Post on 01-Nov-2014
description
Firing up your dream team
A team B idea
A ideaB team
Investor dilemma?
"What matters is not ideas, but the people
who have them. Good people can fix bad
ideas, but good ideas can't save bad people.”
Paul Graham, Y Combinator
Agenda
• 3 main co-founding models• How to split equity• Shareholder Agreement• Who do you want on your team• How do you get them• How to reward them• Key motivation triggers• Firing people on your team
The Foundation
Recruiting
Managing
CO-FOUNDING MODELS
1 2 3+
1 2 3+• 80%+ of total equity• Self starter / charismatic / strong ego• Much more senior than other guys on the team• Can pay for the initial team salaries
1 2 3+
• Trust! Trust! Trust!• Almost perfect complementarity / No overlap• Not a stable situation • Good Shareholder Agreement is critical
50 / 50 Majority / Minority
1 2 3+
• Decision-making rules• Deadlock management• Transfer shares to remaining founder• How to manage transition to CEO
50 / 50 Majority / Minority
1 2 3+
• “Majority” has anteriority / seniority / expertise• Decision-making simpler• Need some protection clauses for “Minority”
50 / 50 Majority / Minority
1 2 3+• Getting tricky on splitting equity• Decision-making may rely on moving “alliances”• Sometimes unstable and manipulable• A CEO needs to emerge soon from the team
Chances of success?
No statistical evidence that it is true, but…
1 < 2 > 3+
A bit of (old) academic research
• Heterogeneity of team members drive higher long term performance– Murray (1989)
• Long term performance driven by size of co-founding team– Teal & Hoffer (2003)
• But both creates more conflicts, lack of trust, decreasing creativity – Mosakowski (1998), Clarysse & Moray (2001)
Do you need co-founder(s)
• In general, you achieve more and faster with co-founders, so look and keep looking for the best entrepreneurial talents around you
• Seek perfect competency coverage with no or very little overlap
• If enough money in your pockets: give less equity by paying a salary (some co-founders prefer cash)
References
• Disappointed by what I found on this. • Key sentence everywhere: “you need to LOVE
your co-founder”…
HOW TO SPLIT EQUITY AMONG CO-FOUNDERS?
Potential variables
• Experience and credibility• Core expertise• Level of commitment• Ability to bring in key people• Relevant capabilities * importance to project• Time already spent * market value• Future role and responsibility• Early money invested• Who got the idea• Who got started first
Example: The founders’ pie calculator
INPUT
OUTPUT
Source: Frank Demmler
Founder A Founder B
What does is come down to?
• Maximizing the size of the pie• Fairness on a set of criteria and “what ifs”• Creating trust mechanisms• …
X% (1-X)%
It is all about making a
deal
References
• http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%20Calculator.htm
• http://thinkspace.com/how-to-divide-equity-to-startup-founders-advisors-and-employees/
• http://foundrs.com/calculator/index.php• http://www.ownyourventure.com/
SHAREHOLDER AGREEMENT
You need solid paperwork
Key shareholder agreement clauses
VestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
Shareholder Agreement Clauses
VestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
The process by which founders / co-founders / employees accrue non-forfeitable shares.
Industry standard• 6-12 month cliff• 36-48 months
Shareholder Agreement Clauses
VestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
“Protect minority”If a majority shareholder sells his stake, then the minority shareholder has the right to join the transaction and sell his minority stake in the company.
Shareholder Agreement Clauses
VestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
“Protect Majority”A right that enables a majority (industry standard 70-75%) to force a minority to join in the sale of a company on the same price, terms, and conditions.
Shareholder Agreement Clauses
VestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
The (founders) have the right to purchase shares before the offering is made available to other potential buyers.
Shareholder Agreement Clauses
VestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
Important decisions need to have a special approval process. Eg: financing, sale, key recruitments, …
Board role and composition.
Shareholder Agreement Clauses
VestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
How to escape a deadlock in case no agreement is reached among 50/50 founders? How to divorce?
• Put off meeting• Arbitration• Mexican shoot-out
References
• JFDI Shareholder Agreement: http://mengwong.com/sg/capital/thin.pdf
• NVCA investor term sheet:http://www.nvca.org/index.php?option=com_content&view=article&id=108&Itemid=136
• Paul Graham (Y Combinator):http://www.paulgraham.com/startupmistakes.html
IS IT TOO LATE?
Maybe it is possible to change
• Discuss based on rational arguments• Offer to buy shares to pay for the past and
keep the future for yourself • Some key favorable moments for a REWIND– When all goes well and everyone agrees– Financing round (investor pushes for a new
configuration)• The longer you wait, the harder it is
Some ideas to increase your stake
• Buy back non vested shares instead of Company• Increase your ownership if IRR > X% p.a.• Take from Key People Pool or issue new stock if
your role increases (say you become CEO)• Call option on investors’ shares at predefined
price• Right of first refusal in case of share transfer
Have rights and the money to exercise them
WHO DO YOU WANT ON YOUR TEAM?
Not this guy, do you?
The best recruiter in the
world
”You look for three qualities: integrity,
intelligence and energy. But the most
important is integrity, because if they
don't have that, the other two qualities
are going to kill you.”
So who?
Hire only A+ people
Why?
1. If you have A+ people, you may fail. If you don’t have A+ people, you will fail.
2. A+ people won’t joint you if your team is not A+. So start being A+ yourself.
3. If you are afraid to lose control because of A+ people on your team, then you are back to point 1.
4. It is a bit like in sports: if you train with athletes, you have more chances to become and remain one: it motivates you, you acquire the techniques faster by watching others, you train harder.
5. You want to make sure that each new person on your team will make a critical difference to your business.
My definition of A+
• High level of personal integrity• Doers, Achievers, Solution-oriented• The best experts with humble attitude (*)• Accountable• Speak up when there is a problem• Love the product / vision (“infected people”)• High level of resilience
*an expert who is not humble and has no listening attitude is useless
What are your criteria?
HOW DO YOU GET THE A+ PEOPLE?
Create a competitionThe best people are not afraid of it. In fact, they seek it.
You want to see…
…how they compare…
…to get only the best (*)
*most probably, not these guys
Define the Prize
• Job description• Include the job challenge• What is your Unique Value Proposition• Best (required?) to include the compensation
Create visibility for the job
• Your Network• Your employees networks• Job boards are more than ok• University placement offices• …
• Informal meetups (ongoing)• Be a visible expert• Inbound marketing
PUSH
PULL
Example of recruitment process
• Screen CVs• Quick interview over the phone • Test competences (hard*)• 3 interviews minimum (**)• Check references• Discuss compensation• Make a priced offer
*get to muscle rupture, A+ people prefer hard challenges** use trusted external people if needed
Sell, Sell, Sell throughout the process
Recruitment is a lot of work (*)
# candidates Time spent (hrs)
Communicate the job offer 5
Screen CVs 180 6
Quick phone interview 20 5
Test competences 10 15/3=5
3 interviews (45 minute each) 5 11
Check references 3 3
Sell and discuss compensation 1 2
Total hours 37
*not even talking about ongoing networking, inbound marketing…
Example of interview guide (*)
*quick and dirty, the point is you need one to rate candidates consistently
Examples of questions to references
• Context of collaboration• Why should I recruit her/him?• What drives her/his motivation?• Can I trust this person?• How can I help this person feel good?• What are the 2-3 things she/he needs to work
on?
“If you were to launch a new company, would Mr. Candidate be the first person you would take on your team (and pay from your savings account)?”
“Why?”
If there was only one question to ask
Don’t make the offer till the very end
• You want your offer to be accepted, not discussed nor refused
• So discuss before, it feels more comfortable for you and the candidate
• An offer letter is just a formalization of a pre-existing agreement
Some personal advice
• Take a well connected headhunter as a Business Angel investor.
• Between 2 candidates, choose the one with the best attitude, as competences turn out to be less relevant over time.
• Recruiting is one of the key skills you want to develop on your team.
HOW TO REWARD EMPLOYEES?
Just to give it a try
Base+
Bonus+
Equity
-0 to -50% vs market rate at the beginningDepends on development stage, resources, cash / equity candidate profile, and your value proposition.Aim to reach market rate fast (in the end, you don’t want to take the risk of losing them)
Forget it at the beginning except if super well defined and quantifiable goals.
Equity distribution for “employees”
• Employees ≠ Co-founders• Count more in value, less in percentage terms• Take from Key People Pool (12-20% post money)
Title % equity post Series A Value @ 10m USD post money in 000s
CEO 5-10% 500 – 1000
COO 2-5% 200 – 500
VP 1-2% 100 - 200
Director 0.4 – 1.25% 40 - 125
Lead Engineer 0.5 – 1.0% 50 - 100
Source for % equity: VentureHacks
From art to science (Fred Wilson)
• Cut employees in 4 brackets (except CEO)– Officers: CMO, CRO, CTO, CPO, CFO… 0.50– Key People 0.25– Employees in key functions 0.10– Employees in no key functions 0.05
• Multiply by salary to get equity value– For a CMO earning 150k: 150 * 0.5 = 75k
• Calculate corresponding # shares– 75 000 / company value (10m) * total # shares
outstanding (1m) = 7500, ie 0.75% of total equitySource: Fred Wilson
Cont.
• Apply vesting scheme over 4 years• Potential gains for employee– 75k * Value multiplier over period (5-10?) –
exercise price (say 75k) = 300 – 600k
Some references
• VentureHacks: http://venturehacks.com/articles/option-pool-shuffle
• Fred Wilson: http://www.avc.com/a_vc/2010/11/employee-equity-how-much.html
TEAM MOTIVATION
Posters don’t work.
HR not so well either.
SHARED VISION
“If you want to build a ship, don’t drum
up the people to gather wood, divide
the work and give orders. Instead,
teach them to yearn for the vast and
endless sea.”
Antoine de Saint Exupéry
CULTURE
“The Culture is defined by who you recruit, promote, and let go”
- Netflix presentation
ACHIEVEMENTS
What worked for me
• Setting challenging and agreed upon goals• Progressively give more control to people• Share the data, even the hard one• Listen to the young guy and the silent person• Recognize and reward the achievers• 4-8 people sub-teams• Have the tough discussions• Have the team spend time on what it doesn’t
know yet
Call for half times to review and celebrate.
References
• Motivation models: http://www.slideshare.net/rmullenger/motivation-models
• Lance Laking, common sense on people management:http://www.slideshare.net/webgoddesscathy/human-capital-building-high-performance-teams-for-your-startups-success
• Netflix HR: www.slideshare.net/reed2001/culture-1798664