Is It Fair That Founders Get The Lions Share of Equity?

Something has bothered me for some time and its just now starting to get talked about.  Below is not a rant, but rather an exercise in thinking about fairness in compensation.

Founders receive huge amounts of equity in the companies they start, yet over time as more and more employees join on and work incredibly hard to help grow the business into a successful enterprise the percentage ownership (cap table) doesn’t reflect adequate compensation.  Why is it that an employee that joined just a few months or a year after the founder receive orders of magnitude less equity – and cash after a liquidity event – than the original founders?

Does it really matter if you were there first and if it was your idea to begin with?  If so, how important and impactful is it?  Millions of dollars?  Billions of dollars worth of difference?

Yes, founders do take inordinate amount of risk in starting a new venture and they should receive compensation to reflect that.  But when we are talking about $billion+ outcomes we then start to talk about income inequality on absurd levels.  The difference between a founder receiving $1 billion or $2 billion is not the same as taking that extra $1 billion and spreading it over 100 or 500 employees – that which makes quite a bit of difference in each of those people’s lives.

The fact is early and middle employees are hugely important to the success of a startup and should be compensated accordingly.  More so, they might even be vital to the company’s success, such as a Director of Sales or VP of Engineering may be in helping a gangly startup grow up into a mature and profitable company.

A recent podcast from Andreessen Horowitz covers this issue, and touches on how founders can think about structuring their equity grants a bit differently so that they can appropriately compensate early and later employees.

Anyway, listen to the podcast as it covers a lot of points in this touchy subject.

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Finally Emerging From A Founder Depression

At times we can be our own worst enemy.  The challenge is to minimize those times.

We often hear choosing to become an entrepreneur – and the life that accompanies it – is not for the faint of heart.  This is absolutely true.  But for the longest time I didn’t really understand what it meant.  Or moreover, I didn’t fully respect the ramifications of the simple choice of taking my entrepreneurial leap.

Yet now being on the other side of this experience, I understand on a deeper level what entrepreneurship all about, and how to best navigate through it the rest of my life.  As I describe some of my thoughts and observations, I hope they might resonate with you as well and help you through whatever your situation you might be in currently.

Entrepreneurs, by default, are high performers.  And high performers, by default, are hard on themselves when times get tough.  Combine those two and you could get a deadly combination.

Entrepreneurs hold themselves to higher standards than others and often are disappointed when things don’t necessarily end up as great as they had thought when they initially set out.  But you know what?   Entrepreneurship never ends up like you initially thought.  It’s messier than anyone ever imagines and more extreme than anyone ever describes.

After I experienced a failed startup I dropped into what I now can identify as a depression.  I was not – and am not – depressed as in the clinical sense, but it was more like what you would think when people refer to the last economic depression we recently survived.  It was temporary and externally triggered.  Things weren’t right and I was responding to them certainly in a negative and self deprecating way.

It was painful.  It felt troubling.  It sucked because I wasn’t supposed to be there.  Or so I thought.

What I discovered was I denied myself some truths I should have admitted at the time.  I wasn’t admitting things like: 1) I really didn’t know what I was doing, and neither does anyone else.  2) The business was not working the way we had positioned it.  2) Startups actually do fail!  3) It’s okay to walk away rather than being so committed to a project you drive yourself into the ground.  4) Your personal value is more than just your company’s success.

I did not admit those things and the result was just that – nose dive right into the ground.  Being a friend or family member you probably wouldn’t have known it by being around me.  I am a damn good actor.  I do a great job of burying the issue and grabbing another beer to selflessly talk about your challenges and issues.

Yet deep down inside was some of the worst self talk anyone could imagine.  I was not my biggest cheerleader, supporter, believer and best friend.  If you are wondering, negative self talk is not the path to success.

It took a few years to pull myself out of it.  It took me accepting the fact that although I knew I could be a great founder at some point in my life, now was not the time.  It took me putting my ego aside and accepting positions with other startups and companies where I could add value and learn more about building companies.

It seems elementary now, but letting go of the founder dream and using my skills in an another company was the farthest thing from my mind at the time.  It took me admitting I did not know it all and I need to place myself somewhere to both earn a living and learn more about the world of technology and growing a business around it.

This type of wisdom and perspective is almost impossible when you think you are worthless.  And that is exactly what people think when their startup fails.  They think since they could not make their own company work – one where they pretty much put every ounce of effort they possibly could into making it work – what’s their value anywhere else?  This and other similar thinking is obviously incorrect and ill applied.  Yet, I am telling you this is exactly what I and other founders find themselves thinking.

I have since pulled myself back together, landed a great position with another company here in Seattle and on the path to learning and earning!

The resulting mental and emotional clarity is refreshing. It has allowed me to stabilize my life and opened up space for other projects like Founders RAW, Coinme, and getting back to writing.  It has allowed me to establish myself as a mentor and advisor to other entrepreneurs, here and elsewhere in the world. It has allowed me to embrace and fully enjoy a meaningful relationship for the first time in a long time.

The lesson here is not that you can do things to avoid the founder depression.  More than likely it’s inevitable for you, me and every other entrepreneur.  The lesson is in identifying the oncoming founder depression, quickly observing its symptoms, and then finding mitigation strategies you can deploy to keep you afloat – and happy.

Entrepreneurship is not for the faint of heart.  But it is for the wise and honest.

3 Startup Principles Every Early Stage Founder Needs To Know

I recently gave a talk to early stage entrepreneurs at a weekend hackathon in Bellingham, WA.  It was fun, challenging and educational for all.

Given these individuals were just starting on their journey, I chose to focus on things they should be considering coming right out of the gate.  Below are the three things I addressed with them and what I feel every founder needs to think about as they hack together their team and build out a first version of their product or service.

Cofounders

cofounders

The very first thing you must think about is your team – whom should be on it and whom shouldn’t.  Get it right or pay the price later.

Especially when you are starting something at a weekend event like a hackathon or Startup Weekend, it’s tempting to just grab abled bodies from anywhere so you so you can fill empty seats.  This is not advised, since the wrong person on a can bring down the entire ship.  It’s very important to fill specified roles within the team to put your company in the best position to succeed.

Here are the three positions I feel need to be filled if you are considering forming a team to build a software/app based startup:

The Developer.  First – and especially if you are starting something in tech – you’ll need a technical person.  This individual is the one who architects the product and who writes the code. Great engineers are able to balance pragmatism and perfectionism, are not averse to debugging and bugfixing, and employ a healthy skepticism of their code and the world around them. This is the engineer.

The Designer.  Second, you’ll need someone who makes the code look pretty, readable to the layman allowing for a great user experience.  Great designers understand that 90% of good design is not about the pixels, they understand basic coding and have a well rounded view of other sciences of the world.  This is the designer.

The Hustler.  Lastly you’ll need someone who can sell your product, or the one who understands how to get it in the market and found by people.  This is generally the business person, the CEO, and the Hustler.  To quote Fred Wilson, CEO’s really need to just focus on 3 things.  They set the overall vision and strategy of the company and communicate it to all stakeholders. Recruit, hire, and retain the very best talent for the company. And lastly, make sure there is always enough cash in the bank.  That’s the Hustler.

Fill those roles first, or deal with the consequences later.

Customer and User Validation

interview

The second thing early stage founding teams need to think about is finding out who will actually use the product by doing customer discovery and validation.  The knee jerk reaction of most founders is to believe they are so genius they can think up an idea in the shower, grab a few developers to build the app and then sit back and enjoy millions of downloads from all over the world.

NOT-GONNA-HAPPEN.

It’s imperative to get out of the door and talk to actual people who YOU THINK would be your end users.  You need to interview them, asking questions about what problems they are encountering, why they are having those problems and how are they trying to solve them today (they usually just piece together a few random tools to solve it until something better arrives.)  Figure out how they are doing it now so you can offer a solution 10x what is available on the market today.

And rather than trying to plan the entire thing out before talking to customers – like sitting in an office and writing a 30 page business – just start with a hypothesis, do some interviewing and testing on a few good ideas on how to solve it, and then adjust and pivot with the results you observe.  You will learn more in a week or two of testing hypotheses than months/years of preparing a well written business plan full of (mostly) wrong assumptions.

Do your customer interviews now or learn later no one wants what you just built.

Product Simplicity

tip

The last one is a biggie!  It’s paramount a founding team understands their vision, know what they are trying to change in the world and then break it down into approachable pieces to start with.

As a founder you need to think about your entire vision as a large iceberg. The challenge is to find the tip of the iceberg and only release that as the first version. The rest of the iceberg is under water and very large, just as your entire vision is in your head and not visible to the rest of the world. Some think of this as an MVP (minimum viable product) and I concur, I just like the illustration better.

Most founders make the mistake of not finding (or determining) the tip of the iceberg and thus end up building the whole iceberg, resulting in lost time, a bloated product and a lost value proposition.

For every Uber – a very simple and easy to use app – there’s thousands of apps that get it wrong and initially build a too complex product. They end up confusing users and not even getting to the point of an exponential user growth curve.

Twitter was simply a status update and following what others were updating. That’s it and people could easily talk about it and share it with their friends. Snapchat was pictures you could send to friends that disappeared after 10 seconds.  YO was absurdly simple, yet at least it was simple enough where millions of people got it and downloaded the app to mess with friends.

The key is to break down your complex problem into its essence. Know the end game and the large vision but find the simple starting point where millions of people will understand what to do with the app. Find the least amount of features and code possible to solve your initial problem.

These three principles are essential to a successful product launch.  If not paid attention to they will hinder a startup team from building a product, launching it successfully and achieving any traction in the market.

Great Founders RAW Conversation With Brewster Stanislaw Of Inside Social

This was one of my favorite Founders RAW conversations I have had this past year, with Inside Social founder Brewster Stanislaw.  We talk about fundraising, cofounders, the future of social technology amongst a lot of other stuff.  All around a good guy and a great conversation.

Enjoy.

 

Doing More Than One Thing At A Time

Should you work on more than one project/company at a time?

Is it good to wear numerous hats at once?

These are the thoughts bouncing around my head right now as I evaluate what comes next for me.  Many of you know I have a number of things going on right now – from Seconds (mobile payments) to Callin’it (the sports prediction app) to Founders RAW to my writing and to other startup ideas I have.  This doesn’t even include the work I do on a weekly basis to keep a consistent income and pay the bills.

It’s good then that I finally figured out a time structure that works for me.  Basically, just get the #^$% done is how I operate.  It doesn’t matter if it takes 30 mins or 10 hours, I just need to get the deliverables – delivered.

And it’s working.

The point of this post – and the questions I opened with – is  I think doing more than just “one thing” at a time works.  For some of us.  I recently noticed myself bouncing from one thing to another after short bursts of energy given to a particular project/company.

It seems to work for me and my personality.

Similar to a workout, I give high intensity attention the particular activity for a short time and then move on to the next thing during the day that needs attention.  During a typical day I might work on 2 or 3 different companies/projects/products but in the aggregate it seems to work.

It’s refreshing to move onto a totally different company and project right after completing a task with the first one.  For me, it means progress since I am starting to see the exponential impact these projects are having on my life.

And it’s a hell of a step in the right direction after the challenging year I had last year, where I felt stuck in the mud.

This might not be sustainable long term, as in trying to run the next big company I decide to start.  Once you have  structure, employees, and a more natural cadence to the daily efforts of the company some of my side projects might need to cool down for a while.

Then again, Virgin Group founder and billionaire Richard Branson pretty much lives the exact lifestyle I am describing above.  So I think the lesson is in finding the right cadence and level of appropriate ADD that allows you to maximize effectiveness in as many things as possible.

If that’s just one thing – great.   If it’s many, you are probably one of the few.

Yes, Youth Can Be Entrepreneurs Too

Adam Lieb, founder and CEO of Duxter, started his entrepreneurial journey at a very early age.  He founded and sold his first company at the age of 11! Not too shabby, eh.

I sat down and talked with Adam during one of my recent Founders RAW conversations where we covered what it’s like to start a company so early in life, the value of Law School and how easy (or hard) it is to raise money for a growing startup.

What a great conversation!

You Are Never “Too Good To Step Aside” As CEO

Sometimes your ego will write checks your body can’t cash.

This is so true for the startup founder who chooses the role of CEO in his own company.

I thought of it recently as I read a great post by Jonathan Strauss, former CEO and founder of awe.sm, about stepping down from the founder/CEO role after 4 years.  In it, he very honestly describes his feelings on the decision and what ultimately brought him to remove himself from the leadership role.

Jonathan aptly describes entrepreneurship:

To be an entrepreneur I believe one must have a somewhat irrational belief in your own capabilities, otherwise you’d never be dumb enough to start a company. Regardless of any perceived glamor, most entrepreneurs I know will tell you that starting and running a company is fucking hard and there’s often more misery than joy.

He. Nails. It. On. The. Head.

If you are a frequent reader you will know this description of entrepreneurship can be found here on this blog as well.  No doubt, founding a company is one of the most difficult and emotionally taxing things in the world.  It’s a wonder company creation is actually on the rise when you read statements like these.

Jonathan goes further on why it was so hard to remove himself:

I put hiring a CEO in the same category as taking an acqui-hire or just closing up shop and moving on — things I would think about at 4am in the office on those darkest nights when I’d have a bout of sobriety about the insanity I’d turned my life into. And ultimately, things that represented the one unacceptable option motivating me to push even further beyond my limits I’d long surpassed: failure. In the early days, the only way for me to keep awe.sm from failing was to tie my fate with the company’s. If awe.sm failed, I failed. But as we switched from lean startup to growth company, I didn’t fully realize how making my ego a shareholder went from being necessary for survival to being a limitation on what we could achieve.

One of the toughest “checks” to cash as a founder is to think you are the sole reason for company success or failure.  Notice how Jonathan admits he attached himself and his fate with the fate of the company.  It is indeed one of the inherent flaws of us founders.

I commend Jonathan for his decision but I am also not letting the lesson pass me by, and you shouldn’t either.  The ego issue is very dangerous for both of you and your company.

Founders need to have a healthy balance of ego.  On one side you need to have an almost superhuman confidence about yourself and your vision because that is the only way you can get thorough the really tough times of starting the journey.  But – and THIS IS A BIG BUT – you also need to understand you are not Superman and the company can actually succeed with someone else at the helm.  You aren’t the only person on earth who can identify a market, describe a vision, build a team, sell customers and increase monthly revenue.  Other people can do that too.  And even with you still on the team.

More importantly, others might be able to do it all better than you.

So, take Jonathan’s example and learn from it.  Sometimes removing yourself from the most scrutinized and stressful position in the company is the best decision for everyone involved.

Even you.