It's a frustrating and uncertain place to be as a founder.
You're being paid peanuts compared to what you could be making in the industry (generally your comp is garbage until maybe Series C) and your equity is already as good as it's ever going to get, so some reasons to stay behind are:
1. you're really enjoying the gig
2. you think that by you staying behind, the overall worth of your equity will be higher than by having someone else take over
3. you think that quitting at that stage will be a permanent black mark on your record, the captain abandoned the ship
4. you're totally out of money after years of trying to make ends meet with a startup founder gig, so you can't start a new company without spending a year or two working for someone else first
There's real opportunity cost to sticking around. You could be starting a new business and begin another 4 year vesting countdown there. Maybe you're ok working for someone else, you could be at Google collecting a 1/2M paycheck, feeling like you're on vacation compared to a growth stage CEO job. Maybe you just want to take a breather and actually have time for your spouse and kids for a little bit, before another dive.
I'm in a similar tough spot, I'm the technical founder and am about to leave the company for health reasons. The difference between my case and what's described here, is that my salary isn't too bad (for Dutch standards) and that the investors are best described as angel investors.
The fact that they are angels makes everything more personal though. And with the current market, getting someone with my set of skills to replace me at a decent rate is going to be near impossible. It's a really tough spot, but in the end mental health is most important.
This piece seems to assume that founders of a company are just some kind of super-employee of the VC that are only going to be around so long as they are getting regular compensation.
That isn't how it's supposed to work. The founder has to believe they create the value. They don't work to get grants of stock, they work to increase the value of the stock. They created all the stock in the first place!
If they think that they could just hire someone else to do their job and everything would just turn out the same then what the hell did they even found the company for in the first place?
The way VC is set up in the valley has warped peoples understanding of what a business even is.
To be fair, Fred Wilson is not saying that these grants of new stock are appropriate everywhere -- he specifically said he has never seen it happen when a founder-CEO owned 25% or more of the company and that the cutoff is somewhere around "double digits".
If a founder-CEO only controls about 8 or 9% of the company stock then perhaps they ARE just a kind of super-employee of the VCs.
You need different sets of skills at different times. Peter Thiel eloquently articulated this as “before you can have a company vision, you need a company mantra”.
In the beginning the work is about instantiating the product into the world. It’s unclear what bumps you’re going to run into so you have to be careful about overdefining the problem. You also can’t have no definition or no work gets done. It’s tricky (this is the 0->1).
The 1->Many is different. You also can’t over constrain the problem but you need a lot more definition and constraint than you did before product market fit. Not everyone likes this part.
If you have a founder who does the 0->1 really well and has a massive equity position, but they don’t do the 1->Many well, that’s going to make the company very, very difficult to govern.
It’s tricky to think about how to reason about this because many people think they can do everything. Not everyone is a creator, and not everyone is an operator.
It’s not obvious (and if there isn’t a big success incentive, it’s hard to get good people to work on the problem).
For most Founders who go the VC route,the reality is your boss is the investor. Crowdfunding 2.0 aka Security Tokens will change this dynamic. Then your boss is the market, which is more healthy.
Large shareholder-employees stick around because they believe they can grow the value of their company.
A CEO owning double digit share of their company doesn’t need more shares. What they want and need, most of all, is dry powder to grow.
Secondary to a large war chest comprised of equity pool and cash to pay salaries, is a decent salary for themselves to keep the family happy with their living conditions while the CEO is basically unavailable as a partner, off trying to grow their company.
I’m surprised that the blog post seems to miss this? I generally have high regard for AVC posts.
A CEO/Founder is never going to be able to double the size of their slice of the pie. While the CEO/Founder is absolutely crucial in doubling the size of the overall pie. At 4 years in I’d say most VC funded companies are still aiming to be 10x’ing the size of their pie at the least.
An equity grant at 4 years in should be totally irrelevant. Deck chairs on the titanic. A little anti-dillusion is nice but not necessary. It’s all about the size of the pie, not the slices, at that point. And growing the pie requires funding on good terms, and massive focus and execution. Generally that means long hours and time away from home, for which a $200k salary helps tremendously to keep the family on board for the voyage.
This idea of keeping the family happy suggests a niche market unto itself. I can think of a few services that would make that easier. There are a bunch of high end concierge services out there, but one that focused on founder families is like an extended family office. Gears turning.
This in my mind doesn't address two key items (unless I somehow missed it?)
1) If you truly care about the business, and it's not just a numbers game, you might have some emotional attachment to the product, and the people working for the company. This complicates things for everyone.
2) Leaving will likely devalue your stock. Bad for investors, probably worse for you (as it's likely your largest asset). Pulling yourself out unless the company is in a super strong position, with a likely high chance of hiring a good replacement may not be super smart for your own finances.
Investors are usually diversified, holding stakes in lots of different companies. Meanwhile, founders are usually all in with all their eggs in one basket (albeit a basket they are guarding intently). An alternative to asking for more equity is to negotiate for a higher salary, and using those funds to diversify your holdings. As you'd expect, this conversation is easy if the business is going well, and isn't if it's not.
I have a question - Is founder vesting standard outside the valley/software startups?
If I and my partner set out to build (say) a restaurant franchise in Texas, do 4 year vesting schedules, cliffs, etc make their way into incorporation documents? How do things work in non-silicon-valley-startup businesses?
Either vesting is a part of standard business incorporation (in which case I don't see why it needs special discussion in a software startup context, we don't need to discuss whether a company should have annual or quarterly balance sheets, for example - such 'standard elements' are taken for granted) or it is highly software startup specific (in which case there might be interesting rationales for such provisions existing that are specific to software, software startups, or conventions of SV VCs)
Founder vesting is usually set up either at the onset to protect multiple founders from breakups, or as a term requested by investors in a priced round of funding.
If you set up a business of any type, you're free to give yourselves a vesting schedule or not. If you take on smart outside capital, it may be a term they require.
Software is somewhat unique in that it takes relatively little capital to start a business, outside of the sweat equity that the founding team puts in.
If you're opening a restaurant in Texas with someone, you're looking at something like $100k to $250k each, depending on local regulations and what kind of scale you want.
This is a good post and it was pretty comprehensive. Worth noting however, that there are many more hairy solutions Fred didn't raise.
For instance, some founders will negotiate a grant upon IPO or upon sale of a company beyond $x dollars as a way to try and align interests with investors. The problem with those is that it can cause unnatural behavior (eg, Snapchat IPO'd too soon, I'd argue, because Evan's investors gave him a grant that vested upon a qualified IPO exceeding a certain price. Or the tax issues late-breaking grants can create upon a trigger.)
> the company would have to go out and hire a new CEO and that new CEO would get an equity grant that would be between 2.5% and 7.5% of the Company, depending on the value of the business.
If this is true, it’s much better to come in as replacement CEO than to be a founder. After four years and multiple rounds of financing much of the risk has been mitigated. Additionally, no incoming CEO is working in their garage and mortgaging their house.
There is, of course, the FYIFV (Fuck You I'm Fully Vested)[1] trope that originated at Microsoft. But I doubt that Gates and Allen were part of that. :)
What I saw at one startup that went public is that the founders didn't start out with a large amount of stock. But after the IPO the board (the founders' buddies) would continue to award them substantial stock grants, even though the company was doing just OK not great. That's not a scenario that's covered by the article.
> 2/ But that argument about how a new CEO should be compensated essentially puts on the table the question of whether the founder CEO is actually the best person to run the Company right now or if there is someone better suited to do that who could be recruited for a new market equity grant. It is often not in everyone’s best interests to have that conversation.
Why would it not be in everyone's best interests to have that conversation?
The CEO might not get to stay in their highly-compensated, prestigious position that they presumably worked very hard for.
The board might have to answer questions about why they didn’t start looking for a new CEO sooner.
The company might have to suffer through the trauma of switching CEOs.
All shareholders might lose some equity if a large grant is given to the new CEO. (Nearly equivalently, the company will lose a large chunk of the shares reserved for new hires, reducing its flexibility in hiring.)
Of the founders I have met that are fully vest, most stick around. I presume because they have a comfortable lifestyle or their shares will be worth more by their direct participation in the company.
I firmly believe that true altruism does not exist and find it insulting when I'm told otherwise. There's always a trade off.
You can of course say no, but nowadays it's so common that you are unlikely to find someone who would make a deal without it. Basically it goes to show that the people who have the money are the ones who have the power, not the CEOs of start-ups.
It’s not about being babysat, it’s about downside protection for VCs. If you’re competent and believe in your business (which any founder CEO should be and do), your personal assessment of the risk of you leaving should be effectively zero — meaning this term (“founders must adhere to this vesting schedule”) reduces to, “sure, if that makes you happy, let’s negotiate on more important things.”
Not agreeing to this term (or negotiating heavily) when accepting investment capital can be a huge red flag for this reason. It immediately weeds out people who aren’t committed to the business.
A vesting schedule is useful if you have cofounders, or VC investors.
You want to know that your cofounders (or a VC will want to know the founder) has a very real reason to stick around, especially in the toughest years.
Otherwise, you could jump ship at anytime and keep ownership of a huge part of the business.
[+] [-] 8f2ab37a-ed6c|7 years ago|reply
You're being paid peanuts compared to what you could be making in the industry (generally your comp is garbage until maybe Series C) and your equity is already as good as it's ever going to get, so some reasons to stay behind are:
1. you're really enjoying the gig
2. you think that by you staying behind, the overall worth of your equity will be higher than by having someone else take over
3. you think that quitting at that stage will be a permanent black mark on your record, the captain abandoned the ship
4. you're totally out of money after years of trying to make ends meet with a startup founder gig, so you can't start a new company without spending a year or two working for someone else first
There's real opportunity cost to sticking around. You could be starting a new business and begin another 4 year vesting countdown there. Maybe you're ok working for someone else, you could be at Google collecting a 1/2M paycheck, feeling like you're on vacation compared to a growth stage CEO job. Maybe you just want to take a breather and actually have time for your spouse and kids for a little bit, before another dive.
Tricky spot.
[+] [-] donkeyd|7 years ago|reply
The fact that they are angels makes everything more personal though. And with the current market, getting someone with my set of skills to replace me at a decent rate is going to be near impossible. It's a really tough spot, but in the end mental health is most important.
[+] [-] jchendy|7 years ago|reply
That's director-level compensation. Would somebody whose only experience is 4-5 years of running a startup be hired straight into a director role?
[+] [-] Negitivefrags|7 years ago|reply
This piece seems to assume that founders of a company are just some kind of super-employee of the VC that are only going to be around so long as they are getting regular compensation.
That isn't how it's supposed to work. The founder has to believe they create the value. They don't work to get grants of stock, they work to increase the value of the stock. They created all the stock in the first place!
If they think that they could just hire someone else to do their job and everything would just turn out the same then what the hell did they even found the company for in the first place?
The way VC is set up in the valley has warped peoples understanding of what a business even is.
[+] [-] mcherm|7 years ago|reply
If a founder-CEO only controls about 8 or 9% of the company stock then perhaps they ARE just a kind of super-employee of the VCs.
[+] [-] beaner|7 years ago|reply
[+] [-] josh2600|7 years ago|reply
In the beginning the work is about instantiating the product into the world. It’s unclear what bumps you’re going to run into so you have to be careful about overdefining the problem. You also can’t have no definition or no work gets done. It’s tricky (this is the 0->1).
The 1->Many is different. You also can’t over constrain the problem but you need a lot more definition and constraint than you did before product market fit. Not everyone likes this part.
If you have a founder who does the 0->1 really well and has a massive equity position, but they don’t do the 1->Many well, that’s going to make the company very, very difficult to govern.
It’s tricky to think about how to reason about this because many people think they can do everything. Not everyone is a creator, and not everyone is an operator.
It’s not obvious (and if there isn’t a big success incentive, it’s hard to get good people to work on the problem).
[+] [-] dlubarov|7 years ago|reply
[+] [-] chaostheory|7 years ago|reply
Fred Wilson is based in NYC and not SV.
[+] [-] bernardlunn|7 years ago|reply
[+] [-] microdrum|7 years ago|reply
[+] [-] zaroth|7 years ago|reply
A CEO owning double digit share of their company doesn’t need more shares. What they want and need, most of all, is dry powder to grow.
Secondary to a large war chest comprised of equity pool and cash to pay salaries, is a decent salary for themselves to keep the family happy with their living conditions while the CEO is basically unavailable as a partner, off trying to grow their company.
I’m surprised that the blog post seems to miss this? I generally have high regard for AVC posts.
A CEO/Founder is never going to be able to double the size of their slice of the pie. While the CEO/Founder is absolutely crucial in doubling the size of the overall pie. At 4 years in I’d say most VC funded companies are still aiming to be 10x’ing the size of their pie at the least.
An equity grant at 4 years in should be totally irrelevant. Deck chairs on the titanic. A little anti-dillusion is nice but not necessary. It’s all about the size of the pie, not the slices, at that point. And growing the pie requires funding on good terms, and massive focus and execution. Generally that means long hours and time away from home, for which a $200k salary helps tremendously to keep the family on board for the voyage.
[+] [-] motohagiography|7 years ago|reply
[+] [-] verelo|7 years ago|reply
1) If you truly care about the business, and it's not just a numbers game, you might have some emotional attachment to the product, and the people working for the company. This complicates things for everyone.
2) Leaving will likely devalue your stock. Bad for investors, probably worse for you (as it's likely your largest asset). Pulling yourself out unless the company is in a super strong position, with a likely high chance of hiring a good replacement may not be super smart for your own finances.
[+] [-] joshfraser|7 years ago|reply
[+] [-] plinkplonk|7 years ago|reply
If I and my partner set out to build (say) a restaurant franchise in Texas, do 4 year vesting schedules, cliffs, etc make their way into incorporation documents? How do things work in non-silicon-valley-startup businesses?
Either vesting is a part of standard business incorporation (in which case I don't see why it needs special discussion in a software startup context, we don't need to discuss whether a company should have annual or quarterly balance sheets, for example - such 'standard elements' are taken for granted) or it is highly software startup specific (in which case there might be interesting rationales for such provisions existing that are specific to software, software startups, or conventions of SV VCs)
[+] [-] kenneth|7 years ago|reply
If you set up a business of any type, you're free to give yourselves a vesting schedule or not. If you take on smart outside capital, it may be a term they require.
[+] [-] ThrustVectoring|7 years ago|reply
If you're opening a restaurant in Texas with someone, you're looking at something like $100k to $250k each, depending on local regulations and what kind of scale you want.
[+] [-] davidu|7 years ago|reply
For instance, some founders will negotiate a grant upon IPO or upon sale of a company beyond $x dollars as a way to try and align interests with investors. The problem with those is that it can cause unnatural behavior (eg, Snapchat IPO'd too soon, I'd argue, because Evan's investors gave him a grant that vested upon a qualified IPO exceeding a certain price. Or the tax issues late-breaking grants can create upon a trigger.)
[+] [-] YPCrumble|7 years ago|reply
If this is true, it’s much better to come in as replacement CEO than to be a founder. After four years and multiple rounds of financing much of the risk has been mitigated. Additionally, no incoming CEO is working in their garage and mortgaging their house.
[+] [-] repomies6999|7 years ago|reply
[+] [-] PhantomGremlin|7 years ago|reply
What I saw at one startup that went public is that the founders didn't start out with a large amount of stock. But after the IPO the board (the founders' buddies) would continue to award them substantial stock grants, even though the company was doing just OK not great. That's not a scenario that's covered by the article.
[1] https://en.wikipedia.org/wiki/FYIFV
[+] [-] DenisM|7 years ago|reply
[+] [-] cheerioty|7 years ago|reply
[+] [-] arikr|7 years ago|reply
Why would it not be in everyone's best interests to have that conversation?
[+] [-] krallja|7 years ago|reply
The CEO might not get to stay in their highly-compensated, prestigious position that they presumably worked very hard for.
The board might have to answer questions about why they didn’t start looking for a new CEO sooner.
The company might have to suffer through the trauma of switching CEOs.
All shareholders might lose some equity if a large grant is given to the new CEO. (Nearly equivalently, the company will lose a large chunk of the shares reserved for new hires, reducing its flexibility in hiring.)
[+] [-] iblaine|7 years ago|reply
I firmly believe that true altruism does not exist and find it insulting when I'm told otherwise. There's always a trade off.
[+] [-] the_clarence|7 years ago|reply
[+] [-] freddie_mercury|7 years ago|reply
[+] [-] tptacek|7 years ago|reply
[+] [-] erikb|7 years ago|reply
[+] [-] sheeshkebab|7 years ago|reply
[edited - removed my ranting]
[+] [-] keithwhor|7 years ago|reply
Not agreeing to this term (or negotiating heavily) when accepting investment capital can be a huge red flag for this reason. It immediately weeds out people who aren’t committed to the business.
[+] [-] icedchai|7 years ago|reply
If you want to control your own destiny, bootstrap. Otherwise, unless you're very successful, you're in for a world of pain.
[+] [-] paulddraper|7 years ago|reply
You want to know that your cofounders (or a VC will want to know the founder) has a very real reason to stick around, especially in the toughest years.
Otherwise, you could jump ship at anytime and keep ownership of a huge part of the business.
[+] [-] rargulati|7 years ago|reply