). Customers appreciate the difference, and en masse fire the traditional agent who has been sending them a bottle of wine every Christmas for 10 years, giving us 20% of all high-value real estate transactions (no way!).

Way.

*~*~*~*~*~*~*~*~*

It’s hard to express just how much settling those questions has galvanized Redfin to attack the monsters under our bed. Sure, we were dimly aware of those problems before, but we existed in a state of seething, unacknowledged tentativeness. Weeks of contemplating what it will take for us to win prepared Redfin to swallow the red pill, stuff the TaunTaun, hack the Kobayashi Maru. At very few moments in a company’s history does it makes its way so deliberately. Like the recovered patient who saw while sick everything she had always meant to do, we want to make the most of our new lease on life.

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About a year ago, tech news aggregator Techmeme hired Megan McCarthy as its first dedicated human editor. Founder Gabe Rivera clearly liked the idea; he’s now added three more, doubling the size of the staff.

Rich DeMuro (formerly of CNET), Lidija David (formerly of ReadWriteWeb) and Mahendra Palsule (a former IT project manager) all join McCarthy to make up the editorial staff for Techmeme. Rivera notes that this team means they basically have human eyes watching for the best tech news 24 hours a day now. This allows Rivera and his fellow programmer, Omer Horvitz to keep the backend and the algorithm rolling.

When Rivera announced the addition of a human editor last year, it caused some controversy. Many people believed that only using a set of algorithms for surfacing news was better because it would take out much of the bias that a human might introduce to the system. But Rivera believes this curation is an integral part of the process to help with fast breaking news and to better filter out spam and old news being re-reported.

The result is a site that seems to be head and shoulders above other tech new aggregators, including Google News, which is quite bad. Maybe we’re a bit biased, since we sit atop Techmeme’s Leaderboard, but the other praise Techmeme has gotten throughout the years doesn’t lie (see the BlurbLog on the side of Rivera’s blog post).

Techmeme is also clearly Twitter-crazy now. Several months ago they added a way to tip stories to the site using the “tip @techmeme” syntax in tweets. That continues to be a valuable part of the site. Today, Rivera is highlight a Techmeme Twitter team list as well.

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Seattle based Redfin, an online real estate startup, has raised another $10 million in a venture capital round led by Greylock Partners. Existing investors Madrona Venture Group, Draper Fisher Jurvetson, Vulcan Capital and The HIllman Company all participated in the round, and Greylock’s James Slavet joins the Redfin board of directors.

This was a safety round, as Redfin announced profitability over the summer and have now exceeded a $20 million in revenue run rate (it was just $15 million last summer). They’ve roughly quadrupled in size since 2008, even in a down real estate market.

I used Redfin as a buyer over the summer when I was looking for a house. Here’s how it works, and why it’s so attractive compared to normal real estate broker deals: As a buyer you spend a lot of time on the Redfin site, looking at available houses and a rich set of data on previous sales, comps in the neighborhood, other homes listed in the same price range, etc. (or you can use their iPhone app, which the company says is the highest rated real estate app).

If you want to view a home you schedule online. They set it up for you and meet you at the house.

In all, it isn’t much different than the standard buying a house procedure. Except at the end they refund 50% of their commission to you. On a $500,000 house, you get a check for $7,500 at closing.

Sellers who use Redfin pay a flat a $5,000 – $7,000 fee, depending on services ordered. And if you’re also using Redfin to buy a home while you are selling, that fee drops by $1,000.

As you can imagine, real estate professionals aren’t thrilled. Nor do they love CEO Glenn Kelman, who said In an interview with 60 Minutes: “Real Estate is by far the most screwed up industry in America.”

But customers clearly love the service, and they have closed more than $2 billion in home sales since launching in February 2006. The total U.S. home real estate market is around $1 trillion, so they have some room to grow.

Redfin is currently available in Boston, Chicago, Seattle, Washington DC, Baltimore, New York’s Long Island and Westchester County as well as most of California, including the San Francisco Bay Area, Southern California and Sacramento.

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An interesting tidbit from today’s Naked Truth event in Seattle: Redfin CEO Glenn Kelman said his company just turned profitable. Since I was sitting next to him on the panel, I asked him off microphone what revenues were. He said the run rate is around $15 million. 2007 revenues were $5 million, 2006 revenues were $1 million.

That’s great news for everyone except the real estate industry. The Seattle-based startup represents buyers and sellers in home real estate transactions for far less than the entrenched industry rates that take 5 of the sale price of a home and split it between buy and sell brokers. On the buy side they reimburse 50% of the fee they receive back to the buyer. On the sell side they charge a $5,000 - $7,000 flat fee. The normal broker fees on a million dollar house are up to $60,000, so the savings are obvious.

The company was profiled favorably by 60 Minutes in 2007, but real estate agents and brokers have known about the company for far longer. Even as far back as 2006, Kelman told me, they’ve had to deal with “threats, stalkings and other disturbing behavior towards their employees and some customers from, apparently, angry real estate professionals.” Now that Redfin has shown that their model works profitably those threats will likely become worse.

Disruption is never fun for those being disrupted. The DOJ is hitting the real estate industry from one side, and Redfin is hitting them from the other. The result? A better deal for the rest of us.

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Well it appeared to be signed and sealed when news leaked back in April that two icons of the UK’s tech startup world were joining forces to create a new fund to address the so-called ‘equity gap’ in Europe. But it gradually emerged that the actual name of the project would change and there were no real details, not even a web site to explain how it would work. But at last night’s Europas Awards in London, Bebo co-founder Michael Birch and Brent Hoberman (Lastminute and mydeco) announced the launch of the fund they’ve now set up together: PROfounders Capital. It’s understood that Birch, who exited from Bebo when it sold to AOL last year for $850m, is the prime investor, however they hope to double the “founder-lead” £30m fund over the next few months.

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The Europas, the inaugural TechCrunch Europe Awards 2009 for European and EMEA tech companies, were held last night, Thursday July 9, 2009 in London. Check out our live blog from the event. For these inaugural awards, over 400 entrants were voted on by the industry and the results merged with those from 19 expert advisors from across Europe. Here are the winners, highly commended and finalists in each category. Congratulations to all!

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The Data Portability wars just got a little more interesting. Power.com, the service that lets users aggregate their social networks into a single hub, is countersuing Facebook for restricting users’ ability to export and move their own data. The company is claiming that Facebook is unlawfully withholding the data that users own (as stated in Facebook’s own ToS), and is stifling competition by refusing to allow third party services like Power.com to access the data, among other things. This should be fun.

It’s been over six months since we last heard about these two duking it out, so here’s a quick refresher: Power.com launched last August, offering users the ability to import their latest updates and user information from Facebook, MySpace, and a number of other social networks. It did so by tapping into the social networks’ APIs when available, but also by scraping user data when they couldn’t access it through other means — a big no-no for most social networks, as we saw with the Scoble/Plaxo fiasco. It didn’t take long for Facebook to file suit against Power.com for scraping user data and storing user credentials (another violation of Facebook’s ToS). A week later we heard that the two parties might be close to a settlement, but apparently that didn’t work out — the suit is still pending.

Power.com CEO Steve Vachani likens the current situation with Facebook to one the cell phone carriers saw before they allowed for number portability. In the case of the cell phones, users were effectively locked into a certain carrier because they had spent so much time building up contacts and giving them their phone numbers, and it would be too much effort to switch to a new one. It’s an analogy that has been drawn since the data portability movement began, and while it may make sense, there’s no guarantee the courts will view phone numbers and a user’s social network data in the same light.

That said, Power.com is making some good points. The idea that users aren’t allowed to input their username and passwords into other services is particularly hypocritical, as that’s exactly what Facebook invites you to do to import contacts from services like Gmail and Yahoo Mail.

Facebook can point to its efforts with Facebook Connect, which lets you log in with your Facebook username at third party sites and import some select data from your profile, as evidence of its openness. But this isn’t true data portability, it’s just a new walled garden — third parties are generally only allowed to cache your data, which means that you’re still tethered to Facebook.

Of course, while we may not like the current situation, there may well not be anything illegal about it — that’s up to the courts to decide. We’ve all agreed to the Facebook Terms of Service, and there’s no question that Power.com breaks them. We’ll be following the upcoming case closely.

20090709_PowerBattlesFacebook_Lawsuit -

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Taking place tonight in Seattle is The Naked Truth 2009, a Redfin-hosted conference to give entrepreneurs advice. Michael is there participating as an expert to discuss industry trends. This year’s topic is revenue models for consumer Internet startups. The four presenting startups, Redfin, UrbanSpoon, Picnik and Animoto have some interesting information to share via their slides, which we’re posting below, pointing out a few of the highlights.

For those who want to follow along live, you can find the video of the event here.

First up, restaurant recommendation service UrbanSpoon, which was recently bought by IAC. Some highlights of their slide:

• Of their visitors on the web, 74% come from Google.
• Of their visitors through mobile devices, 99% come through the iPhone (they have one of the more popular apps).
• They’re seeing more than double the revenue off of those mobile users versus web users.
• When they were featured in an iPhone commercial, they saw 300% growth.

Next up, online imaging editing service, Picnik (which has a partnership with Yahoo to edit Flickr pictures).

• 80% of their revenues come from paid subscriptions, the other 20% from advertising.
• About half of their subscribers do so on the first visit to the site, 75% of those do within 4 visits.
• “Partnerships are not nirvana” — obviously a shot at Yahoo.

Video slideshow maker Animoto (which recently raised a new round of funding):

• They have 700 paid users per 100,000 users, but are already cash-flow positive with that.
• They say their hybrid model (freemium + virtual goods) is working

And finally, online real estate company, Redfin:

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