Phil Libin On Evernote's Close Call: Just 3 Weeks of Cash Left During The 2008 Financial Crisis

While Evernote now has north of 75 million users and a valuation that's reportedly more than $1 billion, the company faced many close calls. In fact, it had just three weeks of cash left during the 2008 financial crisis when an investor bailed at the last minute, said CEO Phil Libin today at Y Combinator's Startup School in Cupertino.

The investor dialed Libin saying they had seen 60 percent of their fund value vanish into thin air as equity markets crashed on Lehman Brothers' bankruptcy filing.

They called Libin and told him, "We're not going to do it."

"We panicked," he said. "I spent a week frantically calling everyone that I knew."

Because he had entered "exclusivity" in those financing talks, Libin had given up his right to move discussions with other investors further along.

So he was left in a lurch. With two weeks left of funding, Libin made the painful decision to shut down Evernote and fire everyone. (He said that you can't burn your cash all the way down to zero because you need reserves for the legal costs of shutting down a company.)

"I remember sitting there at 3 a.m. thinking that this is what it must feel like to be an adult," he said. "This is what it feels like — making adult decisions. This sucks."

But then something just short of a miracle happened.

A passionate Evernote user from Sweden dialed him up. He told Libin that he had been using the product for two months. He said it had changed his life — it had made him happier and more organized.

Libin remembered thinking, "That's nice. This makes me feel better. Maybe if you can make a difference to one random guy in Sweden, that's enough."

The user, who asked to remain unnamed, went on to offer some investment. Twenty minutes later, they ended up on a Skype call and then within about a week or so, the investor had wired Evernote a half-million dollars.

That gave the young company enough runway to prove traction and fix a complicated legal structure that had scared off earlier investors.

They went on to secure investment from Japan's DoCoMo Capital, then several rounds of financing with participation from Sequoia Capital.

After talking about his close call, Libin also offered a couple key pieces of advice to young founders.

1. Make friends with potential co-founders. "I think the most important thing at a young age that you can do is cultivate a group of brilliant, high-energy, willing-to-work-for-free, best friends for life."

He said many of his key people from his earlier companies like Engine Five have stayed with him through Evernote.

He joked, "You shouldn't even make friends with people you couldn't see starting a company with. Why bother? You only have so many friends you can have."

2. Don't get clever with legal structures. Evernote was originally formed out of a merger between two companies — between Libin's startup and that of another company in Silicon Valley that was working on the same idea.

"We were way too clever with the legal structure. It basically made us un-fundable for a couple of years," Libin said.

"This was all a mistake. The personalities between the two teams were great. We were able to build something fantastic. But until we were worth enough, we had to unwind and fix it. The fact that we were clever — trying to preserve this unconventional structure — probably cost us 18 months."

3. Build products for yourself. He said Evernote was the first company that he's been passionate enough about to work on for life. (His earlier companies relied on contracts with companies and government agencies.)

With Evernote, he tried to do something different. "I thought — let's build a company we want to keep. Let's explicitly say there is no exit strategy. Let's make something sufficiently epic to be our life's work."

And Libin says this matters now because the larger a company gets, the harder the job gets.

"It gets better. But it doesn't get easier," he said. "If what you're trying to optimize for is making things easier, this isn't it. This gets harder and harder all the time. It's not fun day to day. Month to month, it's really gratifying. It's vastly satisfying. But the only reason this works, is because we found something sufficiently epic to do.

"Five years ago, it would have been stupid advice to build something for yourself. But now if you build something that you love, that you believe is sufficiently epic, there might be another billion people in the world who love it, too — unless you're weird."