| description | I'm helping build a startup, what do I need to know? #thisisnotadvice is a community-edited, comprehensive reference guide on how to work. |
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There may be no topic in the history of business with as much published advice as there is on startups. These questions are just a few that may matter. For a repository of many more, see resources like Founder Library.
If I want to start a company, what's the very first thing I should do?****
There are many different ways up the startup mountain. The "missionaries vs. mercenaries" concept of who builds great ventures is nice, but some great founders were unfortunately just mercenaries. There are also people who say, "I'm going to start a company, I don't know about what," and while it's tempting to call them "wantrepreneurs," they sometimes do great things.
While there are many ways up the mountain, think about your "first useful thing," which is it's sort of like a minimum viable product (MVP). If you read The Lean Startup, you'll learn that an MVP is intended to test a single hypothesis, so it's almost a throw-away.
A "first useful thing" is guessing the first thing that you can offer that will be valuable to someone. Surprisingly, many founders instead think about the 92 things they'll eventually do, or their long term vision. Long term vision is amazing, but just making something useful for a single person, that's the guess you need to make. In startups, it all starts with a guess.
You don't need to be a "natural entrepreneur." It's similar to running – sure, some people are really good at running, but anybody can practice and get better. [Ed.: in my career, I've started about 19 things, and only two of them were worth incorporating into an organization. Over time, I've gotten better at imagining things.] You can practice guessing and, like everything else, you can get better at it.
How do I do the least amount of work to prove I have a good idea for a startup?
Prove -- to yourself, at least! -- that customers will value your product, and give yourself enough time to evaluate yourself and the startup process.
When starting out, it’s easy to spend time on your strengths and ignore your weaknesses until much later. In fact the startup world often fetishizes a founder's particular strength. That is to say, if you know a particular founder is design-oriented, you expect to see some of the most beautifully designed things from them. Despite this, if you know you are capable of doing something, it can be beneficial to focus on the other things. Simply put: start with the stuff you don’t know you can do.
[Ed.: I remember a startup in which we, foolishly, passed on investing that had made such fast progress. When I asked them how they'd advanced so quickly they explained that they'd exclusively focused on things they were unsure would work.]
Often the biggest question around a startup is whether other people will want it. It's good to take shortcuts, if they allow you to prove that people will want your product. There's also a paradox in the shortcuts: you want something that seems extraordinary to others, but you also want to work as little as possible and not put in time to make this thing extraordinary. Consider creating a throw-away product, or a minimally-viable product. This is a product that you don’t intend to sell, but it serves as a way to test an aspect of your hypothesis. The goal here isn’t to create something beautiful, but simply to prove that it will do what you want it to do and that people will find it useful. [Ed.: I love when we get pitched things that are totally busted and janky, but a bunch of the people using it adore it because it just does that thing they need. The product being busted and janky isn’t a problem, because you can fix that over time.]
You want customers to think, "Oh, this is amazing, this solves my problem." In the olden days, you may have had a conversation or used a PowerPoint to make your pitch. But now, people are getting away with something that looks like a Google Sheet because they know exactly how to talk about it, answer the problem and re-pitch it in a way that their customer base understands. They're putting less effort into the pitch presentation but they are still impressing their customers -- because they focus on what the customer finds valuable.
You also want to discover what you personally enjoy in building your startup and, as importantly, want to avoid. A startup is more than just a product or an idea, it's a fiction created by a set of people and there is a social angle in creating a startup. Think of the startup world as an ecosystem. Apart from you, the ecosystem also consists of those with whom you work and those to whom you sell. Ask yourself, “Do you like selling to these types of people? Do you like the people who you might have to hire?” You may find that some aspects of your approach, which you originally felt were essential, no longer seem like the right way forward. A classic example: a technical founder whose product requires enterprise sales, but later discovers they don't want to be selling things to enterprises or taking CIOs out for steak dinners. Those "what do I enjoy" discoveries matter. On the one hand, you want to be lazy and figure out your idea as quickly as possible. On the other hand, you still need to figure out if you want to devote yourself to it. When you are trying to prove you can create a startup, you tend to think of the customers, but really, it's as much about the customers as it is about you. Your enthusiasm for your startup is as essential a resource as capital or customers.
[Ed.: Julie Uhrman, my co-founder for a startup we built, had a great definition of success, which is, "If every day or every week, you're more excited about it than you were the week before, you're succeeding." And it sounds so simple but ultimately the battery pack that fuels companies is founder energy.]
When trying to do as little work as possible, it is important to test if your product is useful and have insight about the thing that is going to be wildly exciting to the customer. Even if you cut a ton of corners, you can't cut the corner of what will excite the customer, or keep you energized.
[Contributed in part by: James Cham, Partner, Bloomberg Beta]
How do I tell my family and/or significant other that I want to start a company?
Starting a company is not a single moment, oftentimes you inch toward it. For some it looks like, "I had this Google Doc I shared with somebody about a thing I was thinking about... we should launch this feature and see if it works... oh wait, it has a lot of users... wait a minute, I think we have a company now."
One of the major moments people experience is when they choose to wear the identity of founder. When you change your LinkedIn to say "Founder," that's a big deal. And telling the people you love the most is part of that.
If you have a significant other, they are your "co-founder." No matter what, they are along with you for the ride. You have no idea what starting a company is going to be like for you. You can ask friends, but it's different for every person. It might not be that stressful or it might be all-consuming, 24/7, and literally change the shape of your body and the biochemistry of your brain.
Ideally at the very first moment when you're aware of the desire to start a company, you should invite in your significant other or family and have an open conversation about all the possibilities of might unfold. Ideally they will be enthusiastic for you.
[Ed.: My former co-founder, Julie Uhrman, who now runs a soccer team in LA, had an incredible definition of success when thinking about the process of starting a company. She said, "If every week you're more excited about it than you were the week before, you're succeeding." And it sounds simple, but that's what happens. You gradually build and build and then one day, voila, a company.]
Some founders mistakenly think, "I'll manage my stress so my significant other, they won't have to feel my stress." This never quite works. They will feel it. You will not be able to hide it. You need them to be your co-founder. Don't try to "manage it" inside because it'll just make it worse.
[Ed.: When I started a company, it started out as, "Here's a project idea ... you should work on that with X ... let's bat some ideas back and forth ... oh she's incorporating it and we should invest a little bit of money." All of a sudden I realized I was completely emotionally consumed. And Sara, my wife, said, "We didn't talk about this. I didn't sign up for this." She was incredibly supportive, despite that. She should have had many moments of discussion and decision along the way. I interpreted her creative enthusiasm and involvement as, "We talked about it." And I should have created more opportunities for her input along the way.]
So how do you tell your significant other or family that you want to start a company? Do it immediately, gradually, and with an understanding that you don't know what you don't know.
Should I have a co-founder?****
No, you shouldn't have a co-founder (...if you're asking yourself this question). If you're asking yourself if you should have a co-founder, then you don't obviously need one, and it's not a rule that you need a co-founder. Co-founding teams can be great – Google did well with a co-founding team – but there used to be this myth around the VC world that there were no good companies with a solo founder. But then Jeff Bezos did pretty well ... then Elon Musk did pretty well ... then Katrina Lake did pretty well (even if she had someone working with her in the beginning).
The evidence suggests you can win in multiple ways. Instead of thinking about whether you should have a co-founder, think about when you should have a co-founder. [Ed.: I worked with Julie Uhrman and she was the primary founder and I was the secondary founder and it worked great. I would never have been able to do it without her.]
Some founders say "suchandsuch VC is telling me I need a co-founder to do thisthingortheother, so I'm going to go find one." Do you actually think you need one? If so, then great, but "a VC told you" is not a reason.
In his research on entrepreneurs, Ethan Mollick learned that solo founders last longer in terms of building their company and are no more or less successful than teams. Teams can be detrimental in some ways, because decision-making becomes harder.
How to figure out if you do need a co-founder: do you have a skill you need for the company, where the person to fill it is important enough that they need to be a co-founder for you to get the right talent? In the case of Instagram, Kevin Systrom hacked up a prototype, but ultimately he needed a technical founder and brought in Mike Krieger to make things sing.
Most of the time, the co-founding teams that work the best have pre-existing history with each other, where they've had some base of experiences on which to draw, to trust each other.
The best co-founding teams tend to already know each other well. Startups are such a trust-driven, pressured environment that if you already have a bond, then it's so much easier than an "instateam." That's one of the reasons co-founder dating is such a difficult concept, and there are so many wife-husband, sister-brother, or best friend teams.
Do you even need a co-founder? You can practice starting a company while you search for one, and maybe discover you don't need a co-founder at all. Starting companies is a trade, an occupation. It's not magical chemistry where you take the magical idea and the magic skills and you can mix them all up and then -- bam, something great happens. Like being a chef or an architect, if you practice at it, you get better at it.
The best way to have ideas is by trying to have lots of ideas, working on them, and running into walls over and over.
A lot of the time you have an inkling of an idea, there are so many ways that you can test it -- as simply as asking 20 of your friends, "Is this interesting?" Make a Google form and ask a hundred people. By doing side projects on your own, you may test whether you even need a co-founder. If you do need a co-founder, or if you even just want one because you feel lonely -- that's good to learn.
Now practical tips on how to find a co-founder:
Say in public some of the ideas you're interested in. Twitter is great for this. See who's drawn to you and work with them. Hack with them on some stuff, make some things, see where it goes.
Who are the most talented people with whom you have ever worked or wanted to work? What are the interests that you share that you want to work on together? That respect, more than some resume assessment, is the glue that can make a great company.
You start working with somebody and, if every week you're slightly more committed to working with them than you were the week before, great. [Ed.: My co-founder at the startup we started, used to say that success is if every week you're doing better than the week before. Deceptively simple. True.] You don't need a big "let's talk about the status of our relationship" moment. (Though at some point it helps to talk about your expectations.)
It's like hiring for anything else, with the exception that it's hard to fire a co-founder. It's painful. So do more diligence, proportionately to that. Work with them for a month, talk to lots of people who know them, go hang out with their family, eat dinners together. If you actually like each other, it can work much better.
These tips are all based on this philosophy of: teams that know each other well tend to work out best, starting companies is a trade you can practice, and always solving for quality.
How much does my company name matter?****
When it comes to naming, there is a basic "test suite" to go through:
Whether you're good or bad at naming, eventually you'll need to get your company's .com URL, so you need to choose a name to get things moving.
And you need to like the name. If it doesn't feel good to you every time you say it, then you're going to be carrying that discomfort for a long time.
The name shouldn't have any obvious fatal flaws. There have been company names that were anagrams for swear words. If you became wildly successful, that could end up being a shackle.
Also recognize that often names evolve. Justin.tv became Twitch, eShares became Carta. So don't agonize over it too much. Only stress to the degree your customers will stress – if they won't stress that much over your name, you shouldn't stress that much.
[Ed.: At the company I started, we agonized over the name. We came up with the trick that if you had a numeral in the name, then it was easier to get the .com. But then the design team we hired to work with us presented a better name, so we changed it.]
When you're naming a company, it's easy to stew over phonetic questions like, "Can it be spelled easily? Can it not?" Depending on the context, these things can be overcome. The least obvious question is, "How much do you love your company name?" Because that name may walk with you for a long time. So you might as well love it.
Most people tend to think too much about whether some startup idea (or early product) would be easy to clone. Most wildly successful startups would be easy to clone (or would have been in their earliest days). Would Airbnb not have been easy to clone in the beginning? Most startups lack defensible IP in that traditional sense. It's usually about the cost benefit of copying a startup, or the skill required to bring the finer details to life. It's more like a movie than like "technology."
There are now alternative corporate forms to a standard corporation or LLC that intend to induce companies to have more of a positive impact on the world. They do that through a combination of mechanisms. Some of them are government standards. B Corporation is a certification from a nonprofit. (If you know about building design, the mechanism is similar to the LEED certification for environmentally-friendly design.)
Do these mechanisms create a company that, in fact, "makes more good?" There's no structure that can guarantee making a better company. These new structures give you a basis as a company to say to your shareholders, "I am choosing to optimize for something other than shareholder value. And therefore, if you believe I'm being a poor fiduciary of the company because I'm not building shareholder value, I am taking away a basis for you to sue me." It's unclear if that power has ever been tested; in theory, that's one benefit.
The idea that being forced to deliver shareholder value causes bad corporate behavior might be based on a mistaken assumption. If you ask a company solving for shareholder value to do good, they could say, "What if I'm just solving for shareholder value, just over the long term? If it's good for business to be good for the environment and good for workers, isn't this just a question of time horizons?"
If the benefit of these structures isn't delivered through some "guarantee of goodness" that follows from the corporate form maybe the rationale is that companies that try to do good, in fact do good, and these structures encourage that?
What does drive companies to do good over the long term? When companies are attempting to solve for short term profits, they can often cause harm. What prevents them from doing that? One solve is to ahve shareholders who care about the long term. (Matt Levine, the Bloomberg newsletter writer, pointed out that in this moment post-Covid-19 where the market has remained steady, we may be seeing markets valuing the long term and "looking through" next quarter's numbers.)
The right incentives can ensure companies do the right thing in the long-term. For example, a CEO who wants to do the right thing and has power can bring this goodness to life. While unusually powerful company CEO's (e.g., with two class share structures) can cause harm by doing things without fear of market repercussions or board removal, they can also do a lot of good.
Can these new corporate forms be helpful? Of course, as can, e.g., conducting a planning process that makes you do more good.
Is there some other reason to adopt one of these structures? One frequent critiques is that these things are just marketing. It could be a positive symbol to employees and others which communicates, "Hey, our company takes this seriously. We're willing to go through a process that validates our willingness to do good."
There are so many decisions in the life of a start-up that are one way doors, or costly to reverse. Your choice of corporate form is one of those costly-to-reverse choices. It's best done with a tremendous amount of seriousness and contemplation. If you want to understand this better, here's a practical guide.
As an early-stage founder, can I serve two customer segments at once?
In general, serving two customer segments at once is not a good idea as it can take your focus away from making your product market-ready. An exception to this is founders who are not sure who their ideal customers are.
Focusing on getting your product fit for the market is incredibly important for new companies. Serving two customer segments can detract from this focus, even if it’s the same product and technology. Unless the end-to-end process is exactly the same, the process will probably not be similar enough to maintain the necessary level of focus. If you are going to successfully serve more than one customer segment, how you get the customer, what the customer wants, and how you communicate with the customer needs to be identical for both groups, which is very rarely the case.
Founders often don’t believe that focus will be an issue as they view themselves as being very focused. People sometimes think of focus as a glass of concentrated liquid, and as you add more and more things to focus on, you add more liquid and the focus becomes diluted. With this line of thought, adding just a bit of liquid will only dilute it slightly.
A more useful analogy is thinking of your focus as a liquid and the things that require your attention as food coloring. When you add food coloring, even just a couple of drops, the new color will change the color of the entire glass. Adding more customer segments to your focus can change your entire process and affect your ability to focus.
There is one case where serving different customer segments can be helpful. This is when you're not yet sure who your focus customer-type is or who your first customer will be. If this is you, you're in discovery mode, so rather than focusing on making your product fit the customers, you are focusing on who your customers are. For a short period of time, you can serve different customer types and see which one is best for you, but doing this can become problematic if you serve too many customer types in too many ways.
The number of customers you can experiment with depends on what type of enterprise you are. If you're in the slow burn enterprise sales business and you're selling $500,000 contracts with something that is deeply integrated, then you probably shouldn’t try too many customer types at once. On the other hand, if you're in a consumer-type thing where you have landing pages and you're just pinging out emails to people, you can go ahead and try many different types of customers at once.
Once you are done with experimenting and it comes to choosing a customer type, examine the reasons why you should or should not focus on one customer type. If you think you shouldn't focus on a customer segment, challenge this thought by asking yourself how you could make it work. It can be helpful to imagine that you are trying to persuade a skeptic to choose that customer type.
Unless you are unsure of who your target customers are, serving multiple customer segments usually backfires as it negatively affects your ability to focus.
[Contributed in part by Minn Kim, former principal at Bloomberg Beta]
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How do I know when to start charging for my product?
You should start charging for your product sooner than you may think. The only reason to wait to charge is when the product will be much more valuable to each customer if you wait -- as may happen, for example, in companies with a network effect. (In that case, you may waste valuable time trying to charge customers when the current value fails to tell you much about the eventual value.)
It can feel uncomfortable to charge early on, when you feel a type of "founders' guilt." You may doubt your product is good enough to charge people for it. The psychological temptation of founders and investors is to undercharge. Investors often believe Economics 101 holds, which is that if you price less, you'll grow faster, but this is not always true in the early stages. Many founders also believe that if they charge, they'll slow their growth. That depends on the nature of the service. There are plenty of cases where customers value something more because they pay for it.
One advantage of pricing early is that it can serve as a proxy for determining if someone's getting value out of the product. When people pay for your product, it proves that they view the product as valuable enough to warrant spending their money..
Another advantage is that it highlights the people who are truly interested in the product from the beginning, so you know who to prioritize from day one rather than having a whole bunch of freeloaders and people who want access to something early but will never convert to paying users.
The number of people who are willing to pay can also help you to identify if your pricing is right. You can experiment with dropping or raising the price and observe if your conversions increase or decrease. The choice to price allows you to get the evidence to figure out your place in the market..
Many companies offer free trials for their services, and the people using their services never get off the free plans. Consider taking the opposite approach: decide that, if your product provides value to people, they should be paying for it–and they should be paying for it from the beginning. If your customers don't feel like they're getting value, you can stop charging them and work with them to get a refund because the software is not for them.
Although there are benefits to charging from early on, there are still consequences to charging too early. One way to figure out when to start charging is to use a two-phase approach. The first phase is pressure testing, where you get something into the market and see how well people respond to it. After you have tested if there is an interest in a product, you can move on to phase two, which is pressure testing pricing.
During this phase, you would focus on two things: 1) building a sticky, addictive product that people will use daily or weekly, and 2) proving that the product is valuable and people will pay for it.
Oftentimes, asking people for pricing is not going to lead to the best result of where your pricing should be. There are various ways around this. One way could be to run various Twitter polls which ask questions like- ‘how much does your company let you expense per person, without approval or having to submit some sort of expense report?’ The responses to questions like these can give you an idea of how much the average person could afford to pay for your product.
Another benefit to charging for your product is the connotations a paid product has for some people. Many customers appreciate paying for a product rather than being on a free version or trial, as it often means that they will get a better response and more assistance. Sometimes you get what you pay for, and many people recognize this and won’t mind paying for your quality product.
[Contributed in part by Alex Cohen, Founder, CommandDot]
One of the reasons pricing is so hard for people is that it involves making many choices at once. Questions about what your long-term business model is and how much profit you will make can be answered by getting evidence that your product is actually useful to someone.
A general rule of thumb for deciding what the price should be is to take whatever you think is right and double it. A lot of SaaS founders miss out on the opportunity to grow their income because they price too low. Rahul Vohra from Superhuman, has shared interesting perspectives on pricing, noting that you should ask your users what they're willing to pay and what would be too much. From this line of questioning, you can find a middle ground on a price point that offers your customers value but still lets you grow as a business. If you look at other products and see what people are charging, you can say, let's double it and build a premium brand.
Your price choice is a big part of your brand. In most cases, the price of your product is malleable and can be changed over time because you're selling to a lot of end users. If you get the first thousand people wrong, you still have many others. (Though you might also beware, if you have only a few buyers in your market, discounting your early offering. That "just for the first few customers" discount can often stick and become your price because customers ask each other what they paid.)
A great pricing strategy can benefit your company, but if the pricing strategy is the only thing that allows you to be successful, you should build a better product.
Another way to decide on pricing is to assess the product’s value in terms of the time it saves customers. If your customer makes $50 an hour and your product saves them four hours a month, is it worth it to spend $25 to save $200? Most customers would be more than willing to spend $25 a month on something that could potentially save them hundreds to millions of dollars.
When deciding what to charge for your product, it is important to recognize how valuable your product is. Figuring out what your product is worth will allow you to determine how much a customer would be willing to pay for it. There are various ways to figure out what this number is, but asking the right questions and assessing how people respond to your pricing are good ways to start.
[Contributed in part by Alex Cohen, Founder, CommandDot]
How do I get my enterprise customer's attention when my startup lacks brand recognition?
Ask yourself what customer you're trying to get and why that customer, specifically -- clarity can create a reason to connect with a customer.
Once you've identified a possible target customer, you may be able to employ the techniques that Joseph Freed used when starting Cultivate to get customers' attention: 1) networking at conferences and 2) "focusing on logos."
When choosing a conference to go to, the nichier and nerdier, the better. You may try to bond with a representative of your customer who attends (or speaks at) that conference. With big conferences, the speaker gets mobbed by a throng of folks, so a meaningful conversation is just not possible. The best conferences for connecting with customers are smaller and focused on practitioners.
At the conference, you can try to identify the specific buyers who might be interested in your product. If there's a person from a respected enterprise who is speaking, you can try to talk to them after their presentation, saying something like, "Hey, I loved your talk. I'm co-founder of a startup and we're doing some of the things that you're trying to think about." Your goal at this point is really to get advice–when you are at this stage, gaining informal insight (which you can then incorporate or repeat to customers) is just as valuable as gaining customers.
The majority of people are going to say no, but because the speakers are generally more receptive, your hit rate will probably be higher.
[Ed.: I've been on the other side of this situation, as the speaker at a conference, and after speaking you find yourself surrounded by people who are trying to sell you something. Try to approach the people that speak about topics that are related to what you do.]
Focus on getting customers who are recognizable, either individually or as a group (e.g., "small graphic design agencies") to other customers. Seek customers who are admired by your potential customers. People at big enterprises are more likely to buy when they know other credible companies have bought your product.
One way to get these early logos is to be involved with incubators and accelerators from large enterprises. A lot of these programs have no strings attached. You show up, get advice, and then when you email people you can say that you are associated with that enterprise. When people see that you worked with that enterprise, it signals to them that you know how to work and it shows who your target is.
Getting an enterprise’s attention can be particularly difficult when you’re just starting out, but getting creative at conferences and with well-known companies via accelerators and incubators can help you get in the door.
[Contributed in part by Joseph Freed, CEO of Cultivate]
If you believe that changing your company name is the best thing for your business, the process of doing so is challenging and long, but still entirely possible.
[Ed.: Spike is the founder of "Newfront", which was once called “Abe Insurance.” There are a number of reasons why you may want to change your name, but for Spike, the fact that many people thought Abe was an acronym and that he was associated with Shinzo Abe was reason enough.]
There may not be one instance that makes you decide, “Okay, it’s time to change our company name.” But if there has been an accumulation of consumer conversations where your name was identified as something that they can’t relate to or deterred them in some way, you might want to consider changing it. [For Spike, one of these conversations included a broker telling him that he would join their company in spite of their name.]
If you decide that it is necessary to change your name, you might be tempted to delay the process for as long as possible. Like exercise, changing your name can become something that stays at the back of your mind. You know you need to do it, but you never get around to actually doing it.
There are many approaches you can take when trying to come up with a new name. You might choose to speak to someone who has experience with company names, who will ask you questions like, "Imagine how the name makes you feel." [Ed.: Although this may work for some people, Spike believes that they spent too long doing this.] Alternatively, you could get creative and try combining words to create a name.
No matter what approach you take, if you are selling or working in an existing market, you will probably come to the realization that almost every name is already taken. This may not be a problem if you're in crypto, but if you, like Spike, are working in a well-developed market like insurance, you will see that in order to have something unique, you will have to make up a name that isn’t an existing word or something that you would usually think of.
You may decide to change the name of the corporation or just your DBA, "doing business as" name. Your decision may be based on personal reasons, or legal reasons which sometimes require you to change the name of your corporation. Once you have picked the name for your corporation or DBA, the process of actually changing the name starts. If your company is already well-established and you are regulated by multiple states, have many licenses or have trading partners who you have legal relationships with, the process of changing your name can be a long and laborious one. [Ed.: Spike’s law firm gave him a 2 page checklist to make the process easier. You can find it here.]
You will see some things on the checklist that you probably would never have thought of. One of them is the fact that a lot of things are on payroll, especially if you have employees in multiple states. Something else to consider is if you are involved in a lawsuit, you will have to notify the courts of your name change.
Another thing that can make the process difficult is if those you work with have different processes for updating their contracts.
Once you have legally changed your name, you can begin to update your platform. This can be particularly challenging if you already have a complex product with your old name written all over it. An important aspect of this is securing a new domain. It isn’t always necessary to have a domain that matches your company’s name, but if it is for you, it might be best to secure it early so you don’t end up spending large sums of money buying it from someone.
The process of changing your company’s name is undoubtedly a hassle [Ed.: one that lasted about 6 months for Spike], but it is something that can build value in the company in the long term.
[Contributed in part by: Spike Lipkin, Co-Founder & CEO, Newfront Insurance]
[Ed.: The below comes from Lori Mazan, co-founder of Sounding Board.]
Yes, you need a coach. If you are starting or thinking of starting a high-growth company, then as a founder, your own personal growth has to be rapid as well. If your growth isn't rapid, you end up becoming the roadblock to your company's success.
The thing about a coach is they're always on your side; their agenda is only your growth. If you go to a friend and ask for help, it doesn't matter how much they care about you, it's still an ask. A coach is just there for you.
One way to find a coach is to ask around your network to people who you think are successful as founders, CEOs, etc., and see where they've found their coaches. You'll be shocked to learn how many people have coaches, even if they're not upfront about it.
For most people, if you ask them, "Do you have a coach?", they'll be flattered. They'll think, "Oh, they must think I have my act together.
Sounding Board (Ed.: in which Bloomberg Beta is a #proudinvestor) is an enterprise coaching solution, so people can get coaching services and coaching management through a robust technology platform.
The coaching relationship is sometimes compared to a personal trainer, but a professional coach goes well beyond just accountability and "standing there" making you do things. They're a thought partner for you, helping you think in novel ways, helping you go beyond your easy, top-of-mind answer, helping you develop yourself in ways you hadn't thought of yourself before.
How much am I supposed to pay myself?****
If you're thinking about starting a company, the question of how to handle your own personal money is arguably the most important early decision, because it enables you to take the leap. [Ed.: In my case, when I started a company, I saved from prior jobs and did two things at once for awhile.]
Contrary to the popular myth, most of the best founders did not bet the farm when they started their company. They proceeded tentatively, one step at a time. There are dramatic stories of those who did put it all on the line. Most others managed the risks, skillfully. You can "de-risk" your transition by working on your new thing as a side project, or consulting before becoming fully self-employed.
When you do have outside money coming in, you should pay yourself enough so that you can live sustainably. If you are self-funding in the beginning, then of course you own it all and you can figure out how much you wish to pay yourself based on what you need. (On average, most founders tend to pay themselves too little, not too much, because they're concerned with how it might look to overpay themselves, and they're making sure they use the business' capital well.)
Figuring out how to pay yourself sustainably depends on your life circumstances. Maybe your co-founder is a mom who is the sole provider for a family with two kids, and her needs are going to be very different than those of a recent college graduate, or for someone who's in their third career.
If you're thinking about starting a company with a cofounder or cofounders, this can have an impact on your pay. Be open with each other about your respective life circumstances so you're clear about expectations and needs from the beginning.
There are rare cases where somebody wants to pay themselves a very large salary, e.g., they raise a million dollars and want to pay themselves $350,000. When you're talking to investors, you have to remember that you are pitching a company and they want you to use the resources as responsibly as possible.
The principle is you should pay yourself enough to be able to live without distraction -- so you can focus on the work at hand.
When is it appropriate for founders to get an equity plus-up?****
When you're a founder, you own your company – or you own it with co-founders – and when you bring on investors your ownership goes down because there's only a hundred percent of the company to go around. Typically founders are on a vesting schedule, meaning they receive their ownership gradually over time.
You might think, "That's weird, I started the company – why do I need to receive the ownership gradually over time?" There are two reasons: 1) It protects co-founders from a founder who wants to leave (and if that founder leaves after one year and everybody else worked 15 years, they shouldn't get the same amount). 2) It protects investors from the risk that they'll invest and the founder will leave.
The standard vesting period is four years. So what happens at four years and two months, and you've raised a few rounds of funding and you have 25%... should you have more equity? The short answer is yes. If the company had to hire someone new, they'd need to pay them equity. Why should you keep working without getting more equity, just because you already have some?
In life, you often only get paid when you ask to get paid. [Ed.: I've had many times in my life where I realized that if only I'd put up my hand and said, "Hey, I think I deserve more," I could have been paid more and in some cases much more.] As a founder, the equivalent is when you feel you want more of your company, then it's on you to ask.
If the company had to bring in your replacement, what would they pay them in terms of equity? Let's say you've raised a couple of rounds of funding, so they'd have to pay the new leader 3% (or something like that) in equity. Then that figure might be an appropriate ask for you.
Your team is going to get refreshed grants every few years, because you want them to continue to have an incentive; it doesn't make sense for you to be treated differently from your team. This approach generally works in normal cases, but there can be extenuating circumstances where it's more complicated. For example, a founder made an error in the beginning and took an investor that got way too much equity, so they don't own enough. This can be a problem for the business and require a more serious correction.
There are also cases where prospectiveinvestors will offer an equity plus-up to the founder as an incentive to take their offer. For example, an investor comes in and says, "I'll invest at the following price, but, Founder, I'll also give you an extra 3%." You have to be careful about a situation like this and communicate openly, otherwise it will look like you're only worried about your self-interest, as opposed to that investment being good for the company.
With co-founders, there are a lot of the same considerations, but in the early days it's a relationship question of working out amongst yourselves what you think is right as a founding team. Ideally you are presenting to the board (or whoever decides) a package of what you think is the right answer (if the board has to adjudicate founder conflicts, it never goes well). The equity for each individual might be less if there are more co-founders, so there might be more of a demand for somebody to get a bit more.
A startup founder asked me for help with a project. How do I ask to get paid for it?****
When helping startups with projects, you can err in either direction: 1) focusing too much on getting paid, or 2) or constantly doing favors and never getting paid. There are also different ways of getting paid: sometimes you get paid in cash, sometimes you can get paid in equity. Sometimes you can get "paid" in a commitment to work together on something else, or a soft understanding. Only you know how important it is to you to get paid, and whether you value cash or something else.
Think about how you want to get paid, know what you want to request, and then be thoughtful with how you ask for it. It's okay to say, "Look, I really love your project and I think it could be amazing. I'm in a place right now where in order to be able to do that kind of work, I need X, or the value I think I deliver is Y." And then just ask.
You can also over-correct in the other way, which is to just do the work without getting paid. You say, "Hey, I'll look at your product model." Or "I'll give you thoughts on your email marketing. Happy to do whatever." And then eventually you end up feeling the other person took advantage of you. Great founders are sometimes really good at getting free work out of people, so you need to know your boundaries.
When setting boundaries, always consider timing and dosage: Ask about payment in a way that is likely to be palatable to the person on the other side, and know how you want to get paid because cash is different than upside in the future and you can get a mix of both. And sometimes it's just too complicated. The thing can get weighed down when you're like, "Well, I'd like to work on it, but I'd like a mix of cash and equity by the hour." Sometimes you may just do the work and hope that it works out. Know your own line and then raise it appropriately.
[Ed.: I know lots of people who like to do startup stuff, because I've worked in the tech industry for a long time and have built some genuine friendships. Awhile back, somebody who I'd worked with closely started a company and Bloomberg Beta could have been an investor. They started asking me my thoughts on how to approach other investors, and I was fine with that, I was happy to talk to him. But at one point it was Saturday at 6:00 PM and he was asking for advice, and I said, "Wait a minute. Are we talking about us investing?" And it got a little awkward. So I said, "Look, we're friends, but you wouldn't call your friend a cardiologist and ask them to perform heart surgery on you." And I'm not saying I'm a cardiologist, but at some point you do have to draw your lines – even with friends.]
What's it like working at a big organization vs. a startup?
[The below comes from Hadiyah Mujhid, Founder and CEO, HBCUvc]
Joining a startup can provide immense opportunity as you get to be a part of a small team and learn directly from the company’s founder(s). Although you’re taking a risk, you're still getting paid – even if it may not be the kind of salary you can get elsewhere.
One thing that prevents people from joining startups is something people call ‘the mother effect’–that is, you think your mother won’t be proud of you if you go work at an organization that she hasn’t heard of, compared to big brands like Google, Bloomberg, or Lockheed Martin [Ed: where Hadiyah got her start]. So you need to be confident in your identity and what you tell others. The world is slowly changing in how people view startups: now, more people (and more mothers) are recognizing them as wonderful places to work.
Your perspective during college, and even after college, may be purely economic – you might only focus on who will pay you the most right now. This is understandable when you have bills to pay. It can be difficult to develop a lens that lets you evaluate a short-term salary versus long-term wealth.
[Ed.: The first time I got offered a job with a big salary, I was drawn to those six digits. That was really hard to turn down.]
At a smaller startup, they won’t be able to compete with pure salary, but if you're a part of a team that's going to grow, then you have entitlement to equity or ownership in that company.
Beyond salary, it’s important to consider the other opportunities you can get from a startup, such as experience that will help you for your next company and role. And one of the best things you can gain from a startup is the network. When you first join a company, you get to be a part of a cohort, maybe joining other recent graduates or other folks who are in learning mode, where you bond because you don’t know anything. [Ed.: Some of the people I worked with at my first job are still some of the people I work with now.]
Taking the leap and joining a startup can pay dividends when it comes to building connections and experience.
I'm an executive at a big company. What should I know about being an advisor to a startup?
Ask yourself why you want to be an advisor. It's flattering to get asked to advise a company, but the reasons to participate may vary. It's rarely about wanting to make money because the money might or might not arrive at some future point. It's often about a desire to learn by collaborating with people or a desire to elevate oneself by being an advisor. Or the person asking you is somebody you really care about and you just want to help them.
There are different kinds of advisors. Sometimes being an advisor just means someone can call you for advice. Sometimes it is about using your name, privately or publicly (in which case you have to think about whether or not you wish to have your name used in that way). Sometimes it is a formal relationship of providing advice in exchange for equity. Sometimes in exchange, you're also asked to not compete -- not to advise competitive businesses. [Ed.: When I was an executive at a big company, I said no to being an advisor at one company because it was clear they were just giving me a little bit of equity to prevent me from talking to anybody else in this space –and it was a space that I cared about, coding learning. So I didn't want to do that.] There's a package of gives and gets with advising, so you need to know why you're doing it.
If you're in a big organization, that organization might have policies about outside affiliations. If the reason the company wants you to work with them is because you're an engineering leader at Bloomberg, that might be an issue for Bloomberg, so you should know what your organization's policy is. And ethically speaking, you should just be transparent. You should disclose your potential advisory role to whoever you work for and make sure they know, especially if the startup you are advising may talk about your advice in public. The company may actually be trying to borrow the brand of your employer, saying, "Google executive such and such is an advisor." If that's the case, that brand is more than yours and yours alone. So you be careful about that.
The advisor relationship can vary a lot. When you sign an advisor agreement, you typically get equity and you promise to provide certain services or not to compete. And equity can vary a lot: an early-stage startup might give you 2% to be an advisor on the very high end, but 10 basis points or a quarter of a point is much more common.
The single most common thing that you do as an advisor is you make yourself available if the company has questions. The cadence will vary – once a week, once a month – and you can determine that with the team based on their needs. Know what you want to get out of it and what you're willing to give.
I'm starting a company. Should I actually take money from my friends and family?
Asking your friends and family for money can be a good idea, as long as you are completely transparent about the process and you prioritize your relationships.
The answer to whether to take money from friends is family will be different for everyone. [Ed.: Asking my mom for money was both necessary and incredibly difficult. I knew that my mom didn’t have a lot of money to invest in startups, but we really needed the money. Later, being able to pay her back with five times what she gave me was one of the most joyous moments of the whole startup experience for me.]
Which do you value more, the relationship between you and the person you might ask, or the startup? Assuming that the relationship is more valuable than the thing you want to create, choose the approach that will conserve your relationship. If you are honest about the fact that there’s a good chance you’re going to lose the money they lend you, then losing that money probably won't cost you the relationship. What’s important is honesty.
Asking people who you know for money can be an uncomfortable experience, and it can serve as a litmus test of how far you are willing to go for your startup venture. There are many other moments in the life of a startup that may make you similarly uncomfortable, and this situation can serve as a good opportunity to evaluate how much you are willing to put yourself on the line in the future.
Like many things in life, there are limitations to what you can reasonably ask from a person. What is reasonable varies drastically from person to person and it depends on your life circumstances. [Ed.: My college roommates were capable of writing a $10,000 check and could raise $100,000. I was fortunate that this was the case and I recognize that this isn’t the case for everyone.] What you ask from your friends and family has to be scaled to what your personal network can do.
One benefit to asking and receiving money from your friends and family is that it gives you an opportunity to build a coalition of people who know and trust you–and who can support you. In this way, asking for money can be empowering.
Asking those who are close to you for money can be a difficult thing to do, but if you are courageous enough to do it, you can reap the benefits later.
How do I know if an angel investor is a legitimate candidate to invest, or just pulling a bait-and-switch?
This is first a question about how do you trust anybody in business. It's especially important with investors because that is a marriage from which there is no divorce. And every investor on your cap table, or who loans you money, can ruin your company. Many people approach companies, pretending to be interested in investing, only to try to sell them a service or ask to receive free equity in the business in exchange for advice.
It's often harder to research angel investors than other business partners, especially new ones, because many angel investors are wealthy and wealthy people are often extremely private, even secretive.
And so, with angel investors in particular, before you take the money on the cap table, toss the egg a bunch of times. Get to know them.
Ask them about the last investment they made. See if it smells real. If you know anyone in whom they've invested, ask that person. If you don't know the person in whom they invested, consider emailing them cold.
If they're new to angel investing, you could also send them advice for first-time angels, and see how they respond.
How much do investors tell you the real reason they don't want to invest? ****
"Believe the no, don't believe the reason." That conventional wisdom is more true than not. Founders misread investors more often than they read them accurately... pitch meetings that end in tears have resulted in an investment; grins all around often result in ghosting.
[Ed.: The toughest situation I've experienced for declining an investment was when we had two founders pitch us. We wanted to invest in the business, but we didn't want to serve one of the founders. I didn't know how to share the feedback that we didn't like him, so I didn't say anything. My knowledge about these founders was modest compared to the importance of the relationship they'd committed to with each other -- and I didn't want to risk destabilizing them over a first impression. After six months, I saw a LinkedIn notification that the founder who we didn't like had left. I called the first founder (the one we liked) and asked him if we could have shared the feedback about his co-founder in a productive way. He couldn't think of a way. At least we eventually shared our feedback.]
Ideally, a good investor will find an honest way to give feedback that feels socially appropriate to the situation. They'll also be aware of what it's possible for them to know. For example, if an investor feels unsure about a founder's market, they might say say, "We don't feel confident enough in our ability to have a point of view on it," as opposed to, "I don't believe that you have any good offering/perspective/market opportunity."
What are the dumb things that founders do in pitches?****
Today, there are so many resources on how to pitch VCs so you see fewer dumb things in founder pitches.
Instead, pitches are disappointingly uniform. They adopt some default, without thinking whether it applies to them. Many founders default, for example, to "I want to raise $X for 18 to 24 months and here is what I'll achieve in that timeframe." (You're going to have to start fundraising six to nine months before you run out of money. So you won't actually be able to achieve all that stuff. This reality often makes a founder's carefully arranged plan crumble because they didn't think through that part.)
When do you default to "snapping to the grid" of the available standard others use, versus when do you choose to do something different that might be risky? As often as possible, you should snap to grid because you're already doing so many risky things. Taking risks on something random isn't worth it.
While there are things you're "supposed to say" in a pitch, true mastery of a language is saying the things you're supposed to say in a way that's truthful to you.
There are a thousand variations. In one version, you're out talking to investors, and at some point, an investor starts to lean forward, do some more diligence, and says, "Okay, we'd like to make an offer to invest." At some firms, they'll telegraph that further in advance. "We'll send you a term sheet by the end of the week." At some firms, they'll just drop paper on you. At the moment you have an investor who is willing to set terms for your round, you have a possible lead (though the term "lead investor" has many meanings).
At that moment, the second you have a sense a lead investor is imminent, you try to parlay that into other offers. Think about any other investor who is close to making you an offer (they have to be in similar stages of the process, or they may be unable to catch up in time), and for any investors whose offers you might prefer to the one that's imminent... tell them you're about to get an offer. (Keep the name of the firm to yourself. Treat every firm the way they'd want to be treated.)
Your job is to dance with the pending offer -- stretch out the time you have to respond a bit, so you can see if you get a better offer. Some VCs will try to push you to decide the same day. They use time pressure because they know, you might shop their offer (i.e., try to get a better one). [Ed.: Our venture fund only wants to back founders who, after full examination of their options, believe we are their best possible choice. So we're allergic to "exploding offers." We've lost deals over that, but if you prefer somebody to us, good.]
How do I know if my investor is good?
[Ed.: When Bloomberg Beta speaks with founders, we often encourage them — even in our first meeting — to start doing their references on us and others. I've written more about VC references here.]
Most founders don't do enough to reference-check VCs. Many founders do a "relief reference," which is that they're so happy to get an offer that they just look for someone they know to vouch, or a friend of a friend to say, "This person is not an axe murderer." This "relief" approach isn't enough. An investor will be on your cap table forever and no investor is generically good for everybody.
Investors are amazing at manipulating first impressions -- so you can't trust your gut because they're better at playing the gut game than you are. Instead, cast your net wide, figure out what you want from the investor, and make sure you are minesweeping, not looking for relief.
You're looking for the situation where the VC behaved badly, so you need backdoor references. Look for the ones that went poorly – not just the ones that went well – both in terms of the business and the relationship (sometimes the business goes well and the relationship still frays!).
The founder community is tight so you can also keep an eye out for resources such as Y Combinator's Bookface when doing your diligence, but take the reviews with a grain of salt like you would for Glassdoor. If you are in the process of getting close with an investor, ramp up your diligence accordingly – don't wait until the end. As you're getting closer, start making calls and with a goal of communicating with roughly 15 people by the end. (If they email saying the person's great, that might be enough -- not every communication needs to be a conversation.)
These conversations will help you dig deeper on founder preferences and uncover which VCs are true "founders' choice" investors.
Consider: what do you want to get out of providing this reference? For example: Do you want to talk to more startups? Do you want to make some money by advising a startup?
Head fake: The investor is not really asking your opinion about whether they should invest in the startup. Most investors have big egos and they think that's their job to decide whether they should invest in the startup or not. Your job is to respond to the thing that you uniquely know about.
The investor might be calling to ask how well you know the person... do you trust them? How highly do you rate them compared to others? Maybe you're a scientist and the investor is asking about whether the science is legitimate. What do you make of the credentials of the people involved? Would somebody else be able to clone that science easily? And if so, how much effort would it take? Know why the investor is calling you for a reference.
If you want to get more calls from them, don't sugarcoat it -- say what you really think. And then you might want to add whether you wish to get involved in this startup. You could lend your name in exchange for getting a little bit of equity as an advisor or something like that.
What am I supposed to put on that "market size" slide in my investor presentation?
Maybe don't have one. Maybe nobody was ever persuaded by a market size slide. Either you walk in the room and you're like Flexport, which serves the logistics market, which is so insanely big, and the investor isn't going to pass on market size unless they're a moron. Or you have a business like Uber where some investors passed in the beginning because they didn't think the black car market was that big -- they assumed that Uber would forever remain in that comment. The productive conversation about market size is almost never about the math of the total addressible market and multiplying if the startup "gets 1%" – it's about markets into which you can expand, so-called "adjacencies."
How valuable could your "first thing" be? Or are you going after one market first and then expanding? If the first thing may not be enough, then -- at least for venture investors -- tell a credible tale about expansion. Facebook had it: a college social network, that's a solid first category, and then they grew from there. Talk about the sequence of what you plan to do, as opposed to a calculation about market size.
If a VC asks, "Where's your market size slide?" they're probably stuck in a uniform way of thinking. In which case, make the slide and put it in the appendix, but don't put in too much time and effort doing the math.
If you feel you must make a market size slide, make it in a way that is appropriate to your business model. If you're selling to big enterprise customers, it's about logos and target contract sizes. If, for example, you're selling a software product where customers just need to swipe a credit card, then it should be comparable to other companies', include early price testing, how many customers, etc. You can do math, don't overthink it.
How do I answer questions about whether my business is "defensible" from competitors? ****
When it comes to defensibility, beware "you're dead" questions. By the time somebody starts asking you questions like "What will you do if Google competes with you?" you might already be dead. Don't invest lots of time in chasing answers to "you're dead" questions. (If it's the first question out of the investor's mouth, then you're probably not dead yet.)
Articulate your story in terms of why you can protect the value you've built. For example, "once customers use us, they won't switch." Point to analogous companies. Think about why you will have an increasing return to scale. As you get bigger, why does your product get better for the next customer? Most wildly successful venture businesses have an increasing return to scale.
And relevant for some businesses, but not all, think about "What will you do about a fast clone?" Because lots of businesses don't die, they end up having their wings clipped by a fast clone or a near clone (similar service copying many aspects of yours).
In a sense, all of cloud software is a "near clone" of enterprise software. It's the same thing, but it works slightly faster and you don't need to buy it in a certain way, and you can log in from anywhere, etc. Just being a slightly less expensive SaaS option isn't enough. In general, unless you're dramatically increasing the size of the market, you're going to have a capped ceiling. So the companies that say, "We do X, only less expensively than the current company," tend not to work well.
I got into Y Combinator. Do I do it?
Deciding whether to do Y Combinator (YC) depends on your goals and if YC will be of value to you. Often it is worth it, but it's expensive (YC requires an ownership stake of 7%). Seven percent may not sound like much in the beginning, but as you get bigger, you will realize that it's a lot. Like all things, this price may be worth it in terms of value that YC delivers.
People who can get the most value from YC are founders who lack a network of other founders, or founders who need a moment to focus and would benefit from having to put something together so they can present at the finale of the accelerator -- "demo day." YC gives founders a wonderful community and an opportunity to develop what they're doing. With YC, you may end up working with a partner or other founders that can give advice that could be transformative for your business. If your early customers are other startups, then YC can be especially useful as it introduces you to many potential customers.
The people who may not get value from YC are the people who just want to do it for the name and the validation, or a "boost to their fundraising." There is no arguing that there is value in a name, but a name is more of an added benefit than a reason to do it. Seven percent is a steep price for a name.
For those who do find value in YC, that value will last long after YC. YC is not a full-time thing, but the community that you become a part of through YC lasts: being in Bookface, YC's internal social network, lasts and the reputation benefit lasts.
YC classes are fairly big and this size might mean that you don’t get to work with the kind of founders or partners that would be helpful to you. Despite the large class size, there still remains an under-representation of certain types of founders, so you should keep in mind that while you're joining a community of founders, that community is not going to be representative of all tech founders.
While YC has a lot to offer, there are a number of other great accelerators. Each accelerator has its own set of relationships and customer specialties and can help you with different things, from customer introductions to helping you figure out how to enter the market. Try to have an idea of what you’re looking for in an accelerator program is a good place to start.
If you’re looking at these other lesser-known accelerator programs, you may be asking yourself, "How do I know if an accelerator is good?" There are definitely bad accelerators out there, which won’t support you or benefit you. Find out what is the best company that has gone through the accelerator. If you can’t figure out who that is, then you should probably proceed with caution.
Whether you should do YC or not depends entirely on your specific needs. YC can be very valuable to people who need to connect with other startups and founders, and those who need some direction.
How should we split equity among the co-founders?
There is no one right answer to how to split equity shares among co-founders, but it is important to consider all the factors that can influence this decision and to include these factors in your conversation about sharing equity.
How you should split equity among co-founders is an important decision that you shouldn’t take lightly. It is important as, firstly, if you regret your decision later, it can be hard to fix and secondly, your views on the subject will probably change-- when the person who you thought was going to be really valuable turns out to be a dud, you will have to manage that and deal with the fact that their shares don’t reflect their involvement.
When people approach equity shares, they usually have a conversation that is purely about those equity shares. Really, the conversation should be about much more. In addition to equity shares, you can also talk about how much money the person has, what role money plays in their life, what role a feeling of ownership plays, how much control over what happens is involved, and how important identity is. All of these things play important roles in the division of equity.
Something that can help you ask these critical questions is The Partnership Charter,, where psychologist and business mediation expert David Gage offers a comprehensive guide to the art of establishing and maintaining a partnership. The charter works for everything from marriages to business partnerships, and talking through the questions and answering them can benefit startup founders too. Asking the full inventory of important questions can be really hard, so starting with the Partnership Charter can be useful.
Once you have gone through the questions, you can identify the factors that should influence your decision. There is no one-size-fits-all for sharing equity, for some 50-50 works out well, whilst others can benefit from more unusual splits, like Uber who gave 90% to founders who weren't even full-time with the business.
Deciding on a number is a process of triangulation, and ideally you want to get to a place where everybody's feelings are known, regardless of whether they are happy or unhappy, and you can work with everyone’s feelings as things unfold.
With startups, long vesting periods can be beneficial. The market standard is a four-year vest, meaning you earn into your shares over four years. Founders typically don't have the "cliff" where an employee will vest over four years, but not get anything until the end of year one when they get a year all at once. Founders generally vest all the way through. Long vesting periods can seem daunting, but when you think about the fact that companies generally take a decade to succeed, having a 10-year vest doesn't seem that crazy. These long vests triangulate with many factors. It's not just about the money, or the fairness, or any one factor. It's about all of them, and you need to use the conversation about equity to get them on the table.
You probably won’t care about your vesting period and equity shares unless you find yourself in the scenario where the company has been successful, but you only stayed for a while and then you got pushed out or left. In this case, you're probably going to end up having your stake renegotiated for you anyways. The next investor is going to say, "I don't want this person who's no longer involved at 15%, so as a condition of my investment, you need to go renegotiate that."
Sharing equity is not just about money, it also involves other factors. In order to cover these factors in your conversation, you can ask questions and figure out how everyone is feeling.
How do I need to think differently working as an investor vs. starting a company?****
[Ed.: The below comes from Conor Sen, columnist at Bloomberg Opinion and founder of Peachtree Creek Investments.]
Founders often think, "How would an investor think about this?" And investors often have to get in the head of management.
As an investor, you think about what can go wrong. For example, if the economy slows and the housing market turns down, that might be bad for some company or industry; or what if my tech stock misses earnings and it gets a downgraded multiple... and the list goes on. You naturally have a negative mindset, or at least you always want to be thinking about the possible negative things that could happen.
As a founder, you can feel bogged down by all of the processes of starting your company – getting lawyers, getting registered, getting insurance and so on. But when you actually tell people, "Hey, I started a company," people around you are usually excited. It makes you understand the power of positive thinking, and you need that positivity when you're starting a company. As an investor, you don't think like that.
The thing that positivity allows you to do is pick a few things that really matter and be proud of making them great. But not every founder has this mentality and that's okay. Founders need to understand that each company has a unique investor base that's optimally suited for that company. Think of two companies on the opposite end of the spectrum: 1) a company like Tesla, which is almost messianic in believing in this mythical figure as their leader, and 2) a cigarette company that's selling death on a stick, where as an investor says, "Just pay me the dividends and buy back the stock. I know you're doing a terrible thing, but I'm taking this money." Most companies fall somewhere in between and it's up to a CEO or an executive to know, "Why do people own my stock? Is it for dividends? For buybacks? To feel good?" If you have a mismatch, you will have a lot of problems.
Often companies face the biggest issues when they transition from one phase of a life cycle to a new one. Newly public companies often are really bad at this transition. [Ed.: Conor had a bad experience with Zillow, which he's owned eight or nine years ago. He thought, "Okay, I'm bullish on housing. Here's a site that lets you look at prices." The stock seemed pretty cheap because people were skeptical of IPOs at that point. There was one quarter where they did an acquisition of an apartment rental company and the company they bought represented a decent share of Zillow's revenue for advertising. On their earnings report, they said, "We missed revenue because we bought this company and they're not paying us money anymore because we own it." Then an investor simply said, "They missed revenue," and the stock went down 20%.] As a private company, you think, "We're building the future. No big deal." As a public company the reality is, "You missed earnings."
Talk to investors at different stages to understand the perspectives from where you may be someday. Seeking different perspectives can go such a long way to understanding how to run your professional life.
Do you really know what venture capital is all about? Many people have misconceptions. For example, if you want to be a successful venture capital investor, it isn't obvious that the best way to start is by trying to be a (junior) venture capital investor. The very best VCs tend to be people who had some significant professional life experience -- starting a company, being a respected Wall Street analyst, etc.
Many aspiring VC's believe that being an investor is mostly about giving advice to founders. "I love giving entrepreneurs advice!" It's different when they're your friends. **** Founders often merely tolerate receiving the advice of VC's. They placate their investors to get what they really want, which is money. (And the vast majority of VC advice is inane.)
Early-stage venture capital is different from investing in public markets, where you contemplate big-picture trends, analyze numbers, and make seasoned judgments based on data. A better comparison is to an A&R person in the music business. Your job is to discover new acts, exercise taste on whether or not you want to work with them. Your job is to cultivate them and help them be successful and, ultimately, serve them. Given that, like what does an A&R person do? There are some fun parts. You go to parties and talk to people. You're thinking about music you love. However, much of it is grunt work. Who should we invite to this event? How do we organize a CRM to make sure we've been in touch with people? Did we recommend the right lawyer to this person?
If you do want a job in VC, here are some thoughts on how to get one:
Focus less on telling your story ("I'm really thoughtful about technology!") and more on demonstrating you are a startup junkie. For example, a candidate who says "I love this one company in your portfolio but I'm curious how you thought about this other thing" is favored over a candidate simply saying " I am great at [X]." Venture capital is an occupation where the junkie bar is high.
If you lack a network of people who know VC's who can vouch for you (and almost nobody has this network), then you have to figure out how to reduce the risk to the person hiring you. You can reduce the risk by showing them you've "done the work" or volunteering to do a project. A candidate who has done a little bit of research and been thoughtful in their outreach and done more than a cut and paste stands out. In a sense, it's similar to apply for a job in VC and to be a founder asking to get funding.
The venture capital industry can be opaque. There are ways you can learn about it -- many VC's have an active presence on Twitter. Bloomberg Beta's manual is online. There are also many investors who do regularly write content online -- if you write some, that's another way for you to stand out.
To know whether you have been successful as a VC, you need a consistent track record of backing outstanding companies. Sometimes these are multi-decade relationships with the very best founders in the world. Bill Gurley has said VCs are a business of grand slams, i.e., if your idea is not something that can generate $100 million in revenue, you may not want to take venture capital. It's actually even harder than that: VC is a game where your success is measured by the tape-measure distance of your single longest home run. For a VC, sometimes even a grand slam isn't enough.
The skills depend on the stage of company in which you invest. If you're a late-stage investor, picking and pricing are probably the most important things. Your universe is knowable in terms of which companies are out there. If you're the earliest-stage investor like Bloomberg Beta, sourcing (i.e., seeing the companies in the first place) might be most important. Your biggest misses can be "dark deal flow,", i.e., when a company goes straight to an investor because they had a preexisting relationship, so you never heard about them. [Ed.: There are thousands of those deals all the time and missing them makes me paranoid. At Bloomberg Beta we believe if we serve founders well, everything else will follow. Founders ask other founders which investors to work with. So if you serve founders well, you're more likely to win. How do you see deals in the first place? Oftentimes also from founders in whom you have invested.]
Skill in negotiating, "getting cute" with contractual terms, is almost never the most important skill. We win, in venture-backed startups, by having huge successes, not by wringing an extra 10% out of the ones that struggle (which is usually when the kinds of contractual terms that you negotiate in an investment end up mattering).
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