Hot Seat: The Startup CEO Guidebook

Name: Hot Seat: The Startup CEO Guidebook — Book Notes
Item: Hot Seat: The Startup CEO Guidebook
Rating: 5
Author: Cody McLain

Author: Dan Shapiro

Rating: ★★★★★

Well, I’ve done a lot of the early work already — built a prototype, made some sales, proven the market… let’s say 30%.” “And if you sold that 30% to investors instead of giving it to a co-founder, how much do you think they would pay for it?” she continued. “I think I could get a good valuation this time around, but let’s say $1.5 million,” Joe replied. “OK. So what you’re telling me is that you think it’s better for your company to have a cofounder than $1.5 million dollars, right?” Joe founded the company solo. He never raised any money. And when oDesk acquired MediaPiston, Joe kept every dime.
And what if your co-founders are not sure you’re a great CEO? Because you may be a first-time chief executive, that’s not an unreasonable concern. Of course, this is a concern for the other founders who are new to their C-level titles as well. But the answer to this objection is easy: if you turn out not to be a great CEO, either you will be replaced (losing the bulk of your stock because of founder vesting, as described in the next chapter), or the company will fail (rendering your stock worthless). So, founders should be awarded stock based on the assumption that they’re going to be outstanding at what they do, put founder vesting in place in case that assumption is wrong, and move forward.
A full-time commitment is expensive (200%) A pig and a chicken are close friends. One day, the chicken, seized by the entrepreneurial spirit, rushes up to the pig, feathers aflutter. “Pig!” the chicken says. “I have an amazing idea!” “What is it, friend?” the gentle pig replies. “We should go into business together! It would be a brilliant partnership. We would call the restaurant ‘Bacon and Eggs.’” The pig ponders the proposal for what seems like a long time. Finally, he sighs and shakes his head. “What’s wrong, Pig? You haven’t seen my PowerPoint yet! I’ve got an amazing hockey stick growth curve…” “That’s not it, my fondest companion,” the pig replies. “I’m afraid the partnership would be doomed to fail. In a restaurant called ‘Bacon and Eggs,’ I would be committed, but you would only be involved.”4 If you’re working on the startup full time while your cofounder is working part-time, you’re the pig. Not only are you putting more time and work in, but you’re risking a lot more if the project fails. Consider this: if the company fails, you have no source of income and no idea what you’re going to do next, and your most recent résumé entry is “launched a failed company.”5 Your friend with the backup plan, on the other hand, is switching hobbies. What’s worse, part-time cofounders are an actual liability when it comes to raising an investment. Investors do not care for dilettante entrepreneurs, and with good reason. Why invest in a part-cofounder when you can get a whole one? When you pitch an investor, you’re competing with every other deal they consider doing. The other deals have full-time founders. Semi-founders are semi-flakey. Despite promises and assurances that they will really, truly commit when the funding goes through, quitting the day job when the moment is at hand can be more difficult than they expect, and cold feet are common. Part-time founders create greater team risk. Full-time founders have been working together full time and have had more opportunities for the aforementioned early bankruptcy. When they see a full-time team, investors know you’ve already cleared some hard hurdles together that part-timers may have jogged around. Investors would rather you work out your issues on your dime, not theirs. Part-time founders are often legally bound to their current employers, too. Rarely, companies get mad when founders leave. Frequently, founders are sloppy and found their new businesses in ways that may inadvertently assign intellectual property to their current employers. Those problems become apparent five years later when a huge sale of the company is held up because the provenance of the startup’s original idea is brought into question. This is a whole hot kettle of a mess that’s easily avoided when the founder’s separation is history. Part-time founders send a bad signal. If the founders won’t commit, why should investors? Many investors see the lack of full-time commitment to the company as… well, a lack of commitment. They want to see founders “all in” before they are willing to put their money behind their bet. Cofounder equivocating will be expensive. If there are any part-timers, add 200% to the shareholdings of all the full-timers.
Second, splitters advocate avoiding conflict so you don’t (in Joel’s words) “argue yourselves to death.” Avoiding arguing yourselves to death is one of the biggest challenges at the early stage, so it’s easy to get on board here. But while it’s the right problem to consider, avoiding the discussion is the wrong solution. If you’re going to argue yourselves to death, do it now when you don’t have investors and, worse, employees (“Mom and Dad are fighting again”). Remember the virtues of an early bankruptcy, and instead of postponing your problems, learn to problem-solve together, now, by facing the hard issues. Don’t do it later, on others’ dimes, when the stakes are so much higher. If you’ve completed the whole exercise and still want to do 50/50, that’s OK. Just do one more thing: give or sell one share to someone else. Pick a trusted advisor or mentor. You now have a tiebreaker. You can’t paralyze the company through indecision — that one person will keep you honest and make sure you reach an agreement because if you don’t, you’re going to be giving away control of the decision to your tiebreaker. No matter which way you do it, this is going to be painful. It’s going to involve excruciating conversations. You will not finish it in one sitting. You will not feel good about the process. But you must get used to hard questions. You must get used to trusting each other. You must get used to the idea that you’re all different, not all equal. You need to decouple your egos from the day-to-day process of making business decisions. You must have the difficult discussions about responsibilities, contributions, roles, and compensation. You must do it before you make commitments to investors and employees. And if you find that the only way you can get a decision made is by compromising on an outcome that neither party thinks is the right one, then you need to stop now, before the price of failure climbs higher. There’s no way around it — you’re going to have to split the baby, but it doesn’t require the wisdom of Solomon to get it right. Take your time, keep a level head, and remember: this is just the first of the decisions you’ll be making together for the rest of your company’s life!
As long as we’re being honest, Dr. Wasserman’s book discussing his research, The Founder’s Dilemmas (Princeton University Press, 2013), is so good that I won’t fault you for putting down this book and reading that one first. 2 For example, using the methodology in the previous chapter. 3 One notable exception: the most senior sales executives will generally have a larger paycheck than anyone — if they’re very, very good. 4 For more about this tired joke, see its Wikipedia entry. 5 If this is your actual résumé entry, you may want to consider an absence of marketing ability as a contributing factor to your company’s unfortunate demise. 6 This is a good test of whether you’ve got the right lawyer. If your attorney can’t give you a half-dozen recent comparable for startups at your stage, then you’re dealing with someone who doesn’t have enough domain expertise to represent you well. In fact, good startup attorneys will not only work with startups themselves but have a robust startup practice in their firm. As a result, they can draw on dozens of recent financings from internal data and give you a very accurate target range. 7 “Cap table” is an abbreviation for capitalization table, the spreadsheet that shows who owns which shares of the company. It’s also a shorthand for the shareholder composition, as in “There are a lot of angels in the cap table.” 8 Joel Spolsky, “Where Twitter and Facebook Went Wrong: A Fair Way To Divide Up Ownership Of Any New Company,” Business Insider, April 14th, 2011. 9 Not a hypothetical; this happened at an actual startup (that had an exit over $50M a few years later).
Use a four-year vesting cycle for founders, the same as you eventually will for employees. This is the industry standard.
For founders, a nice compromise is to accelerate 50% of the remaining unvested stock on change of control (single-trigger), and 100% of the rest double-trigger. This is positive for you, but not so much so that investors are likely to complain.
Get the legal paperwork for your stock agreements sooner rather than later to start the capital gains clock ticking. This can easily be a seven-digit difference if you happen to have an early exit. Of all the lessons I impart to you in this book, this is the one that I have learned at the greatest personal expense.
Build Dollars into the Company Culture Tightfisted? Luxurious? Mixing it up with $3K workstations sitting on milk-crate desks? As you think about your company culture (more on that in Part III), think about how you spend money. This is a crucial conversation for founders to have, as their attitudes will drive the rest of the business. Do you spend a day optimizing code, or spend $1K to buy a bigger server? The engineering team will notice. Do you stay in fancy hotels or double up at the Motel 6? The sales team will notice. And whatever it is you’re doing, they will be inclined to do the same. Spending becomes a part of company culture whether you mean for it to or not, so it’s better to set things right from the outset.
Asking for introductions to “investors” marks you as someone who doesn’t really know what he’s doing. An investor/company match is very specific, and if you want to find your fit, you’re going to have to figure out what you’re looking for.
Before you start looking for investors, figure out what kind of investors you want, and what kind of investors will want you.

Hot Seat: The Startup CEO Guidebook

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