PsychTech

It’s understood that startups raise money from VCs for the purpose of growing and scaling the company, possibly towards an exit down the road. It’s also no secret that VCs provide the capital to founders to help them grow and scale the company in hopes of that exit occurring at a faster and more lucrative rate. What is less known is how the VCs provide this capital and where they get the resources to help startups achieve financial success. It’s all embedded in how a VC fund operates.

To start with, let’s say you are a VC want to set up shop with your own fund. To do that, you need to have money. To have money, you go on a fundraising trip, much like a founder does. You meet with various groups of people who represent organizations such as pension funds, insurance companies, endowment funds, high net-worth individuals, or fund of funds. These groups and organizations become the Limited Partners (LP) that give their money to you, a General Partner (GP). Once enough money is raised, that’s when the fun begins.

The first thing you do before you even start raising money is to establish your firm. Your firm is the overarching entity that comprises the fund and is also known as the Management Company. Usually these are established in the same state where the partner physically operate. Once you have the firm incorporated, that is when you create your fund. If you’re really good at what you do, you will likely establish multiple funds over time, but for now let’s focus on the first one. The fund is where the LPs are investing their money. One thing to note is that most LPs will want you to invest some of your own money as well into the fund, usually with a GP-LP ratio of around 1 : 99. So if you raise a $100 million fund, you will be making up $1 million of that. This is done in a legal entity that is set up separately from the Limited Partnership entity to avoid being charged management feeds or interest from carry, which we’ll get to.

For corporate law and tax purposes, these funds are best served by being incorporated in Delaware (startups seeking funding will also be asked by VCs to be incorporated there as well). This fund, which now has capital from two separate entities (one from the LPs, the other from the GPs), is where VCs invest capital into startups. This fund is also responsible for the “2 and 20” deal that is standard among compensation models. The 2 refers to the percentage of the fund given to the firm as a management fee. This fee covers areas that are critical to operating a firm, such as travel expenses, office rent, and salaries. The 20 comes in the form of carry. If a fund has a very successful return, they usually get 20% of anything left over after LPs get their investment back. That 20% is then split among the GPs, and if they’re nice enough, to some of the junior Partners or Principals.

As mentioned before, if you happen to succeed in the first fund, you usually will want to set up the second one. Because most funds are set up with a life expectancy of 10 years with a possible extension of up to 2 years, it is expected that you will be enjoying the fruits of your labor in a set time period. New funds under a firm are set up every 3-5 years in order to keep pace with the commitment period, which is the time where you take the money you raised from LPs and yourself and invest in companies. This is usually done within the first 5 years of the fund’s life, while the rest of its existence is based on providing additional capital (also called reserves) to portfolio companies that were invested in during the commitment period.

Just like how founders are expected to provide an update to their board of directors, GPs are expected to provide updates to their LPs. To a founder, they may think the VC has total control, but that’s not true. VCs report to their LPs to update them on how things are coming along. The use of metrics is relied on heavily and the Internal Rate of Return, along with the multiple, are the most critical metrics in a fund.

If you are a founder, knowing the structure of how VC funds operate helps in the long run because you can understand where the VCs are coming from. Every move they make and every step they take is done for two reasons: to help your company grow and scale and eventually exit, and to ensure they are doing everything possible to create plenty of returns for their LPs.

Negotiations, like taxes, are an inevitable part of life. People negotiate every day whether they realize it or not – what to get at a restaurant, where to fill up gas, who to delegate work to. These small negotiations are often not always conspicuous, which is why we don’t pay too much attention to them and make decisions in the heat of the moment. With decisions that require more thought and have larger consequences, negotiating becomes a must. There is no better example than when a founder successfully convinces a VC to invest in their company, and hands him or her a term sheet to look over.

A term sheet outlines the details of what an investor is willing to pay for a piece of your company. In return the investor receives, in addition to the designated equity, other guarantees that allow the greatest returns for that investor. Now even though most parts of the term sheet are non-binding, there are still a few things any founder lucky enough to be in this situation must consider. Once you receive a term sheet, your mind must immediately shift from trying to sell your company’s vision to trying to get a win-win deal out of the term sheet.

Before you meet with the VC again to discuss the term sheet arrangements, it’s important to know several things. First, you (and your lawyer) need to identify the most important parts of the term sheet. Usually this would tailor around the valuation, liquidation preference, and anti-dilution provisions but usually varies per founder. Identifying the top 3 most important issues that you want to stick to your guns to allows you to be flexible with the VC on other things they may care more about. For the most part, a lot of items in the terms are standard across the board and trying to negotiate on those pieces shows that you’re either a) a rookie who’s never done this before, or b) immature and wasting the VC’s time.

For founders to get the most out of their negotiations with VCs on term sheets, the best way to get a deal that favors founders (and not just VCs) is to have leverage. Leverage is everything, and one way to attain is it to have more than one VC interested in giving capital to you. The ability to go up to a VC and let them know that there are other offers on the table puts the pressure back on them. If they are truly interested in backing you. they become more attentive to your requests and the negotiation floodgates begin opening. You are also in the best position possible because with multiple VCs clamoring for your signature, you have the opportunity to set your terms and are more likely to get them.

Another way to show VCs you mean business is actually knowing what is in a term sheet and identifying what each statement means. Term sheets normally aren’t more than three pages, but if you’re not familiar with what most of the terms on the sheet means, you can be in a weak leveraging position. This is also why it helps to have a top-notch lawyer who specializes in venture financing. Understanding the difference between a 1x liquidation preference with no participation and a 3x liquidation preference with full participation is will save you a significant amount of time and headaches once a liquidation event does occur. If you’re serious about raising money, you should be committed to inspecting every single part of the term sheet and finding areas that look suspicious or that should absolutely be negotiated.

Of course this also means that to have a successful negotiation, you have to know everything about the person across the table. Understand what they commonly look for and what they will and will not budge on. Talk to founders who have had their company invested by the same VC and see how their term sheet negotiations went. Knowledge is power here.

Eventually there will come a time when you and the VC simply can’t come to the right terms. Before you even get to this step, it is important to know what your BATNAs are and when you’re willing to walk away. BATNAs, or Best Alternative to a Negotiated Agreement, can help you during the negotiation process by discovering what your opportunity costs will be should negotiations fall through. Having multiple VCs show interest in your company is an example of a BATNA because if your first deal doesn’t happen, you have other VCs you can work with without skipping a beat. This also allows you to draw a line in the sand and mark it as the point at which you as a founder should walk away from the table. If you reasonably believe your terms are justifiably fair to all parties and there is no agreement from the other side, you can comfortably walk away knowing that you tried your best.

Negotiating term sheets should be about trying to achieve a win-win outcome between the founder and VC. According to Brad Feld, the hardest thing to do in negotiations is to look at these term sheets from the opposing side’s point of view. Doing so helps you gain insight on what the opposing party is looking for in a deal. You can use this information to make compromises where you think is best while also trying to secure the non-negotiables you desire. It’s important to remember here that once you and the VC come to an agreement on the term sheet, communication doesn’t cease from there. Rather, this marks the beginning of what should be a close and long partnership, one that will forever be built upon the negotiations of the term sheet.

There seems to have been a trend this year in the IPO market. It usually has gone along the lines of:

1. Private company raises a few rounds of funding and has a high valuation
2. Private company submits S-1 filings to the SEC
3. Private company enlists the help of an investment bank or two to help underwrite the IPO offering
4. Private company wows investors, which in turn raises the IPO price
5. Private company goes public, everybody from founders to employees to private investors celebrate
6. 3 months later, public company is no longer trading at the same level as its IPO price, public company misses quarterly expectations, stock begins to slide more

This trend at its core can be chalked up to the differences in thinking of a private investor and a public investor. It seems to have exposed the thought that private investors value growth and market share over profitability, which I don’t totally disagree with. However, as soon as the private company goes public, things begin to go awry. Public investors want to see profitability, and even one quarterly report of missed expectations is enough to swing the stock the other way.

In addition to this, the actual valuation of a private company is always something worthy of a debate. Even though it is difficult to accurately measure the value of the company (basics tend to be some sort of multiplier of revenue or number of users), this doesn’t always tell the full story. As the company raises additional rounds of financing, what is really happening is a ballooning of the value of the company based on financials that matter more about the rate at which the company is growing and not the speed at which its burn rate is increasing. Look no further than WeWork, which is losing 28 times more money per customer than what Uber is losing per rider. It has played a big role in the rapid decrease in the valuation and eventually yanking of its IPO (not to mention the fragmented leadership and general hysteria).

Another reason for the discrepancy between the way public and private investors operate may lie within the actual IPO process itself. When the IPO is successful (meaning the price at close is higher than when the bell rings on the first day), investment bankers win. When the IPO doesn’t go according to plan, investment bankers win. This is because of the cut they get by helping the company go public rather than going the Direct Listing route. It’s become so bad that venture capitalists are meeting in Silicon Valley to talk about reshaping this process without investment bankers. Also, if the company does feel pressure from its investors to come up with a liquidation event, that isn’t going to help either. It’s like making a baby walk before it can crawl.

Eventually the thinking between public and private investors will realign. The whole WeWork example is a big reason why. As we’ve seen with the recent IPOs this year (BeyondMeat withholding), expectations seem to differ pre- and post-IPO. Hopefully future companies planning to go public are aware of this and understand the risks, and not just the rewards, of going public.

“The investor’s chief problem – and even his worst enemy – is likely to be himself” ~ Benjamin Graham

Most people don’t stop for a moment and realize that the way we think, behave, or make decisions is linked to multiple fields of study. You can pick two completely different subjects and can tie them together in one manner or another. I find that applying a scope of psychological theories and phenomena allows me to think in a different manner than I would have otherwise. That explains my increasing interest in the fusion of of Psychology and Finance.

Thinking in a psychological manner helps in a lot of ways. It becomes easier to identify the motivations for an individual’s behavior. Reading people and developing this sense of intuition (a la Donna Paulsen) can create this form of assurance of how you are directly impacting others and how you should react in different situations. At its basic core, psychology provides x-ray vision into a person’s mind.

The markets are no different. When it comes down to it, markets have the same mood swings that people do, simply because it’s a reflection of those same people’s moods (which explains how crowd psychology affects both traders and angry mobs). Some people buy at the peak of the market because of FOMO and not understanding how the game is played, when they should in fact be selling. Of course those same people end up selling when the market hits a low when they should be buying. It’s why the smart investors make money off the not-so-smart investors.

There’s a field called Behavioral Finance that takes all of this into account. Behavioral Finance explains why stock markets behave the way they do, why people make certain choices that will make them boom or bust, and even why the term “rational investor” shouldn’t be allowed in finance textbooks. There is no such thing as a rational investor. Much like the Scientific Method, anything that applies to a rational investor is true until you actually experiment out in the real world. Then everything you thought you learned goes out the window.

To understand how the stock market and other financial entities work, it helps to grasp the main biases that play a role in Behavioral Finance (which also affects a multitude of other fields as well):

• Self-Attribution
  • When the market is good and you make money, you typically credit yourself for the gains
  • When the market is going horribly, you blame others or chalk it up to bad luck
• Disposition Bias
  • When investors tend to sell off their winners (regardless of how much they earn) and hold on tightly to their losers (in hopes of it going back to the initial buying price or beyond)
• Confirmation Bias
  • When investors look for information that can provide support in an investment, rather than rationally making a decision based on understanding both sides of risk/reward
• Availability Bias
  • When an investor gets lucky on a recent deal, they think it will happen far more often than they should believe
• Loss Aversion
  • When an investor is more upset about their losses than they are thrilled about their gains

Much like other topics of interest, finance functions with a psychological shadow running behind it. The psychological tendencies found in Behavioral Finance can actually make or break most investors. Understanding how these affect everyday people in finance can help an individual go a long way.

“It is no secret that exercise makes us feel good. It’s simple science: exercising creates endorphins and endorphins make us happy…on the most basic level, Peloton sells happiness.” ~ John Foley, CEO of Peloton

Overview

Peloton likely needs no introduction. The self-labeled “tech / software / apparel / retail / media / social connection” company is at its core a fitness company that sells bikes and treadmills with a touchscreen attached and a subscription for tuning into classes. Let’s not forget it’s main best seller – happiness. It all started in 2012 when CEO John Foley noticed barriers to working out at studio classes while balancing work and kids. Seven years later, the company went public, and results, though still early, are not great.

Stats

Here are some stats that best represent Peloton’s growth:

• 1.4 million subscribers as of September 2019
• Over 400,000 bikes sold
• Over 55 million workouts to date this year
• Employees: 700+
• Up to 48 live Peloton classes a day

Differentiators

A few things stick out when looking at Peloton. For one, they have accumulated a massive cult following for its brand. Not only that, Peloton knows how to keep them satisfied with notions like competitions between the class and friends, extreme limitations without the subscription service (that’s sold separately), and the trainers themselves who provide a fun way to get your cardio in.

Funding / S1 Info

Basic Fundraising / IPO Timeline:

• 2012 – Raised $3.9 million for product development
• April 2014 – $10.5 million for series B
• April 2015 – $30 million for Series C
• December 2015 – $75 million Series D
• May 2017 – $325 million Series E; valued at $1.25 billion
• August 2018 – $550 million Series F; valued at $4 billion
• February 2019 – chose Goldman Sachs and JP Morgan Chase to lead IPO
  • Valued at more than $8 billion
• June 5, 2019 – Filed S-1 for IPO
• September 26, 2019 – IPOs at $29/share

Reasons to Worry

There are a few things to be worried about when it comes to Peloton. The first concern is its lack of profitability. Sure, private market investors want to see growth and will throw cash to make it happen. Public investors are a different breed. They want to see the opposite, and Peloton’s stock price dropping may be a clear indicator of that. Second, Peloton is being sued by the National Music Publishers’ Association for $150 million (now up to $300 million) for essentially using copyrighted music without permission. That only makes things harder for an unprofitable company. Lastly, the health and wellness industry is almost exclusively tied to fads and the next big thing (Ab Roller, P90x, etc). People who exercise based on these fads are likely to stick around until something bigger and better comes around. Right now, that’s Peloton. Who will it be tomorrow?

Conclusion

In general, I am skeptical about where Peloton can go after its IPO launch. It’s concerning to me when the CEO, in a letter to investors, believed that Peloton has the ability to “create one of the most innovative global technology platforms of our time.” To date, PTON stock has dipped nearly 10% since ringing the bell which seems to be continuing a trend marked by earlier IPOs this year of companies going public and then going backwards (e.g. Uber, Lyft, Spotify). This might be the biggest indicator of how different the public and private investors today feel about prioritizing growth over profitability. Unless you’re a true software company, that decision may not be the best long-term choice. However, Peloton is still relatively young and has created a cult-like following with a impressively high retention rate. It will be interesting to see how long they can keep this mark up for.

I’m thinking of starting an ongoing series called “Front Page” where I do a high-level analysis of companies that have recently undergone an IPO. The purpose of this is to shed some light on the journey that companies embarked upon from their humble beginnings to the ultimate destination resort: the ticker of a stock exchange. This series will kick off with Cloudflare.

Cloudflare is a company that provides services around website security and acceleration. Its beginnings stem from one of the best known startup conferences: TechCrunch’s Disrupt, where in 2009, founders Matthew Prince (now CEO), Lee Holloway, and Michelle Zatlyn (now COO) attended the conference. Between then and today, they have expanded their product line to offer services such as DDoS protection, web application firewalls, authoritative DNS, public DNS resolvers, reverse proxies, and more.

Cloudflare garnered media attention over time for multiple reasons. For one, they were known to be providing services for various notorious groups such as LulzSec, 8chan, and The Daily Stormer. They soon stopped providing services for 8chan and The Daily Stormer, but not before they made it known about their staunch support of content neutrality and the First Amendment. On the flip side,

Cloudflare has many differentiators. They block on average 44 billion cyber threats on a daily basis. They’ve also generated a DNS resolver that uses the 1.1.1.1 IP address. This allows your web server to connect at a much faster rate than your ISP. Also noteworthy is their Apps platform, which allows developers to construct apps, deploy them to any CF customer, and get paid for any apps that are used. It’s very similar to Apple’s and Android’s version of the app store. This plays directly into their Developer Fund, a $100 million fund that allows them to invest in startups and projects that are built on the Apps platform. By doing this, Cloudflare essentially creates a flywheel effect that only churns out more innovation, similar to the way Amazon operates.

With respect to funding, Cloudflare has raised over $330 million in capital, spanning all the way to a Series E round. Investors of Cloudflare over the different rounds include Union Square Ventures, Microsoft, Fidelity Investments, and Franklin Templeton Investments. At the time of their IPO on September 12th, their stock shot out at $15 / share. They ended up raising about $525 million from the IPO, and received a valuation of about $4.4 billion.

Because of their strong stance for freedom of speech, Cloudflare launched two initiatives: Project Galileo and Project Athenian. Project Galileo provides free resources to groups such as artists, activitists, human rights groups, and journalists in order to improve their vulnerability to cyberattacks. Project Athenian is designed to make sure that government election websites, both state and local, receive top notch resources for free so that people can have access to things like election information and voter registration.

Cloudflare’s journey has definitely had its ups and downs, especially with public opinion on their support of certain unpopular online groups. However, it is their innovation in web security and infrastructure along with the fact they are one of the best at what they do that has allowed them to weather the storm and mark a big milestone by ringing the bell to announce their public opening.

Imagine this scenario: it’s the weekend. You go to your usual grocery store and you see that there’s a sale on your favorite package of cookies. The angel on your left shoulder tells you that you’ve been doing good at the gym, you’ve been eating right, and you don’t need the cookies. Then the devil on your right shoulder tells you to take the damn cookies and eat it all. You know you shouldn’t buy the cookies, but you do anyway and after half the package is done, you start having this thought in your head – “I shouldn’t have bought these cookies.”

At one point or another, every single person has had an experience similar to this. The “oh I should have done X, not Y” thought you feel when it happens is what is better known as Cognitive Dissonance. It’s that mental uneasy feeling you get when you hold one belief or value and do something else. It stems from Leon Festinger’s research as seen in A Theory of Cognitive Dissonance (1957) when he performed an observation study of a cult that believed the earth was going to be wiped out by a flood. These followers gave up everything when they joined the cult, and when this flood never happened, they began to have this uneasy feeling inside themselves.

In these kinds of situations, people are off balance with their mental thought process and typically react in one of four ways:

• 1) change their current behavior (“after this, I’m done with cookies”),
• 2) change the behavior of the conflicting thought (“I’ve been good this week, I deserve to treat myself”),
• 3) justify the behavior by bringing in new thoughts to make up for it (“I’m going to spend twice the amount of time at the gym tomorrow”), or
• 4) ignore the thought and enter a never-ending state of denial (“cookies aren’t bad at all”).

Smart companies realize this and adapt their products to reduce as much of this experience as possible. They identify gaps between what people want to believe and what their actions represent and manipulate it without anyone noticing, which is a sign of great marketing tactics. It’s what helped spark the e-cigarette industry (for people who know smoking is bad but see a less damaging alternative) and is seen in the 100-calorie pack craze.

In the finance world, cognitive dissonance is all too common. The thought of a rookie trader waiting for a stock to drop in price before buying, only to see the stock skyrocket is nothing unusual. Neither is their reaction to buy the stock when it’s increasing because they think it will only continue to increase, which is completely irrational. VCs are often caught in this trap when investing in hot trendy startups and not looking deep enough or long enough at the future. Investing based on emotion never ends well.

Cognitive dissonance is likely unavoidable, but we should do our best to learn from it when we have these experiences. It helps to be aware of how the introduction of new information affects our biases and whether it helps or harms our judgment. Confirmation bias can also be an anchor to our analysis, since whenever we do experience that mental uneasiness, our first instinct is going to be looking for ways to justify our decision. If we can limit cognitive dissonance, we will be much better off in the long run.

Whenever a private company wants to go public, there are essentially two methods that they can follow in order to list shares on a public stock exchange: the company can file for an IPO, which most businesses do, or you can go the Direct Listing route, which is significantly less common. If you followed Spotify’s path to becoming public last year or Slack’s path this year, you might have noticed that both of these disruptive tech companies opted for the Direct Listing route instead of the usual IPO process.

There a couple of reasons why a private company would want to go the Direct Listing route instead of an IPO, but it helps to understand the difference first. With an IPO, a company seeking to go public works with an underwriter, whose main tasks include determining the initial offer price of shares, assisting in identifying regulatory requirements, buying the shares from the company, and then selling those shares to investors with the help of their network. During the IPO process, the company go on a “roadshow” where the CEO and executive team travel to different institutional investors and do their best to create interest in purchasing their stock. This process helps the underwriter, who normally represents an investment bank or group of banks, determine the offering price. If there happens to be a lot of demand, the price goes up; if not, the price tanks. Of course, if a company starts having red flags come up, that can also lower the valuation of the company (e.g. WeWork, anybody?)

When a company opts for the Direct Listing route, they sell shares directly to the public rather than working with an underwriter. No new shares are listed and existing investors and employees can sell shares immediately. By doing this, companies avoid lockup agreements that are included in an IPO, where there is a period of time (usually 6 months) where existing shareholders cannot sell their stock beforehand. Direct Listing is nowhere near as common of a path as an IPO is for a couple of reasons.

First, when a company goes the IPO route, the underwriter guarantees the sale of a number of shares at the price that was initially offered. They also agree to buy excess shares should that situation come up. There is also the right for the underwriter to sell more shares than they initially planned to if the demand for those shares is plenty, which is also known as a greenshoe provision. On the other hand, there are no such guarantees in a Direct Listing and no large investors that can back you during price volatility of your shares.

Still, there are a couple of reasons where it makes more sense for a company do a Direct Listing. If a company doesn’t have the resources of hiring an underwriter and going through the roadshow process, they don’t have to do so. By hiring an underwriter, companies are expected to shell out a fee per share (usually around 2-8% of the share price). That can add up to hundreds of millions if the IPO price is strong. They may also want to avoid the aforementioned lockup period and also may not want to dilute existing shares with the creation of new ones.

It will be interesting to see if more tech companies follow what Spotify and Slack have done. So far, they seem to be the exception with going the Direct Listing route and they have their reasons for doing so. I have a feeling there may be more to come.

OpenAI, the research company in San Francisco, California that is working on furthering development around artificial general intelligence, created a concept called “Learning Day“. Essentially employees here have an entire day of the work week dedicated to studying up on skills that will make them better at their job. This concept, developed by Wojciech Zaremba who is the head of Robotics at OpenAI, allows people at work to build up their gaps in knowledge and become more cross-functional as a team.

This idea is something I haven’t seen before. However, I am a huge fan of this; any opportunity for someone to level up their education and skills should be taken seriously. For the average person, their assumption that education stops after putting on a gown and waving their cap in the air is one of the gravest mistakes that can be made. You should always be trying to learn something new, no matter how significant. I think of learning like compound interest – a small amount invested daily adds up to a significant amount of wealth in attained knowledge over time. The idea of taking an entire day and dedicating it to this mission is definitely something to consider.

OpenAI bases Learning Day around AI-related learning material and encourages employees to share what they’re learning. They’ve found that although there may be a short-term stoppage in progress, the long-term effects are profound. Teams can actually collaborate with one another on a whole new level. You can have someone who isn’t a developer by trade and speak to a group of software engineers about machine learning principles and engineering best practices. This kind of cross-collaboration actually allows for more rapid progress and a stronger, more cohesive working environment. This result, although limited to a sample size of one, should be tested across different environments and industries, though unfortunately that seems unlikely.

An argument could be made here on the tradeoff of lost productivity. At first glance, it would make sense to be concerned about losing 20% of dedicated time to learning rather than contributing. This model may not work across different sectors and industries. Those with the drive and ambition could probably take time outside of work do the same things. However, just like the concept of artificial general intelligence, the cons in the short-term (lost productivity, high risk) can be more than offset by the pros of the long-term results (substantial progress, cross-collaboration).

I strongly believe that people should carve out time to work on improving themselves, whether it be physically, mentally, intellectually, etc. By dedicating a block of time to improving your skill set, you improve not only your career trajectory, but also your personal self. This can be as simple as reading a book (or joining a book club like Bill Gates’s) or taking up a MOOC on Coursera. In order for individuals to truly make a difference in their careers, relationships, communities, and pursuit of personal fulfillment, the act of attaining and applying knowledge must be at the heart of it all.

Piggybacking from the previous post, one of the most refreshing things to me is when someone is transparent. For someone to say what’s on their mind, to not hold back when asked for feedback, and to just tell it like it is seems to be an endangered quality in people today. It used to be that the truth was expected in most situations, but we seem to have shifted away from that. It is concerning because this is reflected across multiple parts of everyday life, from the illusions seen in almost every humblebrag post on social media to not being able to look at yourself in the mirror to see who you really are as a person. This can be deadly even for VCs and founders alike.

There are many reasons why it is easier to lie than to tell the truth. To not hurt someone’s feelings. To gain a competitive edge. To avoid the consequences. In most cases, I would argue against lying in any of those situations. For instance, let’s say someone were to ask you your opinion on what they were wearing or whether they should do x, y, or z. Most of the time, they are not looking for guidance as much as they are looking for reassurance. If you tell them what they want to hear, and it 1) isn’t your true opinion or 2) is something that could set them back in some way, then you aren’t really helping them. In fact, you’re in danger of setting them up for failure or embarrassment. Always tell the truth in situations like this. People may hate you for it at first, but they’ll eventually come around. Plus, it’s not your responsibility for how they react.

In the startup world, lies can aggregate quickly and snowball easily. The biggest example comes from Theranos, the blood-testing company that was supposed to revolutionize the way consumers can get a hold of their medical information. Essentially, rather than Elizabeth Holmes, the founder and then-CEO, explaining to investors and shareholders that the technology was not yet ready, she created a workaround to paint a Wizard of Oz picture. This is all came crashing down eventually and resulted in absolute catastrophe for nearly everyone involved. The documentary and the book paint chilling recounts of that experience, which only further supplants the notion that lying can take you nowhere but down.

Now this isn’t to say you should tell the truth 100% of the time. There are small exceptions, such as kids asking about Santa Claus or the tooth fairy. That’s more of a rite of passage. But when the situation is much more dire or fragile, it never benefits anybody in the long term when a lie is told. You may get away with in the beginning, but it will almost always come around and get you in the end. Not only does it potentially damage your integrity, but trust is also broken, which can be one of the hardest things to piece back together.

Telling the truth means not having to keep up with the details of the lie. Telling the truth also means it’s not your job to console people or make them feel better. They’ll hate you at first, but you can sleep at night knowing you put authenticity first before anything else.