Depression and Entrepreneurship: Don’t Pull Away

The story of Robin Williams’ death in 2014 was tragic, one of the funniest men in my lifetime, taking his own life because of depression.

I’ve started this post a number of times. Inspired by both Brad Feld and Ben Huh I have admired both men for their transparency (and I’ve told them both). But I haven’t had the heart (or will?) to complete the post and actually make it “live.” I guess I felt like one more voice wouldn’t really matter. Until Robin Williams’ death.

Depression is a reality. Not something having a “positive attitude” overcomes nor a simple series of platitudes that will help you rise above and pull yourself up by your bootstraps. I’ve endured through two bouts of depression in my adult life. For me, it was chemistry compounded with circumstances of being an entrepreneur.

Don’t get me wrong, being an entrepreneur had risks that (I thought) I understood when I took them on at the time. In retrospect, I understood the something about risk, but I didn’t understand anything about the loneliness.

Some of my close friends understood, while others pulled away because they (and I) didn’t know how to deal with it. Thankfully, the closest people in my life didn’t pull away. Thanks to my wife, Kathryn, for not pulling away.

You see, when people don’t know how to deal with uncomfortable situations in their lives, they generally withdraw from the situation. I saw that when my wife went through a battle with cancer nearly 20 years ago. There were people who said they would be there for us and weren’t. I don’t blame them, they didn’t know how to deal with the uncertainty and confusion of cancer, so after the platitudes and emotion of the diagnosis, they withdrew to a safe distance to live their lives. A distance that was comfortable for them – but out of reach for us.

That’s the challenge of depression. When you have a friend in the midst of it, you have to decide to walk with them through it. Or not.

If you decide to be there for them, you have to walk all the way through. Part way through won’t help them. Pulling back to a safe distance will make it more comfortable for you and this time, it’s not about you.

For me, the act of making this post creates anxiety. It’s personally risky. What will you, a normal people, think of me? But the reason to do this post isn’t about you, it’s for the person that’s struggling with depression. For them my risk is super small, especially if it helps just one person walk all the way through and not give up.

There were days when dealing with depression that simply getting out of bed was the toughest decision of my life. There were other days that I thought the world would be better off without me.

Life is hard, and it seldom turns out the way you expect. But people who love you and show it, do make a difference. So will you do me a favor? Will you walk through it with one person today?

This week. This month.

I promise it will be uncomfortable for you. But, it may just save their life.

No matter what people tell you, words and ideas can change the world.

– Robin Williams

Join us on 5/25 for a live, interactive AMA to hear more about this important topic and how we can all help out in our communities. We’ll be joined by Brad Feld, Managing Director at Foundry Group, and co-founder of Techstars. Register here

This was originally published here.

Startup Funding Mechanics: Incorporation, Convertible Debt & Series A

What do first time founders need to know about fundraising mechanics? This post should help you understand the basic lingo of fundraising – so you don’t look surprised or sound like a noob when you’re discussing funding. An attorney will go into a lot more detail and it’s important that you understand investor motivations – not all capital is green.

Please keep in mind, this is a founder’s view, I am not a lawyer – this isn’t legal advice. There are always exceptions to every rule. Especially in legal where optionality creates billable hours. Ask about costs with lawyers in advance.

Starting at Incorporation

Let’s start with incorporation. Who owns what percentage and what is a common number of Issued and Granted share and how do Stock Options play into the equation.

When you incorporate, you will Authorize (Authorized) Shares and Issue (Issued) Shares. Authorized is the total number of shares the company many issue over the lifespan of the company without changing its Charter with the State (incorporating entity). Typically this is a large number of shares so you don’t have to go back to your state or government agency to issue additional shares at a later date. Your corporate Bylaws and Charter will dictate how you can access these additional shares.

Issued shares include the number of shares for founders at the time of incorporation, the Stock Option Pool – usually 10-20 percent depending on if early employees get a grant or an option. As well as preferred shares that you anticipate selling in the early rounds of funding.

For example, if you wanted to increase your stock option pool, it would require documentation and a vote of the Board and perhaps shareholders. There are two types of shares at formation:

  • Common – the most basic of the shares
    • These shares are granted to founders and early employees at the time of incorporation or held in reserve
    • The 6,000,000 shares, in this example, would be divided between the founders – see Awkward Co-Founder discussions for more on that topic
  • Preferred – as implied, these shares will have a preference of some kind – but the preferences will be determined later. The preferences will change with each Series – or round of funding and generally grow in complexity with preferences, see below
    • These are the type of shares sold to investors
    • The specific preferences can change with each round of funding

When you incorporate your company the value or basis of the stock is (hopefully) the least it will ever be. At that point in time, you are granting Issued shares to the founders. This grant is in exchange for an Assignment Agreement and anticipated work to be contributed to the organization.

This is usually calculated in the fractions of pennies – so 3,100,000 shares may reflect a cash contribution of $3,100. This is likely the cash you and your partner(s) will be contributing to pay the legal fees or other costs associated with the early project work. This creates a basis for your stock price – when you sell it later, it reflects the cost you have in the stock. Think:

Total Sale – Basis = Taxable Income

Your Attorney Represents the Company

Not the founder. If you want someone to represent you and your founder team, you’ll need to pay them outside of the company funds.

The attorney also doesn’t represent the investor – but they may try to cozy up to them. In one of my startups we had a big name investor (I won’t name drop here) and our attorney decided that he might get more business by helping out the investor. This is not “good form” and professionals should know better. We ended up letting that attorney go and finding another one in the process.

Board Members also represent the interest of all shareholders – it’s called fiduciary duty. They will be required to vote their shares – especially if you have a class of shares to vote. However, they need to represent the best interest of the business. More on this topic in another post.

You’re now incorporated, you’ve established your basis for the stock. In the US you’ll need to file an 83B election.

Stock Options

Stock Options – are the shares held by the early team members or contractors. These are typically Incentive Stock Options (ISO) or Non Qualified Stock Options (NSO). ISO’s have favorable tax treatment of Capital Gains vs Regular Income (more in Joe Wallin’s blog). They are shares granted at the time of employment or generally the next Board meeting.

  • Strike Price – this is the price the shares are granted at the time, at incorporation, it’s likely $0.01 per share. As a later option it will be closer to the fair market value – for more details see Fair Market Value of a Startup. Keep in mind they can’t be granted at a cheaper rate than Fair Market Value without creating a taxable event. The price is the same price for everyone you grant options at that time.
  • Vesting Schedule – is the term in years that the shares will vest. Usually three or four years, it can be monthly or quarterly. Let’s use the example of a four year schedule with a one year cliff. Cliff Vesting – usually the first 12 months is the initial vesting schedule.
    • 60,000 Share Grant example
    • Strike Price of $0.10 a share
    • 365 Days =  15,000 shares vested
    • 45,000/36 remaining months = 1,250 shares vested per month
  • Reverse Vesting Schedule – for a founder, when you are granted shares at incorporation you own the shares, however, you may be asked to reverse vest those shares. The reason is simple, let’s say you own 35 percent of the company and you decide at month 13 that you want to go do something else with your life – things happen. If it was similar terms as above

 Original Shares


25% for year 1



2.7778% (or 1/36)



 Total Founder Shares at Exit


This leaves 2.26M shares available for the company to use to hire your replacement or replacements over time. Think of this as a “must be present to win” tax. Remember, as much as you might think you are “owed” these shares as a founder, the market recognizes you have to keep contributing as an employee to keep the stock.

Convertible Debt

A convertible debt is a debt instrument used to put money into a company without having to put a price on the value of the company and the corresponding value of the shares. This funding mechanic is good for startups in a number of ways. First, you think your idea is more valuable than it really is, all of us do, so you don’t have to price the stock lower than you would like.

Second, the legal costs associated with this type of financing should be the cheapest option for your startup.

  • Convertible Debt
    • Amount – of the individual and as a total
    • Term – accrued interest over what timeline
    • Rate – usually in the 6-8 percent range 
    • Conversion at Qualified Financing – this stipulates reason for converting and the minimum amount to be raised – this would include accrued interest from the early investors
    • Cap – a cap is the reason a investor is interested in this financing mechanic. In the case of Techstars, it converts at either the lessor amount of the financing or the “Cap”. For example, the cap may be $4M. If you raise a $1M at $5M pre-money, the original investors are effectively in the money from their original investment – though they can’t sell the stock at this point.

Debt is “first in line” to get paid if the company was to fail and you have to sell the assets (assuming there was value). What that means is that if you have IP that you can sell for $100k and you have $1M in convertible debt holders they would get a pro-rata % of that sale before shareholders – like founders – would get paid anything.

Keep in mind, these early investors are taking the most risk at this stage of your company and most don’t want to simply get paid back their principal and interest. They are looking to actually own the stock.

Selling Stock – Preferred Shares

Preferred Stock sales is a priced round of capital to be sold. Generally it “stands in front” of common stock until a company goes public, at that time all of the stock generally is the same – all common. Their are exceptions, like the Killer B stock, but in general an IPO converts all stock to common. The size of each of these Series depends on your location, e.g. the Valley has bigger funding rounds than Iowa City.

Keep in mind, when you sell new shares of stock in the company you are not selling your shares, you are taking shares from the Issued Preferred Shares. This will cause overall dilution to all shareholders, but the cash will go to the company and not to the founder.

  • Series Seed – Series Seed documents are an open sourced set of documents designed to be both company and investor friendly. The goal of Series Seed is designed as a template your lawyer can use to keep the documents cheap – you don’t want $30k to go to the lawyers for a $250k round of funding.
  • Series A – the terms of a Series A round of funding is set by the lead investor. It’s a negotiation, but you’re not completely in control of the process unless you are killing it on your forecast to actuals numbers and have multiple investors that want to lead the round. Having competitors always matters in getting the best Term Sheet.
  • Participating Preferred Shares – this means that they investor will get their money back and then participate like the common shareholder.
  • Series A Extension – extending the previous round and fundamentally the same terms.
  • Series B – simply comes after the series A, can include a range of different terms

A Few Other Provisions

Here are a few other legal terms you’ll see on term sheets

  • Pro-rata participation – this is a provision that allows the investor to keep their pro-rate percentage in future rounds. If they invested and have a 5% share, they have the right to keep that 5% share if they continue to invest in the up rounds
  • Down Rounds – Cram Down Rounds – if you missed your numbers and are running out of cash, but your investors believe in what you are doing you may be faced with either a down round or a cram down round.
    • Down round is simply a pre-money price that is lower than the post money price of your last round – your company has effectively gone down in value
    • Cram Down is where an investor forces other investors to participate or effectively crams down their percentage of ownership.
  • Drag Along/Tag Along  is a provision that allows and protects majority shareholders to pull along a minority shareholder, specifically at the time of a sale.

Questions about fundraising? Use the comment function below.

This was originally published here

What are the 8 B2B and 12 B2C Internet Startup Business Models?

Startup Weekend Hong Kong

In 2012 I started a series of posts, talks and slides on Startup Internet Business Models. Those Slideshare posts have been viewed over 4,000 times.

That led to a research project of 2,600 funded companies from Crunchbase between Jan 2013 to mid 2014.

I’ve finally created a single document with a list of the eight Business to Business (8 B2B) and 12 Business to Consumer (12 B2C) business models that I’ve documented.

I finally promoted the posts to their own page (with some pending sub-pages where I’ll go into detail on each model) to make the content easier to navigate.

Have questions about business models? Post them in the comments section below.

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Have An Acute Focus On The Problem, Not the Solution

I love engineers and developers! But sometimes they build a solution that is in search of a problem.

I recently read a headline on a LinkedIn post that reflected the headline above. I didn’t get a chance to see the author or article (I think it was about QuickBooks or Quicken), but the headline struck me given my interaction with technical founders. Often I’ll have Founders and Entrepreneurs that come into the Founder Institute with an idea for a product or an app, it’s a solution. But does that idea solve a customer problem and can you build a company around the idea?

  • Is your idea a feature, or something that the founder discovered using a current platform or application? Building a feature won’t necessarily allow you to build a product or a company. For example, an App for Facebook, especially when it’s something you think Facebook could build. Building the App might solve the problem, but your real problem isn’t building an app, it’s your ability to get 100,000 users before Facebook builds the solution themselves.
  • gap in the market not currently filled? A gap may not represent a market need if the existing solutions are “good enough” and the cost of switching is high. For example, better Accounting software that fills the gap between QuickBooks and Workday. Both work great as is, and the cost of switching and risk are high.

I worked on a technical hardware product some years ago that was a great example. The company had spent a great deal of time and engineering $$ building a hardware device for IT Security. The problem was that they had never clearly identified a (large) target market, or an initial launch market. They started with the solution then asked me to work backward to find the problem that the product could solve. Regretfully, it’s not that simple.

1. What problem are you solving and for whom?

This seems an easy enough question to answer. There are a number of ways to look at the market and the user for whom you are trying to solve the problem, but just remember that you aren’t the customer. I was meeting with a company last week and they have built a product and identified a single B2B customer that could be a customer of the product. That’s a great way to identify a potential launch customer, but as we discussed the broader market of buyers, the use case became very “fluffy” and they couldn’t identify a company profile or market.

  1. If you are selling a B2C business model – what is the customer profile? It’s not everyone! Is your user male or female, young or old, a Mac or PC user? Etc. You don’t have to go so far as establishing a persona for the customer, but you should do that over time, as you better understand your customer.
  2. For B2B, what are the market characteristics of the customer? Is it a tool for companies that sell to consumers or to businesses? Do they sell large price point, slow sales cycle products or do they do a one-call-close with an inside sales team. Is it a transactional sale that is driven through marketing and customer service and no sales person is involved? Those three examples have widely different selling models and the corresponding margin to pay for your product.

After you evaluate the market, you need to understand if that market is big enough to justify building the product. Don’t stop focusing on the problem, keep it front and center to your company.

2. What is the Solution?

If you follow the Lean Startup methodology, you should be able to identify the your minimum viable product (MVP) before you build it. We recently had a mentor in the Seattle FI program named Justin Wilcox and he framed the MVP slightly differently. For Justin, the MVP started with testing your riskiest assumption that you needed to prove or disprove first, for example:

  1. Can it be built? Is it a technical challenge that can be solved?
  2. Does anyone want the product? Again, you are not the customer, having a buyer of one is a bad business decision.
  3. Would they pay for it? And what would they pay for it? This is only market research before you can actually take a credit card (B2C) or send an invoice (B2B).

One thing is for sure, don’t just keep coding or engineering before you answer some of these questions. You can spend the next 33,280 hours of your life on the wrong idea.

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6 Rules for Startup Sales Comp

I get asked a lot about sales compensation and how to hire sales people for startups. I’ve written before about not hiring a sales person too early here. Your first sales person is going to be the Founder. If the Founder can’t sell it, a sales person won’t be successful either.

Let’s start with the fact that, in general, being a Sales Person is a tough job. Products don’t sell themselves and a sales person spends a huge percentage of their day choosing the self-inflicting job of accepting rejection for a living! For doing what most humans don’t want to do, the good ones get paid disproportionately well for their efforts. New products add a level of complexity to their effort as well; most new products require an educational sales process (multiple demos, customer testimonials, etc.) because people don’t know your brand or product. Educational sales process = time.

The Founder has the vision for the product and, in most cases, that vision is blurred between what features actually exist and are sellable today and a blurry vision of the future for what the product will be in a mature state. This blurry vision can often mask all of the blemishes of the product in its current state. Hopefully, the Founder has been doing the early sales and knows how this current state impacts the sales effort. One other note, customers will also react differently to Founders than to sales people.

So there you have the setup for the epic battle – in one corner, the Founder that doesn’t want to pay anymore than they have to for a sales person. In the other, the Sales Person who knows their day will be full of demos and rejections and thinks that without them, sales will be zero, so they should get as much of the cash in the transaction as possible.


1. It starts with the numbers:

Early stage companies often don’t know their KPIs, Key Performance Indicators, well enough to draw strong conclusions. So you have to recognize that you are forming a hypothesis that will be changing over time. And when you find out your hypothesis is wrong, you’ll need to make changes in the comp plan. See, Picking a Structure that Works below.

Pricing, I’ve written about the mystery of product pricing here for more detail or here, about not starting pricing too low. The summary for this post is that your pricing has to balance between competitive market price and high enough to pay someone to sell the product. Or the direct sales model that you are anticipating here won’t work.

Free isn’t an option if you have need a sales team. Discounted or a period of time is a marketing option, but you can’t support a sales team without a big cash balance or revenue to pay them for their efforts.

Three of the KPIs you need to use (or guess) are:

  • Life Time Value or LTV of the customer. How much will the customer pay for your product over a set period of time? In a mature state, you’d calculate it over a 36 month period. For an early stage company, I’d calculate it over 24 months or less. This will change as you have more data.
  • Churn, initially you’re going to have high churn because the product may lack the features the customer wants to continue to pay for the use. Sales people aren’t in charge of churn.
  • Gross Margin or GM, ideally you’ll be able to know how much margin is in each sale.

This is where the spreadsheet work needs to get done. The total sales expense will be 15-20% of total revenue (not including marketing), but including fully burdened overhead (benefits, expenses, office).

2. Transparency & Motivation

There has been some recent research about how random motivation is good for employees. I’m not sure I agree with the research, but I can tell you that it doesn’t apply to sales people. They need to know with certainty that the tasks they are completing will result in compensation. They need to be clear on why they are getting on the phone to get another “no.”

There are many aspects the Sales Person doesn’t directly control:

  • Product releases/updates/features – that means they can’t sell the future, they have to sell what they have today.
  • Pricing – you may give them some discount ability, but the Founder and marketing team should be setting pricing.
  • Churn – the only time a sales person controls churn is when they are selling the product to the wrong customer – that is just a bad sale. If the sales person continues to sell this way, it’s a problem with the sales person who will need to be terminated.
  • Collections – you don’t want to have your sales person doing collections on accounts, you want them to sell new accounts. Don’t pay reps until payments are received, but don’t make them accounts receivable

They are only in control of their activity. Use to track the sales process. Leads need to convert to opportunities. Opportunities have stages (especially in an educational sales process). Don’t know the process yet? You’d better figure it out before you hire a sales person.

Time is the other factor here. The payoff for the sales efforts needs to be in the same month – not a quarter or a year. A sales person can’t see a quarter or more out – let alone a year – unless it’s a huge transaction size with a corresponding huge commission. Not your average comp for a startup.

By the way, I know you don’t want employees talking about what they make… but they are going to anyway. You better make sure that everyone is on the same plan.

3. Balancing Base Salary and Commission

You are generally going to have to pay “market rates” for salary based on your market and industry. That is still true if you have very few competitors and you’ve innovated a new product.

You can build a scalable sales team or you can throw some interns with “mud against the wall” and see what sticks. I’m not a fan of the intern method. What I mean here is that you hire a few-bunch of new sales people at minimum wage or commission only and see what happens. It’s really hard to forecast that in your model and when you finally cut over to a scalable team, you’re going to be in for an economic shock. I’ve seen companies succeed here, but I’ve seen more fail in the same effort.

In sales comp, you should set a Target Compensation – let’s pick $48k as a basic number to work with – the sliding scale now becomes the mix of salary to at-risk compensation, usually commission or bonus (depending on the market and tax status). In this case, base is at or near market rate for the position, given the industry and market.

The blend starts at 50/50 or $24k salary and $24k commission. This assumes that the product is relatively straight forward to sell and that the sales process is more predictable. If that sales process isn’t predictable, you’ll likely have to be more of a 75% salary, 25% commission. If you’re super early (or too early) in your product release cycle, I’ve seen the split be 90% salary and 10% commission. That usually means you hired the reps too early.

There are rare circumstances where commissions only work, e.g. it’s a person that doesn’t need a base salary, but still wants to receive compensation for their efforts.

4. Aligned Incentives

This rule sounds pretty obvious, but I can’t tell you how often it’s missed. I remember once, early in my career, when I was working with a compensation plan that was capped. I can’t remember what the percentage was, but if I hit the maximum goal for the year before the year end, I was no longer paid commission until January.

I remember the conversation with our National VP of Sales. It was mid October, and we had a passing meeting in the hall. His comment to me was basically, “Great job this year, you’re killing it, just a big push for the end of the year.” I remember saying that I was at my maximum commission for the year and was actively asking customers if they really needed the order this year or could just as easily take delivery next year. He was shocked, but the fact was that our incentives were not aligned – that is a bad compensation plan. So when I’m asked about capping commissions, my answer is always, “No.”

Avoiding “Unintended Consequences” is another way to look at this topic. Sales people are defined by their compensation plan, not their job description. Sorry for the surprise, but they will do the things that benefit them. So make sure that your incentive plan doesn’t drive any strange behavior. If it does, that’s your fault, not the sales reps’!

5. Picking a Structure that Works

It’s important to pick a structure that has longevity built into the plan.  You don’t want to be changing compensation plans every year, or worse a couple of times a year. Here’s an example using the numbers above.

  • Base salary – $2,000/month
  • Commission $2,000/month at 100% of Plan.
    • Usually paid on the 15th of the following month. You’ll need the time to close out the month and calculate the commission.
  • Quota is based on 100% of what is the attainable goal
    • There are two ways to incent on the slide scale – vs. a straight percentage basis, e.g. 125% of goal paying out 125% of commission. This single tweak will have a greater impact on driving sales behavior.
% of Goal % Payout
70% 50%
80% 70%
90% 80%
100% 100%
110% 115%
120% 140%
  • Depending on the base, being below a minimum (in the case above <69%) would payout a zero commission.
  • Above Goal should provide incentive to increase your number – vs. being a straight linear calculation.

6. What should the goal be?

Now that is the question! Here are some examples, based on what data you have and the stage of your company.

  • Total revenue per month
  • # of new subscriptions per months
  • # of pre-paid subscriptions per month (e.g. buy six months and get one month free)

Keep in mind that payout of commission is going to be paid only after the customer pays. You don’t want to start setting a precedent that sales reps get paid even if the customer doesn’t pay, that would be a slippery slope.

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TAM, SAM, SOM and LAM – What’s your Launch Addressable Market?

The effort of market sizing helps establish the potential market share your product could attain within the total market. Market sizing can be a difficult challenge for startup founders. They are looking to prove that they are going after a Multi-Billion dollar market for their products so this can lead to a bit of delusion on the market scoping exercise.

My goal here is to help you to avoid the 1% of China market – you know the person that has an awesome product and if they just sell it to 1% of the China consumer market they will make Billions! Of course the other example is that you just need one customer at $1B!

To help understand market sizing, let’s use a software example (vs. a restaurant of automotive). Let’s say you want to build a better Customer Relationship Management (CRM) product to compete with OK, I’m a Salesforce fan, but I’m happy to start with you on your hypothesis, Salesforce isn’t for every company.

Total Addressable (Available) Market – or TAM – is the entirety of the market for your product. Everyone worldwide that could buy your product.

So in the competitive scenario above, your Total Market would be any person that interacts with customers or potential customers – across all industries, geographies and sales models.

Service (Serviceable) Addressable Market – or SAM – is the market you can acquire with your product. An example of a limitation would be if your product is only in English, you would only be able to target a subset of the TAM that would be willing to buy your product in English. The next filter might be the vertical market that  you are targeting, e.g. technology companies with sales teams vs. let’s say, drug companies with sales teams.

In the CRM market, your SAM would now be the people in sales and customer service worldwide who use English as their primary language for business.

Service Obtainable Market – or SOM – is the portion of the market that you can garner or get to use your product. What is the realistic market share that your company can garner at six months, 1, 2 and 3 years after launch.

This is where the analysis gets harder to calculate. It now has to do with the features you have at launch and the needs of your customers.

You can’t sell to everyone, who is the most realistic target customer?

In the example you’ve decided to target your CRM product at the technology sales market, you’ll need to narrow your market again:

  • Small sales teams
  • Medium sales teams
  • Large sales teams
  • Complex selling cycles
  • Educational sales cycles
  • Transactional sales cycles

The new concept I want to propose is Launch Addressable Market – or LAM. Today’s startup market is very familiar with the concept of Minimum Viable Product (MVP) and Lean Startup methodology talks about “getting out of the building” to validate you idea with real customers (technically prospects because they haven’t purchased anything yet). The concept of the LAM is where your market sizing exercise meets your MVP and product roadmap.

Get out of the building and go prove your launch customers enthusiastically wants your product. If that LAM customer falls into the “Meh” category, they are underwhelmed by your offering, you’re never going to get to your SAM market.

Remember there is a difference between your launch product/market and your scale product/market. If you don’t find customers for your launch, you’ll never get to scale!

You’ll need to convince investors that the market is both big and you can find the path to get to that market.

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