plan floating around...
plan floating around somewhere with the email idea. So we would go in with
the JavaSoft business plan.
If they passed the litmus test of not rejecting us for the wrong reasons and
said, “OK, we don’t mind that you’re young, we don’t mind that you don’t have
Sabeer Bhatia 19
management experience,” only when they would start poking holes in the
actual idea would we share the Hotmail idea with them. That was actually just
because we didn’t trust them.
Livingston: You finally pitched Draper Fisher Jurvetson (DFJ) and they passed
the test. Tell me about getting funding.
Bhatia: They liked the idea right off the bat. They said, “We’re going to get one
of our partners to come in and take a look at this because it could be big.” So
Tim Draper came in the following week and he liked the idea. After another
meeting he said, “OK, we’re ready to fund you. We like this very much. How
much do you want?”
I did some calculations on the back of an envelope and asked for $3 million,
which was our plan based on hiring a few engineers.
They said, “No, that’s too much. How much money do you need just to
prove to us that you can do this—that it’s even possible to make email available
on the web?” So I asked for half a million and he said, “I’ll give you $300,000.”
I said, “Alright, I’ll take it.”
They wanted 30 percent of the company, which would value us at $1 million.
It was an intense negotiation; I threatened to go to the other VCs if they
didn’t pony up the money. We finally settled on a 15 percent split with them
and they valued the company at $2 million post money. But they’d put in a right
of first refusal. Since I was a young entrepreneur at the time, I didn’t understand
that this basically meant that you couldn’t go to any other VC. So even
though they didn’t get their chunk in the first piece, in any subsequent round
they would have the ability to take up the entire round.
Livingston: Your lawyer didn’t point out that clause?
Bhatia:We didn’t have a very good lawyer back then. Of course it was touted to
us as “We love you so much that we want to have the right to buy the next
round. You can go to other people too.”
But that’s the one that got us. It impeded our ability to go to another VC.
What ended up happening was that we could not get a higher valuation because
DFJ wanted to put more money in the company themselves. So any time we
would talk to another VC, they would talk him out of it: “This is not a good company,
don’t worry about it.” So we were really stuck with DFJ for the next
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