The Equity Equation
With entries from:
Bryan Menell   —   6 years ago

"You only have 100 percent of anything, and with only 100 of those percents to throw around, be careful where they go." I can't even remember who I heard say that many years ago, but it always stuck with me. One major reason to start your own thing is to own it, yet I see a lot of mistakes when it comes to equity early on.
A dear friend started a new company with a business partner that was an industry expert. His partner not only knew the industry, but had connections and a vast business network that made him a great partner. After the initial few months of starting up, my friend had the first version of their product in the hands of key customers and had earned the respect of many in the industry. His partner, on the other hand, had become enamored with another startup idea in a different space and they decided to part ways, leaving my friend to continue to run the business. It also left him with only 50% of the ownership of the company, and a silent partner who held a huge amount of stock.
"You didn't have founder vesting," I asked?
"What is that?"
"Even as a founder you vest into your shares, so that if someone departs early you can use those shares to attract another key team member to replace them," I added.
To make matters worse, since they both owned 50% neither one of them had a majority of interest (51% or more) when it came to voting. Which means on matters of importance, they both had to agree completely.
What followed was a lengthy period of legal bills and negotiation that could have easily been avoided. I always advise people to make a plan for their equity at each stage of the company's life, and review your plan with an attorney familiar with early stage companies. It could save you a lot of time and trouble down the road.

Bob Gates   —   6 years ago

Thinking about raising VC money? Where do you stand on the product vs revenue debate?

I've heard from many founders, "My VC told me not to worry about revenue -- worry about product!" I've also been in startups where our VC asked, "So why aren't you making money?" as we slowly ran out of funds...

It's important to remember that regardless of your motivation, the VC has only one: to make a certain profit in a certain amount of time. The VC also knows its own success rate, and given that the vast majority of startups fail, it probably isn't good. So they invest in a lot of startups, knowing that most will fail and a small handful will not just make it but make it big enough to cover their losses on the others -- and make the VC a profit.

When all of its portfolio companies are just getting started, the VC doesn't know which one is going to be the big winner. They tell all of them to focus on product and worry about revenue later, hoping that one or two have a breakout product that sets the company on a path to massive success and allows the company to raise more funds at a high valuation.

What about the other companies? They could be set up for potential failure. What if your idea isn't a billion dollar idea but is a $20 million idea where you and your shareholders can make a nice return for the next ten or twenty years? But you've been focused on product and not revenue, you're now almost out of money, and your VC won't pick up the phone. Uh oh.

There are lots of people and companies looking to invest, not just VCs. When looking for investors, to thine own self be true. Understand your motivations -- how does your company fit in with your life goals? what are your financial goals? how long do you want to do this?

VCs and other types of investors are motivated to get a return on their money, but their expectations on returns vary widely. You might not align on motivation, but you can find an investor whose expectations are aligned with yours and who can help you determine where to land together in the product vs revenue debate.

  • - just now