Everyone knows that you need to give out gobs of stock for the early-stage team, the first 3 - 5 members who're willing to get your idea off the ground. Of course, if you were able to pay them a good salary and can convince them their jobs are secure for awhile you wouldn't need to do so - but lacking a cash compensation, which is standard ops for most startups, it's the equity that will bring them in. Nothing new there.
What are you really offering with equity? The stock is pretty much worthless when you just get started (even on paper the so-called fair market value is only a fraction of dollar). But there is the hope and potential that it will be worth a Carrera, some beachfront property and, most importantly, a letter of resignation - if you and your team are able to deliver.
I recently had an 'a-ha' moment: equity is not only a way to attract the right person to your team, it is a way to dissuade the wrong person from joining your team. Though you have less invested and created little of value at this stage, paradoxically the impact of a wrong hire is highly significant (later on, with more people on board, you have a little more wiggle-room if you've made an injudicious choice). When you're making an offer to someone who'll be part of a five-person or smaller team, both of you know that he will directly impact the future value of the stock. So this person has to feel confident in her ability to deliver - and if she has any doubts about that, she'll know that all the many thousands of shares may amount to nothing more than shredder-fodder. So, assuming that you're working with someone with smarts and a desire for success, she'd most certainly withdraw if she's less than 100% confident in her ability to deliver. And that is a very good thing.
Of course, this will not work as well in a consulting or 'try and then buy' approach, because both parties are avoiding commitment and consequently are unlikely to take on anything of significance. And of course, you still have to go through the usual due diligence. But, as the final test, offer enough equity to make it worth their while - and the ones who're unsure of themselves will walk away, while those who're confident they can make the magic happen, will leap at the opportunity. I've seen it work - the early stagers know that the pot of gold at the end of the rainbow is only as real and as large as they can make it, and if they can't do it, they'll veer off to another yellow brick road (to merrily mix metaphors).
3 comments:
I am in the "trenches" now ( 2nd time – The 1st time, I raised money from some of the most venerable Indian names in the business and we were in 2000-2001. You know the rest of the story ) ..so. here I am right in the middle of building my team for the next adventure .. Your observations cannot be more accurate…..
However, you need a combination of knowledge and “believer”....the scale tilting more towards a believer ( in you and the venture). The ideal profile in the eyes of a VC may not be kicked about you or your game plan. So either you are out of your mind trying to build the business or you are not able to articulate the upsides of joining your team. I don’t think that "an idea" in itself becomes a business. You start with "an idea" but the idea itself evolves into something concrete after the funding team agonizes over it for a long time. Going through crossroads, jumping dead ends etc till you find the formidable niche. In order to do this, you need to have people with knowledge about the business you are trying to build. Many times, your network/contacts etc can only get you so far.
Then there is this whole thing about finding a defendable, differentiable market niche. I think this is a whole load of BS to a large extent. I have heard VCs tell me you need to have at least 12 months of lead time. Now, I have always wondered on this logic. How can you calculate?
I am a big fan of bootstrapping. There is nothing better to silence your critics ..including yourself. If you cannot translate “your idea” into cash or “want to spend cash” then you are walking on thin clouds. ...If I cannot bootstrap then at least I will have multiple customers signed on to buy... I have found that this is a whole lot more powerful in attracting the right talent you need to get your venture off the ground. I have started to rely heavily on customer surveys to validate a business plan.
You're right, getting someone very senior and talented to join a company only for equity is very, very hard. Why would someone who can get a job in companies ranging from funded startups to the grand old parents of hi tech join a company that barely even has a name unless they completely believe not only in the idea but also in you? As important as the idea and market potential is, people joining at such an early stage are risking their careers, and unless they have personal trust in you they'd be foolish to do so. That is why most startups that start with no cash are usually cofounded by friends or those who've worked with each other in the past. Hiring off the street is not only risky for the company, but is also close to impossible, unless you and the candidate are willing to make major compromises, which will then end up affecting the viability of the company or your relationship.
Interestingly, in one of the startups I know, the founder did not know the 'founding' team at all but they're growing very successfully now, and are all still together after 4 years. I think it is possible to find 'believers' (as in Prithvi's comment above) - though you have to do some serious digging.
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