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Welcome back to the episode of
the Startup Therapy Podcast.

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This is Ryan Rutan,
joined as always by my

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friend, the founder,
and CEO of startups.com.

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Will, Schroeder will, we talked
to lots and lots of founders and

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it's a secret to anybody and uh,
most founders seem to think that

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control is a cap table problem.

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It isn't.

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You can own 90% of the company
and still wake up one day

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realizing you need permission
to do anything meaningful.

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Well, like.

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You have an
experience like this?

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Yeah, I like a lot of 'em.

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I remember the first
time this, this happened,

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well, not the first time.

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Remember one of the first times
this happened, I was running

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a company and I owned like, I
think like 80% of it, right?

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Uh, you know, the, the majority.

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And an investor comes to
me, an early stage investor

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and says to me, Hey, unless
you do X, Y, and Z, we're

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not gonna fund the company.

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Ergo, the company's
not gonna make payroll.

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And I remember
thinking, what the hell?

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Yeah.

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Like I own 80% of this company.

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Yeah.

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How can this guy tell me this?

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I'm in

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charge around here.

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Yeah.

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Yeah.

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What I realized was control had
very little to do with, with how

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much you owned and had a lot to
do with how the company is set

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up and what the provisions are.

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Yeah.

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And when we talked to
founders like, like Ryan,

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how many founders do you talk
to that are like, I gotta

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worry about the valuation.

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'cause if the valuation's
not high enough, I'm gonna

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lose control of the company.

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A lot of them.

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Well, we just had, we had that
question pop up last week, right

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when you and I were doing the,
the live workshop on funding

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and somebody asked something
along those lines and you

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know, I think we answered it
then, but it's pretty constant.

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I think a lot of founders really
get this wrong and so like

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today, I think good that we talk
about what control actually is

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and, and probably why equity is.

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Maybe the worst proxy for it.

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I mean, there's probably
worst things, right?

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Like, which way were the
crows flying this morning?

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That's how much the
company I control.

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Probably not, but you know,
equity is not a good proxy

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for it, but it's the one that
we most often see applied.

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Yeah.

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And, and so like, so
here's the theory.

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This is what most people think.

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And if you're in the audience
and you're listening to

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this right now, please like
lean in on this one because

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I'm telling you we're
gonna change everything.

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You think about what control
is in a company, the TLDR

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is, we're gonna tell you
have very little of it.

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The longer version is we're
gonna try to tell you how

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to focus on what matters.

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But here, here's the
The short version.

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The short version is
the idea of control.

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Something along these lines
that if I own the majority of

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the business, like the, the old
school version, like I always

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picture of the Monopoly man
version is that I own 51% of

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the business, and if I own 51%,
then I control the company and

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that's, and everybody has to do
what I say and blah, blah, blah.

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It's like, dude, it
doesn't work like that.

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Nope.

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At all.

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I'm sure there are some
companies where the literal

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51% strikes some sort of
decision making capability.

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Sure.

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But like at that point,
I'm thinking like public

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companies or something, like
something way different.

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Not at all how startups work,

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not a startup raising money
on, on a problem statement

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written on a napkin from
their friends and family.

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Yeah,

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and and I think what's
also missing when, when

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I say to people, okay,
you're afraid of losing

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control, what specifically.

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Are you afraid of losing?

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Yeah.

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And they'll have like
kind of amorphous answers.

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They're like, well, you
know, I wanna make sure

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that, you know, I can control
any decisions, et cetera.

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I'm like, which decisions
specifically do you mean?

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Right.

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Yeah.

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And, and when you start to
get specific, the fidelity

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and what they want to control
drops off quickly because

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they don't really know.

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Yeah.

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They just know they don't want
someone else making a decision,

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whatever that might be.

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I talked to a founder about
this specifically about

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two, three weeks ago now,
and we went through that

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same matrix and I was like,
what is it you're afraid of

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actually losing control over?

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Yeah.

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And they didn't really know.

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And so ran through some
examples and I said like, look,

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typically when you're saying
control, I, I think you mean

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like kind of one of three.

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Major things.

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Strategy, right?

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Like what are we building?

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Who are we serving?

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Okay, cool right pace, what's
our growth rate, what's our burn

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rate, what's our risk tolerance?

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And then things
around people, right?

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Hiring, firing, comp,
and how we build culture.

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Yeah.

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And they're all different
levels and as we'll

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explore, they have different
protections to make sure that

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you maintain some level of
control should you want it,

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right, right

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around those three things.

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But I think it generally falls
into those three buckets for me.

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You know when I never hear this,
this is what blows my mind.

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I never hear the lose control
when people are having

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co-founder discussions.

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Now when they do, it looks
like this, I wanna take

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on, uh, A CTO, let's say.

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Yeah.

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And that person's
gonna build my app.

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By the way.

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Isn't it funny that all
that's gonna go away?

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Yes.

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Like the lever of the CTO
being able to take half

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the company or whatever.

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Hang

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on, let me check.

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Will, it's Tuesday,
March 31st, 7 34 my time.

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I'm pretty sure it went away.

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I think it's gone to get left.

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I just, I, there was, there
was always the genesis of

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this conversation anyway,
the idea is, hey, I'm gonna

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take on this co-founder.

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I wanna make sure they have 30%.

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I have 70%.

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Yeah.

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So I control the company.

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That is the, the understanding,
again, when you press that

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person to say, how do you
know that that will allow

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you to control the company?

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Like, well, I own majority.

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I was like, well, do
you understand how the

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rest of this works?

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Yeah.

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Like how owning a majority
rarely has anything to do with

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controlling decisions, and most
people have no idea whatsoever.

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Hence this episode.

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No.

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And why would you, why
would you understand, like,

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like the intrinsic parts?

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Well, don't you remember
back in kindergarten when

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we all started, uh, taking
on co-founders for our

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companies and they, they
taught us how, right?

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Like, we have no
proxy for this stuff.

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I think, look, I think there's,
there's an easy thing to

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remember here in my book.

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It's like the moment
you're not the only owner.

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Whether that comes in the
form of a co-founder, whether

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that comes in the form of
an investor, when you're not

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the only owner, your absolute
freedom disappears, right?

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You're correct.

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Absolute freedom.

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Until then, you are
absolutely free.

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Right?

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Your absolute freedom
disappears and, and look,

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that's not evil, right?

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That's not necessarily
even a problem.

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That is just the very nature
of shared ownership of.

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Anything.

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Companies in particular have
some very specific things

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that happen, but that's the
nature of shared ownership.

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Let's talk about this
before we get to investors.

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I know the investors
part is what everybody's

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stressed out about.

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Yeah.

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We got a lot to talk about
there, but let's talk about

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it even before we get there.

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When we take on a co-founder.

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Because what throws me off is
I rarely see people like have

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nearly as much consternation
about control when it comes

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to taking on a co-founder or
early employees, et cetera,

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as they do with an investor
who's gonna take geometrically

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less of the company.

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Yes.

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In the early stages.

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So let's go back
to our, our CTO.

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That's gonna build my
mobile app type thing.

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Yeah, yeah.

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Which you hear all the time.

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CTO wants 30% of the company,
which is okay because I still

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own 70% of the company, so
I'm still controlling it.

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And I'm like, pause right there.

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Right?

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Like, why is that okay?

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And when I say that,
I'm saying, why 30%?

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Why do you need, uh, hey, as
long as I'm over 51%, I'm good.

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That means nothing,

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right?

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And let me tell you, having
learned it from the other

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side of the, the equation,
early in my career, I wound

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up in a situation where
I own 40% of a company.

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My business partner owns 60%
of the company, and I assumed,

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mind you, I was like 22.

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I assumed that that meant
I am totally subservient.

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I am his absolute,

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uh, vassal.

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Vassel.

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Yes.

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I, I, I'm in this, this Vassel
position and he actually told

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me, he is like, that's not
the way any of this works.

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He is like, there are
there, first off, we have

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an operating agreement that
you clearly did not read.

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That's it,

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that states exactly how
this supposed to work.

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And second, I have a
fiduciary duty, right?

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Yes.

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Like, even though I own
the majority, there's a

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lot of stuff legally I
can't do without getting

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in all kinds of hot water.

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And Ryan, I had no idea.

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I had no, I, I just thought that
he has a hundred percent rights.

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I have no rights.

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Like he was the monopoly

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man.

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You weren't gonna question him.

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He had a monocle.

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Yeah.

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What can you say to that?

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But think about
that for a second.

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Like, our lack of
understanding of this Yeah.

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Is so significant.

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But the amount of work
we put into protecting

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something that we understand
very little of is a lot.

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It is.

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It blows

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my mind.

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Lemme draw some boxes
around this stuff.

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So let's put some
definition on it.

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Equity is how you split money.

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Control is how you
split decisions.

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Great, great way

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to put it, right?

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Yep.

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Yep.

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The cap table, you
brought that up.

256
00:08:00,495 --> 00:08:02,865
The cap table tells
us who gets paid.

257
00:08:03,344 --> 00:08:04,695
You brought up something else
that's even more important.

258
00:08:04,695 --> 00:08:08,445
The operating agreement tells
us who gets to decide, right?

259
00:08:08,445 --> 00:08:11,385
I think if we can keep those
things in mind as we go through,

260
00:08:11,385 --> 00:08:13,695
as you're sitting on the other
side of this podcast listening

261
00:08:13,695 --> 00:08:16,034
to Will and I go through this,
those are a couple of important

262
00:08:16,034 --> 00:08:17,085
things that I think will help.

263
00:08:17,330 --> 00:08:20,419
Keep you aligned with
how this actually works.

264
00:08:20,479 --> 00:08:21,140
Let's play it out.

265
00:08:21,200 --> 00:08:22,760
So let's do a simple scenario.

266
00:08:22,820 --> 00:08:25,250
Ryan, you and I are starting
a company together and we're

267
00:08:25,250 --> 00:08:26,359
gonna go take on investment.

268
00:08:26,390 --> 00:08:27,740
So let's, let's play
through an investment.

269
00:08:27,740 --> 00:08:27,859
We

270
00:08:27,859 --> 00:08:28,400
have to.

271
00:08:28,550 --> 00:08:28,729
Yeah.

272
00:08:29,150 --> 00:08:29,215
Do we have to?

273
00:08:29,690 --> 00:08:30,500
Yes.

274
00:08:30,890 --> 00:08:34,220
And so day one, you and
I decide to, to drop

275
00:08:34,220 --> 00:08:34,939
an operating agreement.

276
00:08:35,030 --> 00:08:35,480
Okay?

277
00:08:35,480 --> 00:08:35,490
Okay.

278
00:08:35,720 --> 00:08:38,689
Now for folks that don't
understand, like they've heard

279
00:08:38,689 --> 00:08:40,520
of an operating agreement,
they got one for free on

280
00:08:40,520 --> 00:08:42,770
legal zoom, like a template
or something like that, right?

281
00:08:42,770 --> 00:08:43,460
Which a lot of people get.

282
00:08:43,850 --> 00:08:46,550
The operating agreement
is like the constitution.

283
00:08:46,825 --> 00:08:47,455
Of the company.

284
00:08:47,605 --> 00:08:47,755
Yeah.

285
00:08:47,785 --> 00:08:50,815
It basically says, and yours
might, yours being folks

286
00:08:50,815 --> 00:08:53,275
listening, yours might be a
total template that doesn't

287
00:08:53,275 --> 00:08:57,385
say much of anything, but it's
designed very specifically to

288
00:08:57,385 --> 00:09:01,525
say, based on certain conditions
of the company, here's how

289
00:09:01,525 --> 00:09:03,265
those decisions air go control.

290
00:09:03,415 --> 00:09:04,135
We'll get made.

291
00:09:04,740 --> 00:09:05,160
Okay.

292
00:09:05,370 --> 00:09:07,890
Now categorically there's
an unlimited number of

293
00:09:07,890 --> 00:09:10,949
decisions that we can put
as these provisions, right?

294
00:09:10,949 --> 00:09:11,010
Yeah.

295
00:09:11,490 --> 00:09:14,010
Here's one that I got early on
when it, when I was getting my

296
00:09:14,010 --> 00:09:18,750
first VC investment, a provision
said in order to make a decision

297
00:09:18,839 --> 00:09:21,540
on a higher, over a hundred
thousand dollars in annual comp.

298
00:09:22,245 --> 00:09:24,195
You have to get board
approval, which makes

299
00:09:24,195 --> 00:09:25,185
total sense, by the way.

300
00:09:25,215 --> 00:09:25,395
Yeah.

301
00:09:25,575 --> 00:09:26,955
But Ryan, I was
blown away by it.

302
00:09:27,315 --> 00:09:27,435
Yeah.

303
00:09:27,435 --> 00:09:29,415
I was like, what are
you talking about?

304
00:09:29,445 --> 00:09:32,655
I have 80% of this company,
and they're like, you don't

305
00:09:32,655 --> 00:09:33,945
have 80% of its money, dude.

306
00:09:34,545 --> 00:09:34,635
Yeah.

307
00:09:35,775 --> 00:09:36,705
That's where we come in.

308
00:09:37,305 --> 00:09:37,665
Right?

309
00:09:38,055 --> 00:09:41,295
And so I don't think people
understand how there's lots

310
00:09:41,300 --> 00:09:45,345
and lots of unique provisions
that actually drive control,

311
00:09:45,465 --> 00:09:48,105
and some of those are really
important and some of those you

312
00:09:48,135 --> 00:09:49,185
probably don't even care about.

313
00:09:49,845 --> 00:09:49,995
Yeah.

314
00:09:50,475 --> 00:09:53,325
When you think about the stuff
that founders care about,

315
00:09:53,355 --> 00:09:56,295
like when they think about
control, what comes to mind?

316
00:09:56,535 --> 00:09:58,635
You know, it's funny, I, I
think it comes down to some

317
00:09:58,635 --> 00:10:01,065
of this just is like, they
don't wanna be told what to do.

318
00:10:01,935 --> 00:10:04,665
It's, and which isn't really
how control works in the sense.

319
00:10:04,665 --> 00:10:07,425
It's not really that people are
gonna tell you what to go do.

320
00:10:07,845 --> 00:10:10,155
It's more they're gonna
tell you how it's gonna

321
00:10:10,155 --> 00:10:13,395
happen or sometimes what
you can't go do there.

322
00:10:13,395 --> 00:10:14,865
There certainly are times
where they, they may actually

323
00:10:14,865 --> 00:10:17,295
tell you what to do, but I
think that most times what the

324
00:10:17,295 --> 00:10:18,280
founders actually care about.

325
00:10:18,930 --> 00:10:22,710
Doesn't really align with
how companies are controlled.

326
00:10:23,310 --> 00:10:23,400
Right.

327
00:10:23,400 --> 00:10:26,220
So I, I think maybe let's
dig into a little bit more

328
00:10:26,220 --> 00:10:29,880
about how control actually
works, where it lives.

329
00:10:29,880 --> 00:10:29,940
Yeah.

330
00:10:30,270 --> 00:10:32,010
What are voting rights,
what's board composition

331
00:10:32,010 --> 00:10:32,790
have to do with this?

332
00:10:33,090 --> 00:10:34,290
Not ownership percentages.

333
00:10:34,290 --> 00:10:34,560
Right.

334
00:10:34,560 --> 00:10:36,720
And so I think because at the
end of the day, I think really

335
00:10:36,720 --> 00:10:40,110
what founders are concerned
with is that they don't want

336
00:10:40,110 --> 00:10:43,290
to be railroaded into doing
something they don't want to do.

337
00:10:43,979 --> 00:10:45,329
And I think you and I
would both take the view

338
00:10:45,329 --> 00:10:47,520
that no one else wants to
railroad you into something

339
00:10:47,520 --> 00:10:48,599
you don't wanna do either.

340
00:10:48,599 --> 00:10:51,150
Unless you're doing something
that's so absolutely insane

341
00:10:51,150 --> 00:10:53,790
that they have to do that to
save their investment, save the

342
00:10:53,790 --> 00:10:54,989
company, save the team, right?

343
00:10:55,349 --> 00:10:56,099
All those things.

344
00:10:56,099 --> 00:10:56,459
So

345
00:10:56,579 --> 00:10:57,270
let's stick with that.

346
00:10:57,660 --> 00:11:00,750
Typically all these control
provisions actually are

347
00:11:00,750 --> 00:11:01,620
the other way around.

348
00:11:01,800 --> 00:11:01,950
Yep.

349
00:11:01,950 --> 00:11:03,960
They're designed so you
don't screw somebody else.

350
00:11:04,110 --> 00:11:04,410
Yes.

351
00:11:04,500 --> 00:11:07,140
As the founder founding
team, you know, executive

352
00:11:07,140 --> 00:11:10,350
team, they're, those control
provisions are put in place,

353
00:11:10,350 --> 00:11:12,900
particularly by investors,
but even in co-founder

354
00:11:12,900 --> 00:11:14,820
agreements, like long
before we get investors.

355
00:11:14,985 --> 00:11:16,935
Again, going back to a
situation, Ryan, where you and

356
00:11:16,935 --> 00:11:18,165
I set up a co-founder agreement.

357
00:11:18,675 --> 00:11:21,765
The co-founder agreement is
designed not to say, I get to

358
00:11:21,765 --> 00:11:23,715
tell you what to do, or you
get to tell me what to do.

359
00:11:23,805 --> 00:11:24,525
It's not that.

360
00:11:24,975 --> 00:11:28,995
It's dude, if stuff goes
sideways, here's what

361
00:11:28,995 --> 00:11:32,775
you cannot do without
both of us consenting.

362
00:11:32,805 --> 00:11:32,895
Right.

363
00:11:33,780 --> 00:11:34,290
There we go.

364
00:11:34,349 --> 00:11:36,870
You can't sell the company
unless we both agree.

365
00:11:37,229 --> 00:11:37,380
Yeah.

366
00:11:37,380 --> 00:11:40,500
Now, when people think
about control, you said it

367
00:11:40,500 --> 00:11:42,240
a moment ago, they think
about being told what to do.

368
00:11:42,540 --> 00:11:42,780
Yes.

369
00:11:42,780 --> 00:11:43,140
Right.

370
00:11:43,199 --> 00:11:45,329
But the control provisions,
and this is, this is how you

371
00:11:45,329 --> 00:11:48,839
need to frame it, is what
do I wanna be able to do

372
00:11:49,229 --> 00:11:53,189
that could potentially harm
someone else that I wanna

373
00:11:53,189 --> 00:11:54,870
be able to do, regardless
of how they feel about it.

374
00:11:54,900 --> 00:11:54,959
Yeah.

375
00:11:54,959 --> 00:11:56,219
Now most people will
look at that and say.

376
00:11:56,615 --> 00:11:57,035
Well, nothing.

377
00:11:57,040 --> 00:11:58,175
I don't wanna 'em wanna
do anything to harm

378
00:11:58,175 --> 00:12:00,305
people that, okay.

379
00:12:00,545 --> 00:12:00,905
Yeah.

380
00:12:00,935 --> 00:12:04,175
But what's harmed to, you
know, to them may be the

381
00:12:04,175 --> 00:12:05,165
right decision for you.

382
00:12:05,165 --> 00:12:06,785
It's a really slippery slope.

383
00:12:06,964 --> 00:12:08,135
Stick on this for a second.

384
00:12:08,135 --> 00:12:10,025
Let's go back to the
example around the a hundred

385
00:12:10,025 --> 00:12:11,435
thousand dollars hire, right?

386
00:12:11,435 --> 00:12:11,495
Yeah.

387
00:12:11,495 --> 00:12:13,625
Because I think this is one
that actually it's, this

388
00:12:13,625 --> 00:12:14,675
is a thing you may see.

389
00:12:15,125 --> 00:12:15,814
It does come up.

390
00:12:15,965 --> 00:12:18,635
This isn't them saying, we're
gonna look at every hire you

391
00:12:18,635 --> 00:12:19,505
have, we're gonna scrutinize it.

392
00:12:19,505 --> 00:12:20,825
We're probably going to say no.

393
00:12:21,125 --> 00:12:22,085
That's actually not.

394
00:12:22,415 --> 00:12:23,915
One of the things I think
is really important with

395
00:12:23,915 --> 00:12:26,075
these provisions is we look
at where they came from.

396
00:12:26,465 --> 00:12:29,285
Provisions like that came
from people doing shit that

397
00:12:29,285 --> 00:12:30,725
was really wrong, like.

398
00:12:31,165 --> 00:12:34,584
We got investment and then I
hired my mom and my dad and

399
00:12:34,584 --> 00:12:37,824
my cousin and my brother and
my dog Steve, and they all

400
00:12:37,824 --> 00:12:40,165
got really big salaries and
they don't do anything here.

401
00:12:40,165 --> 00:12:42,265
We're just sucking money
outta the accounts.

402
00:12:42,444 --> 00:12:42,655
Right?

403
00:12:42,655 --> 00:12:45,265
And so because that
happened once, yep.

404
00:12:45,324 --> 00:12:46,824
Now we have to have
these provisions, right?

405
00:12:46,824 --> 00:12:47,935
I think that we have
to look at it that way.

406
00:12:47,995 --> 00:12:50,305
A lot of the stuff that
happens on a, in a legal

407
00:12:50,665 --> 00:12:54,415
sense is there to protect
these weird edge cases and

408
00:12:54,415 --> 00:12:55,194
they just have to be correct.

409
00:12:55,375 --> 00:12:55,855
There's not a problem.

410
00:12:55,855 --> 00:12:55,944
And

411
00:12:55,944 --> 00:12:56,214
they're there

412
00:12:56,214 --> 00:12:56,454
for

413
00:12:56,454 --> 00:12:56,844
a reason.

414
00:12:56,964 --> 00:12:58,885
They're there for a reason, and
the reason isn't to stop you

415
00:12:58,885 --> 00:12:59,650
from doing what you want to do.

416
00:13:00,324 --> 00:13:00,685
Right.

417
00:13:00,685 --> 00:13:02,275
It's, it's not, again,
it's not somebody trying

418
00:13:02,275 --> 00:13:02,965
to tell you what to do.

419
00:13:03,115 --> 00:13:06,235
They're just as a little bit
of a control, and I can't

420
00:13:06,235 --> 00:13:08,545
tell you the last time I heard
somebody say, yeah, we were

421
00:13:08,545 --> 00:13:09,444
trying to make this higher.

422
00:13:09,444 --> 00:13:11,785
We love them, and then
the board blocked it.

423
00:13:11,875 --> 00:13:12,145
Right.

424
00:13:12,355 --> 00:13:13,765
I've heard a lot of
people complain about

425
00:13:13,765 --> 00:13:15,145
having that provision in.

426
00:13:15,225 --> 00:13:17,445
Yeah, but I've never heard
anybody complain about having

427
00:13:17,445 --> 00:13:18,855
it exercised against them.

428
00:13:19,155 --> 00:13:19,605
Correct.

429
00:13:19,635 --> 00:13:21,345
This is where it starts
to get really interesting.

430
00:13:21,825 --> 00:13:25,215
It's this specter of
control versus the reality.

431
00:13:25,485 --> 00:13:25,845
Okay.

432
00:13:26,055 --> 00:13:26,115
Yeah.

433
00:13:26,115 --> 00:13:29,205
And again, I, I wanna go back
to the control provisions

434
00:13:29,205 --> 00:13:32,535
we're generally concerned
about, are there to actually

435
00:13:32,535 --> 00:13:34,935
protect the other party,
usually a minority party.

436
00:13:35,820 --> 00:13:35,970
Yep.

437
00:13:35,970 --> 00:13:38,430
Going back to, you know, when
I learned what fiduciary duty

438
00:13:38,430 --> 00:13:41,700
was for the first time and I
was the minority party and you

439
00:13:41,700 --> 00:13:44,160
know, my business partner was
a great guy at the time, not he

440
00:13:44,160 --> 00:13:45,360
still is, but I'm saying he was

441
00:13:46,020 --> 00:13:46,910
business partner at the time.

442
00:13:46,910 --> 00:13:48,600
Your business partner at the
time, who is a great guy.

443
00:13:48,660 --> 00:13:48,900
Yes.

444
00:13:48,900 --> 00:13:48,960
Yeah.

445
00:13:49,050 --> 00:13:52,170
I should phrase that
differently, but was

446
00:13:52,170 --> 00:13:53,010
very cool about it.

447
00:13:53,010 --> 00:13:55,500
You know, he was, and again,
he had way more tutelage

448
00:13:55,650 --> 00:13:58,230
than I did on this, this
topic, and he said, look man.

449
00:13:58,550 --> 00:14:00,980
My goal in this deal and
the operating agreement

450
00:14:00,980 --> 00:14:03,650
and everything isn't to
do things to harm you, if

451
00:14:03,650 --> 00:14:05,060
anything, as the minority.

452
00:14:05,330 --> 00:14:07,190
This is mostly set
up to protect you.

453
00:14:07,195 --> 00:14:07,565
Protect you.

454
00:14:07,760 --> 00:14:08,000
Yep.

455
00:14:08,150 --> 00:14:11,960
And so my first learning
about the control rights, et

456
00:14:11,960 --> 00:14:15,710
cetera, was based on being the
minority and seeing it for why

457
00:14:15,710 --> 00:14:16,850
these things were being done.

458
00:14:16,995 --> 00:14:17,285
Okay.

459
00:14:17,420 --> 00:14:17,600
Yeah.

460
00:14:18,140 --> 00:14:20,180
And so going back to what I
think you, you had a great

461
00:14:20,180 --> 00:14:23,300
setup, which was, you know,
what are these categories of

462
00:14:23,300 --> 00:14:25,850
things that we want to control?

463
00:14:26,235 --> 00:14:29,444
More specifically, why are other
people putting these provisions,

464
00:14:29,444 --> 00:14:30,464
investors, et cetera.

465
00:14:30,615 --> 00:14:30,944
Yeah.

466
00:14:31,214 --> 00:14:32,985
Putting these provisions
in this document.

467
00:14:33,435 --> 00:14:38,685
Well, number one, it's so that
we can't go and do crazy shit.

468
00:14:38,954 --> 00:14:39,225
Yes.

469
00:14:39,225 --> 00:14:42,225
I mean if really like, like if
it comes down to it, there's

470
00:14:42,314 --> 00:14:46,155
gotta be some protections where
we can't just do crazy shit.

471
00:14:46,305 --> 00:14:47,660
Ryan, lemme throw one
at you that I think

472
00:14:47,660 --> 00:14:48,180
is really interesting.

473
00:14:48,795 --> 00:14:52,635
One of the, the most contentious
control provisions that gets put

474
00:14:52,635 --> 00:14:55,245
into, like, particularly around
when we take on investors,

475
00:14:55,335 --> 00:14:57,765
but it can't even be in an
operating group, is that you are

476
00:14:57,765 --> 00:15:00,585
not legally entitled to a job.

477
00:15:01,125 --> 00:15:01,215
Mm-hmm.

478
00:15:01,755 --> 00:15:01,965
Right?

479
00:15:01,965 --> 00:15:03,135
Most people have no idea.

480
00:15:03,135 --> 00:15:05,775
I own 60% of the company,
no one can fire me.

481
00:15:06,075 --> 00:15:06,795
Mm-hmm.

482
00:15:07,035 --> 00:15:07,105
No false.

483
00:15:07,105 --> 00:15:08,505
No one can take away your 60%.

484
00:15:09,045 --> 00:15:10,185
They can sure as hell fire you.

485
00:15:10,335 --> 00:15:10,605
Yeah.

486
00:15:10,725 --> 00:15:11,985
That's the kind of
stuff that people don't

487
00:15:11,985 --> 00:15:13,005
even realize it exists.

488
00:15:13,065 --> 00:15:13,395
Yeah.

489
00:15:13,395 --> 00:15:13,405
Yeah.

490
00:15:13,545 --> 00:15:15,495
That's, it's funny, they're out
fighting about whether they can

491
00:15:15,495 --> 00:15:17,445
spend a hundred thousand dollars
to hire somebody else and they,

492
00:15:17,445 --> 00:15:19,695
they've completely missed the
provision that says, we might

493
00:15:19,695 --> 00:15:21,435
not continue to employ you.

494
00:15:21,435 --> 00:15:21,885
Founder.

495
00:15:21,945 --> 00:15:22,785
Like, wait, what?

496
00:15:23,025 --> 00:15:23,355
Right.

497
00:15:23,505 --> 00:15:25,935
And so just to pause on that,
'cause I think if anybody

498
00:15:25,935 --> 00:15:27,615
hears it goes, wait, what,
what, what did you just say?

499
00:15:27,615 --> 00:15:29,325
Like, I get fired and,
and own the majority.

500
00:15:29,655 --> 00:15:29,805
Yep.

501
00:15:29,835 --> 00:15:30,345
Yes.

502
00:15:30,495 --> 00:15:32,930
Just so you understand
how much you own inequity.

503
00:15:34,065 --> 00:15:37,665
And your employment status as an
employee of the company, which

504
00:15:37,665 --> 00:15:39,315
are two totally separate things.

505
00:15:39,405 --> 00:15:39,585
Yep.

506
00:15:39,675 --> 00:15:41,115
Are not linked one for one.

507
00:15:41,505 --> 00:15:44,805
Now, you might have, you might
wind up with voting control in

508
00:15:44,805 --> 00:15:46,725
the form of the board, the, the
operating agreement, et cetera.

509
00:15:46,995 --> 00:15:48,735
That allows you to
mostly prevent that.

510
00:15:49,305 --> 00:15:51,285
But generally speaking,
this is the kind of stuff

511
00:15:51,285 --> 00:15:52,005
we're talking about.

512
00:15:52,335 --> 00:15:55,455
So for example, if you
were to say, look man,

513
00:15:55,485 --> 00:15:56,115
I'm not doing anything.

514
00:15:57,390 --> 00:16:00,180
Would jeopardize my opportunity
to have a job at my own company.

515
00:16:00,570 --> 00:16:01,470
That's what I'm talking about.

516
00:16:01,470 --> 00:16:02,940
That's what we have to
understand and say, okay,

517
00:16:02,940 --> 00:16:05,520
well if that's a primary
concern, then we have to be

518
00:16:05,520 --> 00:16:08,190
able to address that in the
operating agreement with

519
00:16:08,190 --> 00:16:09,450
the investors, et cetera.

520
00:16:09,720 --> 00:16:09,780
Yeah.

521
00:16:10,050 --> 00:16:11,100
Which they're not gonna love.

522
00:16:11,280 --> 00:16:11,880
However,

523
00:16:12,000 --> 00:16:13,080
they might not even accept.

524
00:16:13,080 --> 00:16:14,670
Then you might have to
decide, I want to continue.

525
00:16:14,670 --> 00:16:17,160
I want to be able to permanently
employ myself, but I'm

526
00:16:17,160 --> 00:16:18,540
not gonna be able to do it
with somebody else's money.

527
00:16:18,660 --> 00:16:19,080
Okay.

528
00:16:19,500 --> 00:16:24,000
Now think about this if you're
the 30% CTO for a second, right?

529
00:16:24,030 --> 00:16:24,089
Yeah.

530
00:16:24,089 --> 00:16:25,500
So let's put a new scenario.

531
00:16:25,500 --> 00:16:29,219
Ryan, you're the 30% CTO
and I'm 70% founder, right?

532
00:16:29,790 --> 00:16:31,709
And I'm, I'm presenting you
this operating agreement.

533
00:16:32,250 --> 00:16:35,160
You're looking at this going,
dude, I don't wanna put all

534
00:16:35,160 --> 00:16:37,949
this work and find that just guy
decides one day just to fire me.

535
00:16:38,040 --> 00:16:38,099
Yeah.

536
00:16:39,495 --> 00:16:42,915
Like you're concerned about
being able to protect, now

537
00:16:42,915 --> 00:16:45,375
you're in the minority and
you still have that concern.

538
00:16:45,705 --> 00:16:46,005
Yep.

539
00:16:46,875 --> 00:16:49,425
So everyone has that concern,
but let me, let me flip it.

540
00:16:49,785 --> 00:16:53,085
If you decide to just stop
showing up for work, and

541
00:16:53,085 --> 00:16:55,095
that sounds egregious, so,
you know, I'm, I'm trying to

542
00:16:55,095 --> 00:16:57,495
deliberately make it egregious,
but there's a lot of versions

543
00:16:57,495 --> 00:16:58,635
of not showing up for work.

544
00:16:58,640 --> 00:16:58,800
Yeah.

545
00:16:59,655 --> 00:16:59,745
Yeah.

546
00:16:59,750 --> 00:17:01,640
There's a version where
you actually go somewhere

547
00:17:01,640 --> 00:17:02,400
else and you don't pay for

548
00:17:02,400 --> 00:17:02,480
work.

549
00:17:02,480 --> 00:17:02,640
Yeah.

550
00:17:02,640 --> 00:17:02,960
Go somewhere else.

551
00:17:02,985 --> 00:17:03,195
Yeah.

552
00:17:03,615 --> 00:17:04,425
Company's not making money.

553
00:17:04,425 --> 00:17:05,295
I have to make bills.

554
00:17:05,295 --> 00:17:05,474
Right.

555
00:17:05,474 --> 00:17:06,359
I gotta, I go get a job.

556
00:17:07,064 --> 00:17:07,544
Yeah, man.

557
00:17:07,544 --> 00:17:09,435
And there's another version
where you do show up.

558
00:17:09,435 --> 00:17:10,454
You just suck at your job.

559
00:17:10,574 --> 00:17:10,964
Yeah.

560
00:17:11,085 --> 00:17:13,125
Like you show up, you
have no contribution.

561
00:17:13,125 --> 00:17:13,274
Oh man.

562
00:17:13,635 --> 00:17:15,794
We've done that in a couple
other episodes where like

563
00:17:15,824 --> 00:17:18,165
that person who you brought
on is co-founder and see

564
00:17:18,165 --> 00:17:21,794
whatever it gets eclipsed
by some junior people later

565
00:17:21,794 --> 00:17:24,314
just because they happen to
be the first ones to say yes.

566
00:17:24,314 --> 00:17:24,944
It happens a lot.

567
00:17:24,944 --> 00:17:25,014
Yeah, man.

568
00:17:25,635 --> 00:17:26,505
Happens all the time.

569
00:17:26,565 --> 00:17:27,555
So now think about that.

570
00:17:27,855 --> 00:17:31,065
You come on, you've got a
30% share in the company and

571
00:17:31,065 --> 00:17:33,615
you're like, I wanna base,
basically make sure I have job

572
00:17:33,615 --> 00:17:36,105
security, that in this operating
agreement I cannot be fired.

573
00:17:36,435 --> 00:17:37,995
Think about what
that means for me.

574
00:17:38,355 --> 00:17:38,445
Yeah,

575
00:17:38,445 --> 00:17:38,925
okay.

576
00:17:38,925 --> 00:17:39,015
Yeah.

577
00:17:39,195 --> 00:17:41,085
I'm like, well that sucks.

578
00:17:41,085 --> 00:17:43,485
Like if, if you stop showing
up for work, you're saying you

579
00:17:43,515 --> 00:17:45,075
like you're guaranteed a job.

580
00:17:45,315 --> 00:17:45,465
Yeah.

581
00:17:45,495 --> 00:17:46,965
Like that's fucked up.

582
00:17:47,295 --> 00:17:49,125
And so I, when we're
talking about these control

583
00:17:49,125 --> 00:17:52,005
provisions, I'm specifically
saying, here you are in

584
00:17:52,005 --> 00:17:53,235
the minority position.

585
00:17:53,565 --> 00:17:54,945
You have the same issue, right?

586
00:17:54,945 --> 00:17:55,995
I don't wanna be
able to get fired.

587
00:17:56,415 --> 00:17:58,185
And even as the majority,
I'm like, I wanna be

588
00:17:58,185 --> 00:17:58,935
able to fire people.

589
00:17:58,935 --> 00:18:00,405
If, if they're fucking
off, guess what?

590
00:18:00,795 --> 00:18:02,025
That's what people
wanna do to you.

591
00:18:02,355 --> 00:18:02,625
Yeah.

592
00:18:02,625 --> 00:18:02,685
Yeah.

593
00:18:02,955 --> 00:18:04,755
That's, that's exactly what

594
00:18:04,755 --> 00:18:06,645
people do thing for
the same reason, right?

595
00:18:06,645 --> 00:18:09,345
It's not that, it just like
arbitrarily one day like, oh

596
00:18:09,345 --> 00:18:11,685
guys, guess it's international
fire, A founder day,

597
00:18:12,405 --> 00:18:12,525
we.

598
00:18:13,440 --> 00:18:13,830
Right.

599
00:18:14,220 --> 00:18:17,190
And so again, we think of all
these different conditions.

600
00:18:17,190 --> 00:18:20,880
Now, if some of this sounds
overwhelming to folks

601
00:18:20,880 --> 00:18:24,270
listening, this is, this is
why we still employ attorneys.

602
00:18:24,570 --> 00:18:26,430
These are the types of
things that attorneys

603
00:18:26,430 --> 00:18:27,360
can walk you through.

604
00:18:27,840 --> 00:18:30,900
A fun side note, last night
I was talking to my, uh,

605
00:18:30,900 --> 00:18:34,320
father-in-law who's a contract
attorney, and I was telling him,

606
00:18:34,380 --> 00:18:37,470
you know, we sold a company this
week, and I was saying that we

607
00:18:37,470 --> 00:18:38,610
did it largely without attorney.

608
00:18:39,240 --> 00:18:41,250
And I was like, mostly
because we had a lot of

609
00:18:41,250 --> 00:18:42,179
experience doing this.

610
00:18:42,179 --> 00:18:42,240
Yeah.

611
00:18:42,240 --> 00:18:45,990
But also because of ai and,
and he was like, yeah, but I'm

612
00:18:45,990 --> 00:18:47,040
pretty partial to attorneys.

613
00:18:48,060 --> 00:18:48,689
It's, you don't

614
00:18:48,689 --> 00:18:49,110
say

615
00:18:49,110 --> 00:18:52,979
itt, of course you're,
but it's guys like him.

616
00:18:53,040 --> 00:18:54,479
You know, folks in,
in legal profession.

617
00:18:54,479 --> 00:18:56,909
If, if you're not sure
that can walk you through

618
00:18:56,909 --> 00:18:57,810
what you don't know.

619
00:18:57,929 --> 00:18:58,139
Yeah.

620
00:18:58,169 --> 00:18:58,500
Right.

621
00:18:58,770 --> 00:19:01,169
We're here to tell you that this
is why you should start raising

622
00:19:01,169 --> 00:19:03,479
your hand and asking these
questions, but they can tell

623
00:19:03,479 --> 00:19:06,419
you exactly what those questions
and provisions are, but.

624
00:19:07,845 --> 00:19:10,005
Let's fast forward a little
bit and let's talk about how

625
00:19:10,005 --> 00:19:11,955
these provisions get in vote.

626
00:19:12,615 --> 00:19:14,925
Okay, so let's say we've got,
we've got a provision that

627
00:19:14,925 --> 00:19:17,685
says, you know, we can be
fired for cause, et cetera.

628
00:19:17,955 --> 00:19:18,015
Yeah.

629
00:19:18,015 --> 00:19:20,775
We've got a provision to
get, to get this that says

630
00:19:20,835 --> 00:19:24,135
we cannot sell the company
unless we get board approval.

631
00:19:24,315 --> 00:19:24,825
Board approval.

632
00:19:24,885 --> 00:19:25,065
Yep.

633
00:19:25,530 --> 00:19:28,140
Probably worth talking
about how boards work.

634
00:19:28,200 --> 00:19:30,390
Ryan, when you think of
like a five to seven person

635
00:19:30,390 --> 00:19:32,940
board, can you explain to
the folks that why that's

636
00:19:32,940 --> 00:19:34,290
there, why that board exists?

637
00:19:34,530 --> 00:19:35,910
I mean, it's there
for governance, it's

638
00:19:35,910 --> 00:19:36,690
there for protection.

639
00:19:36,690 --> 00:19:39,930
It's there to act out and,
and basically to interpret the

640
00:19:39,930 --> 00:19:42,690
operating agreement and make
decisions based on, uh, their

641
00:19:42,690 --> 00:19:44,790
understanding of it and the,
the agreements of the company.

642
00:19:44,790 --> 00:19:44,800
Yeah.

643
00:19:45,075 --> 00:19:46,995
Protective provisions that
have been put into place.

644
00:19:46,995 --> 00:19:48,735
Uh, you know, I think a lot
of people think the board

645
00:19:48,735 --> 00:19:50,205
is there to advise them.

646
00:19:50,265 --> 00:19:51,945
There is such a thing as an
advisory board when we're

647
00:19:51,945 --> 00:19:54,435
talking about a, it's,
this is governance, right?

648
00:19:54,435 --> 00:19:55,400
This is, yeah,
this is governance.

649
00:19:55,400 --> 00:19:57,735
How the company
makes hard decisions.

650
00:19:58,005 --> 00:19:59,715
These are the people
that can fire you right

651
00:19:59,715 --> 00:19:59,835
now.

652
00:19:59,835 --> 00:20:00,855
These are the people
that can fire you.

653
00:20:00,855 --> 00:20:02,655
These are the people that can
make, you know, they can, they

654
00:20:02,655 --> 00:20:04,695
can have control over some of
those things we talked about.

655
00:20:04,905 --> 00:20:06,600
And so that's why
like when we get into.

656
00:20:07,030 --> 00:20:09,520
Things like, you know,
the, the, the board seats.

657
00:20:09,879 --> 00:20:11,470
These aren't just receipts
for giving people Right.

658
00:20:11,560 --> 00:20:13,060
It's, it's a steering wheel.

659
00:20:13,060 --> 00:20:15,160
We're handing somebody
to the company.

660
00:20:15,280 --> 00:20:15,580
Right.

661
00:20:15,580 --> 00:20:17,795
And, and as you said
before, they are, you know.

662
00:20:18,764 --> 00:20:20,565
Operating under the operating
agreement, which is the

663
00:20:20,565 --> 00:20:24,165
company's constitution, which
I find most, most founders

664
00:20:24,165 --> 00:20:26,835
to be woefully uneducated in
their own, their own operating.

665
00:20:26,835 --> 00:20:27,915
So what does say in the
operating agreement like?

666
00:20:28,125 --> 00:20:29,445
Well, let me go dig it out.

667
00:20:29,445 --> 00:20:31,485
Right, but so like, there's
a few things I think about

668
00:20:31,485 --> 00:20:34,065
when we're thinking through
like the board itself and

669
00:20:34,065 --> 00:20:36,435
what's gonna happen is one
who appoints board seats.

670
00:20:36,675 --> 00:20:37,845
How does that happen
to begin with?

671
00:20:37,905 --> 00:20:38,085
Yep.

672
00:20:38,294 --> 00:20:40,304
Which decisions
require board approval?

673
00:20:40,544 --> 00:20:42,855
Things like are there any
things like do you have

674
00:20:42,855 --> 00:20:44,355
preferred shareholder approval?

675
00:20:44,355 --> 00:20:46,845
Are there any special provisions
that, you know, bring out

676
00:20:46,845 --> 00:20:48,044
spec special provisions?

677
00:20:48,585 --> 00:20:50,835
The one we brought up before,
can the board replace you?

678
00:20:50,865 --> 00:20:52,485
Right under what condition?

679
00:20:52,949 --> 00:20:54,600
What's the threshold
for selling the company?

680
00:20:54,600 --> 00:20:56,639
If we're saying it, it's
board approval, do we want

681
00:20:56,639 --> 00:20:58,500
it to come to board approval
or do we want to have some

682
00:20:58,500 --> 00:21:01,199
sort of a preset threshold,
which we see a lot too?

683
00:21:01,199 --> 00:21:03,060
Will, I think there's, there's
times where there are like

684
00:21:03,300 --> 00:21:06,090
board approval and then there's
thresholds, which is that

685
00:21:06,090 --> 00:21:07,020
we're agreeing ahead of time.

686
00:21:07,020 --> 00:21:08,939
It's like under this
amount, we're not selling.

687
00:21:09,295 --> 00:21:12,264
Without approval over this
amount, we're free to go

688
00:21:12,264 --> 00:21:14,395
right so that it doesn't
mean that we have to

689
00:21:14,395 --> 00:21:15,415
always come to a decision.

690
00:21:15,745 --> 00:21:18,415
You know, something that's
really funny about everything

691
00:21:18,415 --> 00:21:21,895
we talk about here is
that none of it is new.

692
00:21:22,135 --> 00:21:24,715
Everything you're dealing
with right now has been done a

693
00:21:24,715 --> 00:21:28,555
thousand times before you, which
means the answer already exists.

694
00:21:28,555 --> 00:21:29,495
You may just not know it.

695
00:21:29,650 --> 00:21:30,430
But that's okay.

696
00:21:30,790 --> 00:21:32,620
That's kind of what
we're here to do.

697
00:21:32,620 --> 00:21:35,290
We talk about this stuff on
the show, but we actually

698
00:21:35,290 --> 00:21:39,400
solve these problems all
dayLong@groups.startups.com.

699
00:21:39,490 --> 00:21:42,760
So if any of this sounds
familiar, stop guessing

700
00:21:42,790 --> 00:21:45,820
about what to do, let us just
give you the answers to the

701
00:21:45,820 --> 00:21:47,170
test and be done with it.

702
00:21:47,590 --> 00:21:47,860
Again.

703
00:21:47,860 --> 00:21:49,090
Let's go back to our situation.

704
00:21:49,120 --> 00:21:50,140
Two of us are
starting a company.

705
00:21:50,140 --> 00:21:52,135
In this case, let's just, for
easy mass, say it's 50 50.

706
00:21:52,774 --> 00:21:53,105
Right.

707
00:21:53,435 --> 00:21:57,125
You and I, you know, had our
own probably really shallow,

708
00:21:57,125 --> 00:21:58,865
and I just mean like we
didn't go too deep into it.

709
00:21:59,165 --> 00:21:59,375
Yeah.

710
00:21:59,375 --> 00:22:01,774
Uh, discussion over what should
be in the operating agreement.

711
00:22:01,804 --> 00:22:01,865
Yeah.

712
00:22:02,014 --> 00:22:03,455
Neither of us were
that experienced.

713
00:22:03,485 --> 00:22:06,274
You know, we did some chat
GPT prompts to find out.

714
00:22:06,274 --> 00:22:07,685
We did some, some
sleuthing online.

715
00:22:07,685 --> 00:22:10,085
We asked a couple other founders
and it's, it is usually a

716
00:22:10,085 --> 00:22:12,905
fairly loose document, but
then we get to, to take on

717
00:22:12,905 --> 00:22:15,575
investors and we're both
stressed out because we're

718
00:22:15,575 --> 00:22:18,830
like, Hey, um, these investors
want 20% of the company.

719
00:22:19,910 --> 00:22:22,580
Which means you and I are gonna
dilute down to, to 40% each.

720
00:22:22,580 --> 00:22:23,000
We're like, ah.

721
00:22:23,000 --> 00:22:24,710
But collectively, we
still have control.

722
00:22:25,160 --> 00:22:25,790
Not really.

723
00:22:26,015 --> 00:22:26,305
Okay.

724
00:22:27,149 --> 00:22:30,360
Here's what happens the moment
you get a meaningful investment

725
00:22:30,420 --> 00:22:33,720
on, and meaningful sounds like
a, a pretty broad term, but it's

726
00:22:33,720 --> 00:22:35,129
usually after your pre-seed run.

727
00:22:35,190 --> 00:22:37,350
I, I'm just going to spitball
it and say it's usually

728
00:22:37,350 --> 00:22:38,399
over a million dollars.

729
00:22:38,490 --> 00:22:38,550
Yeah.

730
00:22:38,550 --> 00:22:40,050
You know, once you start taking
over a million dollars that's

731
00:22:40,050 --> 00:22:43,590
right, under a million dollars,
people can kind of let it ride.

732
00:22:43,920 --> 00:22:46,080
Once you get over a million
dollars in investment, this,

733
00:22:46,080 --> 00:22:48,690
this stuff's tends to start to
come up and, and even higher.

734
00:22:49,050 --> 00:22:49,980
Here's what happens though.

735
00:22:50,220 --> 00:22:52,020
First thing that happens is
the investors, and there's

736
00:22:52,020 --> 00:22:53,220
typically more than one.

737
00:22:53,620 --> 00:22:56,050
In this round, we'll
say, look, as part of

738
00:22:56,050 --> 00:22:57,070
the operating agreement.

739
00:22:58,005 --> 00:23:01,095
We're gonna need to create a
board of five to seven people.

740
00:23:01,095 --> 00:23:03,495
Typically, the board is
always an odd number so

741
00:23:03,495 --> 00:23:05,895
that you obviously can't
have a tie on votes.

742
00:23:06,255 --> 00:23:08,115
And the, the composition
of the board almost

743
00:23:08,115 --> 00:23:09,165
always looks like this.

744
00:23:09,585 --> 00:23:11,985
There's two members from the
company, two members from the

745
00:23:11,985 --> 00:23:15,165
investors, and one independent
that both of us kind of vie for.

746
00:23:15,165 --> 00:23:16,785
'cause we want to have
it to be our person.

747
00:23:17,055 --> 00:23:17,175
Yeah.

748
00:23:17,175 --> 00:23:18,315
At a small enough number.

749
00:23:18,375 --> 00:23:19,365
No one really cares.

750
00:23:19,365 --> 00:23:21,285
You can pick your buddy and
think you, you've got control

751
00:23:21,285 --> 00:23:24,915
of everything at a big enough
number that doesn't fly anymore.

752
00:23:25,245 --> 00:23:25,965
People see through it.

753
00:23:26,195 --> 00:23:29,345
That's where all of these
decisions, this is where

754
00:23:29,345 --> 00:23:31,685
the control happens,
like hard stop here.

755
00:23:32,285 --> 00:23:35,225
It has nothing to do with what
you and I now have in equity.

756
00:23:35,795 --> 00:23:36,125
Yeah.

757
00:23:36,215 --> 00:23:39,575
If in the operating agreement
it states that under this

758
00:23:39,575 --> 00:23:42,875
provision, this provision,
this provision that it requires

759
00:23:42,875 --> 00:23:45,455
a board majority, which
most of this will, it's just

760
00:23:45,455 --> 00:23:48,755
kind of the simplest way to
say it, then a whole bunch

761
00:23:48,755 --> 00:23:49,515
of stuff starts to happen.

762
00:23:50,535 --> 00:23:53,925
For example, I come in one day
and all of a sudden it's like

763
00:23:53,925 --> 00:23:57,435
an intervention and it's you,
it's our independent and our,

764
00:23:57,495 --> 00:24:00,045
our two, uh, our two investors.

765
00:24:00,075 --> 00:24:02,535
You never want to be
surprised by seeing your

766
00:24:02,535 --> 00:24:05,325
board sitting into a room
you walk into like that.

767
00:24:05,535 --> 00:24:08,085
It's never happy
birthday, right?

768
00:24:08,115 --> 00:24:08,205
Yeah,

769
00:24:08,205 --> 00:24:08,805
exactly.

770
00:24:08,805 --> 00:24:09,140
You don't never

771
00:24:09,140 --> 00:24:09,260
that.

772
00:24:09,720 --> 00:24:11,669
We just feel like you, you're
not getting paid enough.

773
00:24:11,700 --> 00:24:11,879
Right?

774
00:24:11,879 --> 00:24:11,939
Yeah.

775
00:24:12,030 --> 00:24:13,409
So we just figured
we'd get all together.

776
00:24:13,409 --> 00:24:13,590
Right.

777
00:24:14,040 --> 00:24:15,720
And at that point, you
know, they're saying, Hey,

778
00:24:15,810 --> 00:24:16,919
performance isn't what it is.

779
00:24:16,919 --> 00:24:17,879
The company needs
to raise money.

780
00:24:17,879 --> 00:24:18,870
We don't think you're capable.

781
00:24:18,870 --> 00:24:20,879
You know, whatever,
name your excuse.

782
00:24:21,120 --> 00:24:22,500
We think you're gonna
need to step down.

783
00:24:22,560 --> 00:24:24,750
And I'm using this as a,
like a pretty egregious case.

784
00:24:25,169 --> 00:24:27,090
And I'm like, I'm not
going to step down.

785
00:24:27,090 --> 00:24:27,659
Mm-hmm.

786
00:24:27,666 --> 00:24:29,745
Me and Ryan are, are voting
that I'm staying here.

787
00:24:30,285 --> 00:24:31,035
Right, Ryan.

788
00:24:33,795 --> 00:24:34,395
Exactly.

789
00:24:34,395 --> 00:24:35,655
And all of a sudden
Ryan gets real quiet.

790
00:24:35,715 --> 00:24:35,805
Right.

791
00:24:35,805 --> 00:24:36,885
I can't find my vote.

792
00:24:36,885 --> 00:24:38,205
I don't remember where to put

793
00:24:38,205 --> 00:24:38,265
it.

794
00:24:38,265 --> 00:24:38,440
Yeah, right, right.

795
00:24:38,440 --> 00:24:38,560
Yeah.

796
00:24:38,715 --> 00:24:40,305
Oh, just vote like
everybody else.

797
00:24:40,305 --> 00:24:40,905
Votes, guys.

798
00:24:40,905 --> 00:24:41,475
What do you think?

799
00:24:41,475 --> 00:24:41,775
Right.

800
00:24:42,285 --> 00:24:42,375
Yeah.

801
00:24:42,375 --> 00:24:45,555
And now you realize
how Inconsequentially

802
00:24:45,765 --> 00:24:46,575
hopeless you are?

803
00:24:46,845 --> 00:24:47,025
Yeah.

804
00:24:47,025 --> 00:24:47,325
Okay.

805
00:24:47,685 --> 00:24:51,585
Because like I own 40% of
the company, but I only

806
00:24:51,585 --> 00:24:53,625
own one fifth of the votes.

807
00:24:54,165 --> 00:24:55,695
I only own 20% of the votes.

808
00:24:56,505 --> 00:24:56,895
Right.

809
00:24:57,285 --> 00:24:57,345
Yeah.

810
00:24:57,345 --> 00:24:59,595
And let's say it's a simple
majority, just means like

811
00:24:59,595 --> 00:25:01,545
three outta the five people,
you know, voted that way.

812
00:25:01,815 --> 00:25:04,005
And even if you backed me up
on this, Ryan, and you're like,

813
00:25:04,005 --> 00:25:05,235
you know what I, I have no idea.

814
00:25:05,235 --> 00:25:06,045
This is bullshit.

815
00:25:06,345 --> 00:25:08,835
If the independent votes against
us and the two investors,

816
00:25:08,895 --> 00:25:09,105
yeah, man,

817
00:25:09,105 --> 00:25:09,525
they win.

818
00:25:09,840 --> 00:25:12,960
Done board math beats
founder egos every time.

819
00:25:12,990 --> 00:25:13,350
Right.

820
00:25:13,350 --> 00:25:14,250
It's the way it goes.

821
00:25:14,250 --> 00:25:17,159
Once the board exists,
you're no longer supreme

822
00:25:17,159 --> 00:25:18,300
leader or supreme leaders.

823
00:25:18,600 --> 00:25:18,780
Yeah.

824
00:25:18,780 --> 00:25:22,409
You're kind of employees
with influence that point.

825
00:25:22,860 --> 00:25:23,310
Correct.

826
00:25:23,310 --> 00:25:25,649
And I don't think, I don't think
the founders understand it.

827
00:25:25,770 --> 00:25:27,120
Let me flip it the
other way 'cause I think

828
00:25:27,120 --> 00:25:27,990
this also interesting.

829
00:25:28,649 --> 00:25:31,139
If, if for some reason we
still had a five member board

830
00:25:31,530 --> 00:25:34,649
and you and I were both,
uh, on the board and you

831
00:25:34,649 --> 00:25:36,600
know, again, e equal votes,
we're not getting into like.

832
00:25:37,950 --> 00:25:40,560
Way, way, way later we
start to get into weights.

833
00:25:40,560 --> 00:25:42,450
You mentioned preferred,
et cetera, like, like some

834
00:25:42,450 --> 00:25:44,880
votes are worth more than
others, but let's just

835
00:25:44,880 --> 00:25:45,870
keep it simple, right?

836
00:25:45,870 --> 00:25:46,950
It's just five people.

837
00:25:47,010 --> 00:25:47,700
Majority rules.

838
00:25:48,270 --> 00:25:49,560
It goes the other direction too.

839
00:25:49,950 --> 00:25:52,650
You and I might be
down to 4% ownership in

840
00:25:52,650 --> 00:25:53,760
the company, not 40%.

841
00:25:53,785 --> 00:25:54,075
Yeah.

842
00:25:54,960 --> 00:25:57,360
If we've somehow been able
to maintain our voting right.

843
00:25:57,570 --> 00:25:59,340
We have a
disproportionate control.

844
00:25:59,400 --> 00:25:59,640
Oh yeah.

845
00:25:59,700 --> 00:26:01,470
In the company, you
see this with public

846
00:26:01,470 --> 00:26:02,340
companies all the time.

847
00:26:02,700 --> 00:26:04,980
You know, you see people
who have a lower amount,

848
00:26:04,980 --> 00:26:07,170
but a lot of cases they have
a different class of, of

849
00:26:07,170 --> 00:26:08,220
voting shares, et cetera.

850
00:26:08,220 --> 00:26:08,280
Yeah.

851
00:26:08,580 --> 00:26:11,010
That gets way more complex than
most people will ever deal with.

852
00:26:11,490 --> 00:26:14,490
But the point is, since a lot
of these board decisions are,

853
00:26:14,640 --> 00:26:17,160
uh, happen at the majority
level, and there's five votes

854
00:26:17,160 --> 00:26:19,500
to be had, sometimes seven
as the, the numbers, you

855
00:26:19,500 --> 00:26:20,405
know, the dollars get bigger.

856
00:26:21,900 --> 00:26:25,020
That's really what drives
most of the big decisions.

857
00:26:25,050 --> 00:26:27,780
The big decisions being
like, does the company

858
00:26:27,780 --> 00:26:29,010
sell things like that?

859
00:26:29,070 --> 00:26:29,340
Right.

860
00:26:29,520 --> 00:26:31,020
Or, you know, are we
gonna take on more, more

861
00:26:31,020 --> 00:26:31,920
funding, things like that.

862
00:26:32,070 --> 00:26:33,930
One thing I think we might
wanna touch on here Will,

863
00:26:33,930 --> 00:26:36,330
which is the, the operating
agreement itself, right?

864
00:26:36,330 --> 00:26:39,120
I, I don't want founders the
way we've told it so far.

865
00:26:39,120 --> 00:26:40,650
It kind of sounds like there's
this thing that we draft

866
00:26:40,650 --> 00:26:43,080
in the beginning that then
controls things forever.

867
00:26:43,320 --> 00:26:43,530
Right.

868
00:26:43,530 --> 00:26:45,570
And that's not
quite how this for,

869
00:26:45,570 --> 00:26:47,280
it's just full provisions that
say we can never get fired.

870
00:26:47,430 --> 00:26:47,790
Yeah.

871
00:26:47,790 --> 00:26:49,320
We, we wrote it into the
original operating room.

872
00:26:49,320 --> 00:26:49,830
It's right here.

873
00:26:49,830 --> 00:26:50,820
See, they're like uhha.

874
00:26:50,820 --> 00:26:52,950
You mean the one that's
been amended 90 times, uh,

875
00:26:52,950 --> 00:26:54,600
since you started taking
on investment dollars?

876
00:26:54,870 --> 00:26:56,640
So you wanna talk about
that just for a minute, just

877
00:26:56,640 --> 00:26:57,510
so that people understand.

878
00:26:57,690 --> 00:26:57,840
Yeah.

879
00:26:57,840 --> 00:26:58,440
Good call win.

880
00:26:58,440 --> 00:27:00,030
Where and how those
things get beat up,

881
00:27:00,030 --> 00:27:01,350
changed and, and amended.

882
00:27:01,670 --> 00:27:05,300
The operating agreement to
some degree kind of can get,

883
00:27:05,420 --> 00:27:08,870
you know, restated re uh,
amended, uh, rebuilt every

884
00:27:08,870 --> 00:27:10,010
time there's a funding round.

885
00:27:10,010 --> 00:27:11,510
That's, that's
what's most typical.

886
00:27:11,720 --> 00:27:14,540
Now, the reason for that
is because the most recent

887
00:27:14,540 --> 00:27:17,030
investor is going to have
certain provisions that

888
00:27:17,030 --> 00:27:17,810
are important to them.

889
00:27:18,149 --> 00:27:20,699
That they won't jump in
if that isn't dialed into

890
00:27:20,699 --> 00:27:21,449
the operating agreement.

891
00:27:21,719 --> 00:27:23,639
And there's all kinds of stuff
in there that's important

892
00:27:23,639 --> 00:27:26,250
to them because they're the
last money in that may not

893
00:27:26,250 --> 00:27:29,159
necessarily be to the best
interest of other people that

894
00:27:29,159 --> 00:27:31,500
are currently in there in
almost every case, not to the

895
00:27:31,500 --> 00:27:32,490
best interest of the founders.

896
00:27:33,120 --> 00:27:37,679
And so even if you and I write
the perfect operating like,

897
00:27:37,679 --> 00:27:39,209
aha, we've got this figured out.

898
00:27:39,510 --> 00:27:39,600
Yeah.

899
00:27:39,600 --> 00:27:42,750
Brian, before we raise money,
let's write an ironclad

900
00:27:42,750 --> 00:27:45,060
operating agreement that says
no one can ever fire us and no

901
00:27:45,060 --> 00:27:46,169
one can ever make decisions.

902
00:27:46,260 --> 00:27:46,439
Yeah.

903
00:27:46,990 --> 00:27:49,840
We figured out, and only people
named Ryan and Will are allowed

904
00:27:49,840 --> 00:27:50,889
to make decisions that matter.

905
00:27:50,889 --> 00:27:51,129
Right.

906
00:27:51,490 --> 00:27:52,149
You know, you name it.

907
00:27:52,149 --> 00:27:52,420
Right.

908
00:27:52,930 --> 00:27:55,870
Better make sure that we write
that in some kind of ink that is

909
00:27:56,590 --> 00:27:58,690
impervious to redlining, right?

910
00:27:58,735 --> 00:27:58,855
Yeah.

911
00:27:58,860 --> 00:27:59,215
Right, right.

912
00:27:59,379 --> 00:27:59,770
Might as well

913
00:28:00,399 --> 00:28:01,240
can never be changed.

914
00:28:01,240 --> 00:28:01,660
It'll be fine.

915
00:28:01,690 --> 00:28:02,800
Doesn't make a
lick of difference.

916
00:28:03,250 --> 00:28:05,710
Every investor, when they
come on board is gonna say,

917
00:28:05,710 --> 00:28:07,120
yeah, but the operating
agreement looks like this.

918
00:28:07,725 --> 00:28:08,115
Right.

919
00:28:08,415 --> 00:28:11,625
And that's a huge part of
the closing process when

920
00:28:11,625 --> 00:28:13,035
everybody's agreed to invest.

921
00:28:13,305 --> 00:28:15,585
And then you turn it over to
the attorneys and they fight

922
00:28:15,585 --> 00:28:17,985
back and forth while they go
through the closing process.

923
00:28:18,375 --> 00:28:20,625
They're going through that
to say, Hey, my client, most

924
00:28:20,625 --> 00:28:23,745
recent investors have these
terms, uh, that are very

925
00:28:23,745 --> 00:28:26,205
important and we need to make
sure they're properly amended

926
00:28:26,205 --> 00:28:27,135
into the operating agreement.

927
00:28:27,375 --> 00:28:29,535
Now, look, there's a lot of
people that are, that are in

928
00:28:29,535 --> 00:28:32,295
the room as well, like previous
investors, et cetera, that

929
00:28:32,295 --> 00:28:35,085
are like, Hey, screw you, like
that's gonna work against me now

930
00:28:35,115 --> 00:28:36,135
and I'm gonna fight with you.

931
00:28:36,285 --> 00:28:38,475
Good luck with all that
problem for another day.

932
00:28:38,925 --> 00:28:42,885
But I think what's interesting
here is that, again, our

933
00:28:42,885 --> 00:28:46,875
illusion of control is that, but
I thought, you know, if I just

934
00:28:46,875 --> 00:28:48,675
own the majority, I don't have
to deal with any of this stuff.

935
00:28:48,675 --> 00:28:51,855
It's like, dude, as this is not
where any this is coming from.

936
00:28:52,155 --> 00:28:52,215
Yeah.

937
00:28:52,215 --> 00:28:54,015
And there's, there's one other
point I wanna make and I'm

938
00:28:54,015 --> 00:28:54,715
curious your thoughts here.

939
00:28:55,530 --> 00:28:59,100
I've been in a situation
multiple times as a funded

940
00:28:59,100 --> 00:29:01,350
founder, and you talked
to lots of funded founders

941
00:29:01,350 --> 00:29:04,080
about this stuff, where I
have full control of the

942
00:29:04,080 --> 00:29:05,970
company in whatever capacity.

943
00:29:05,970 --> 00:29:07,590
I think, like I've got
voting rights, I've

944
00:29:07,590 --> 00:29:08,310
got, you know, whatever.

945
00:29:08,310 --> 00:29:08,610
Right?

946
00:29:09,600 --> 00:29:12,105
But I got no money and it
looks something like this, it,

947
00:29:12,270 --> 00:29:13,410
it looks something like this.

948
00:29:14,460 --> 00:29:17,190
Once again, you and I
both have our 40% shares.

949
00:29:17,550 --> 00:29:21,810
We've got 20% investors, but
we're about to run outta money.

950
00:29:22,110 --> 00:29:22,260
Yeah,

951
00:29:22,260 --> 00:29:22,470
right.

952
00:29:22,470 --> 00:29:23,970
We, we raised 2 million bucks.

953
00:29:24,120 --> 00:29:25,260
We ripped through it all.

954
00:29:25,380 --> 00:29:26,250
We set up payroll.

955
00:29:26,250 --> 00:29:27,750
We got a bunch of people
we gotta pay every, every

956
00:29:27,750 --> 00:29:29,910
month and, and we're
about to be outta cash.

957
00:29:30,720 --> 00:29:34,410
And the investors come back
and say, we're willing to

958
00:29:34,410 --> 00:29:36,240
put in X amount of dollars.

959
00:29:36,360 --> 00:29:36,600
Yeah.

960
00:29:36,720 --> 00:29:38,820
However, here are
our conditions.

961
00:29:39,675 --> 00:29:43,544
That invokes the golden rule,
which is be with the gold rules.

962
00:29:43,905 --> 00:29:44,115
That's

963
00:29:44,385 --> 00:29:44,504
it.

964
00:29:44,504 --> 00:29:46,935
And the reason I, I wanna
bring this up is because

965
00:29:46,935 --> 00:29:49,125
this is part and parcel with
running a funded startup.

966
00:29:49,125 --> 00:29:51,375
This isn't like, oh,
this happened one time.

967
00:29:51,794 --> 00:29:53,715
It's like, it kind of
happens every time.

968
00:29:53,715 --> 00:29:55,125
It gets worse when you
take on more money.

969
00:29:55,185 --> 00:29:55,344
You know what I mean?

970
00:29:56,110 --> 00:29:56,950
Pretty much every time.

971
00:29:56,950 --> 00:29:57,160
Right?

972
00:29:57,160 --> 00:30:00,310
Like, 'cause even if you
won governance on paper.

973
00:30:00,400 --> 00:30:00,460
Yeah.

974
00:30:00,460 --> 00:30:00,640
Right.

975
00:30:00,640 --> 00:30:02,470
Investors can still
control outcomes through

976
00:30:02,470 --> 00:30:03,400
financial leverage.

977
00:30:03,790 --> 00:30:04,000
Yep.

978
00:30:04,120 --> 00:30:04,420
Right.

979
00:30:04,420 --> 00:30:06,970
And runway is kind of
the only board seat

980
00:30:06,970 --> 00:30:08,260
that can't be outvoted.

981
00:30:08,920 --> 00:30:09,190
Correct?

982
00:30:09,220 --> 00:30:09,460
Yeah.

983
00:30:09,520 --> 00:30:09,850
It's

984
00:30:09,850 --> 00:30:10,390
at that moment.

985
00:30:10,840 --> 00:30:11,410
Great way to put it.

986
00:30:11,410 --> 00:30:12,370
You could, right?

987
00:30:12,370 --> 00:30:13,450
Technically I suppose you could.

988
00:30:13,660 --> 00:30:16,150
And, and you're like, okay,
so you choose to exercise

989
00:30:16,150 --> 00:30:17,830
your vote into insolvency.

990
00:30:17,830 --> 00:30:20,440
Like that's what are you
gonna, what would the point be?

991
00:30:20,830 --> 00:30:21,100
Right?

992
00:30:21,100 --> 00:30:21,400
So.

993
00:30:21,635 --> 00:30:24,485
Again, best voting right,
is a positive bank balance.

994
00:30:24,485 --> 00:30:26,135
You've got to be able to
absolutely support the

995
00:30:26,135 --> 00:30:29,165
decisions you wanna make
because otherwise, like you

996
00:30:29,165 --> 00:30:32,855
said, the financial leverage
piece is, is always there.

997
00:30:33,155 --> 00:30:36,035
You need money to move
forward then, right?

998
00:30:36,035 --> 00:30:37,895
If it's, that's
where it comes from.

999
00:30:37,895 --> 00:30:38,675
Cash is control.

1000
00:30:38,675 --> 00:30:41,615
When you're outta runway, rights
become theoretical, right?

1001
00:30:41,615 --> 00:30:43,055
And that's the end of it.

1002
00:30:43,835 --> 00:30:45,425
Can you make
payroll right there?

1003
00:30:45,425 --> 00:30:46,145
There's your right.

1004
00:30:46,665 --> 00:30:46,995
Right.

1005
00:30:46,995 --> 00:30:47,205
Right.

1006
00:30:47,205 --> 00:30:49,875
And, and, and we are all
as startups perpetually

1007
00:30:49,875 --> 00:30:50,625
going out of business.

1008
00:30:50,625 --> 00:30:50,685
Yeah.

1009
00:30:50,685 --> 00:30:53,385
Like that's the nature of
how this business works.

1010
00:30:53,685 --> 00:30:54,794
It's not a one-off.

1011
00:30:54,824 --> 00:30:56,415
It's not like, oh, there
was that one startup

1012
00:30:56,415 --> 00:30:57,165
that ran outta money.

1013
00:30:57,284 --> 00:30:57,524
Right.

1014
00:30:57,554 --> 00:30:57,615
Yeah.

1015
00:30:57,615 --> 00:31:00,044
It's like every startup that's
going to run outta money.

1016
00:31:00,195 --> 00:31:00,254
Yeah.

1017
00:31:00,254 --> 00:31:01,215
In a few survive.

1018
00:31:01,334 --> 00:31:01,425
Yeah.

1019
00:31:01,455 --> 00:31:04,095
So this is an
incidental condition.

1020
00:31:04,095 --> 00:31:05,774
This is like the
most common outcome.

1021
00:31:06,790 --> 00:31:08,980
For, for, again, for founders
that are, for founders that

1022
00:31:08,980 --> 00:31:10,840
have been through this, we
don't have to explain anything.

1023
00:31:10,840 --> 00:31:11,260
They're like, yep.

1024
00:31:11,800 --> 00:31:12,875
Yeah, that's pretty
much, that's it.

1025
00:31:12,875 --> 00:31:13,629
That's exactly how it goes.

1026
00:31:13,780 --> 00:31:16,480
And it sucks for founders
that haven't, but they're

1027
00:31:16,480 --> 00:31:17,560
getting into fundraising.

1028
00:31:17,919 --> 00:31:19,720
I wanna say what I wish
somebody had told me.

1029
00:31:20,110 --> 00:31:23,770
When you raise money, it's the
last time you have control.

1030
00:31:23,980 --> 00:31:24,100
Yeah.

1031
00:31:24,100 --> 00:31:25,659
Until you make money.

1032
00:31:26,024 --> 00:31:26,445
Okay.

1033
00:31:26,715 --> 00:31:29,175
And so when we raise money, you
and I raised 2 million bucks.

1034
00:31:29,205 --> 00:31:30,105
We got money in the bank.

1035
00:31:30,375 --> 00:31:32,534
We've got a little bit
of control at that point.

1036
00:31:32,564 --> 00:31:32,625
Yeah.

1037
00:31:32,895 --> 00:31:36,284
In as much as we have two
voting seats out of five.

1038
00:31:36,554 --> 00:31:36,735
Right.

1039
00:31:36,735 --> 00:31:39,254
So we have a little bit of
control and we don't have

1040
00:31:39,254 --> 00:31:41,835
to ask anybody for anything
because we're doing okay.

1041
00:31:41,895 --> 00:31:43,605
We're making payroll,
like everything's fine.

1042
00:31:44,024 --> 00:31:46,544
Now, fast forward 18
months and now we've got

1043
00:31:46,544 --> 00:31:47,445
six months of runway.

1044
00:31:48,105 --> 00:31:48,435
Right.

1045
00:31:48,795 --> 00:31:51,525
And now we still want to
be able to say, but this

1046
00:31:51,525 --> 00:31:53,925
is our strategic direction,
but this is our valuation,

1047
00:31:53,925 --> 00:31:55,695
but this is how much money
we're gonna raise, et cetera.

1048
00:31:55,725 --> 00:31:55,815
Mm-hmm.

1049
00:31:56,565 --> 00:32:00,525
And the investors, both the
current ones and the future

1050
00:32:00,525 --> 00:32:04,215
ones are like, I don't care
about any of what you want.

1051
00:32:04,455 --> 00:32:04,755
Right.

1052
00:32:04,755 --> 00:32:04,845
Yeah.

1053
00:32:04,905 --> 00:32:07,110
Like, you're gonna do
what I want, or You're

1054
00:32:07,110 --> 00:32:08,055
not gonna make payroll.

1055
00:32:08,655 --> 00:32:09,415
And we're like, yeah.

1056
00:32:10,140 --> 00:32:10,379
Huh?

1057
00:32:10,620 --> 00:32:10,830
Yeah.

1058
00:32:10,830 --> 00:32:11,070
Yeah.

1059
00:32:11,490 --> 00:32:13,440
We really don't
have any control.

1060
00:32:13,440 --> 00:32:13,500
Yeah.

1061
00:32:13,710 --> 00:32:15,330
Like it doesn't
matter what we own.

1062
00:32:15,629 --> 00:32:16,110
No, it doesn't.

1063
00:32:16,440 --> 00:32:18,720
When you're profitable,
you can negotiate.

1064
00:32:19,020 --> 00:32:21,120
When you're broke, you comply.

1065
00:32:21,210 --> 00:32:21,510
Right?

1066
00:32:21,510 --> 00:32:23,400
Like that's, if you want
to go play with more of

1067
00:32:23,400 --> 00:32:26,370
their money, you are going
to play it by their rules.

1068
00:32:26,400 --> 00:32:26,910
You are.

1069
00:32:27,000 --> 00:32:29,400
It's interesting because you
see this in public companies

1070
00:32:29,400 --> 00:32:31,500
now, there's all different
conditions set in public

1071
00:32:31,500 --> 00:32:34,650
companies, but when public
companies are doing well, read

1072
00:32:34,650 --> 00:32:36,030
Elon Musk on any given day.

1073
00:32:36,370 --> 00:32:36,730
Right.

1074
00:32:37,090 --> 00:32:40,000
Elon Musk can do whatever
the hell he wants.

1075
00:32:40,000 --> 00:32:42,520
Now, in most cases, if you look
at his companies, he owns a

1076
00:32:42,520 --> 00:32:43,689
tiny share of those companies.

1077
00:32:43,689 --> 00:32:43,840
Right?

1078
00:32:43,840 --> 00:32:46,270
Like he's, he's a big
shareholder in Tesla.

1079
00:32:46,419 --> 00:32:48,189
Relative to Tesla.

1080
00:32:48,399 --> 00:32:48,460
Yeah.

1081
00:32:48,460 --> 00:32:50,290
But you know, small
shareholder otherwise.

1082
00:32:50,409 --> 00:32:56,169
Um, but when Tesla's stock
is doubling, and Elon Musk

1083
00:32:56,169 --> 00:32:59,590
put this theory to the test,
you can do the craziest shit.

1084
00:32:59,850 --> 00:33:02,370
Imaginable and
everyone's fine with it.

1085
00:33:02,520 --> 00:33:02,760
Okay.

1086
00:33:02,760 --> 00:33:04,320
He sure did put
that to the test,

1087
00:33:04,320 --> 00:33:04,485
didn't he?

1088
00:33:04,485 --> 00:33:06,300
He sure put that to the
test and in case you weren't

1089
00:33:06,300 --> 00:33:08,699
sure, but it's when things
go the other direction.

1090
00:33:08,850 --> 00:33:09,179
Yeah,

1091
00:33:09,510 --> 00:33:09,810
right.

1092
00:33:09,990 --> 00:33:12,840
That you see what your control
in your position really is.

1093
00:33:13,229 --> 00:33:16,889
If Tesla stock just plummets,
now this is a bad example

1094
00:33:16,919 --> 00:33:18,600
'cause SpaceX is where he's
gonna make all his money.

1095
00:33:18,600 --> 00:33:21,659
But if Tesla stock plummets
Right, and that was the only

1096
00:33:21,659 --> 00:33:23,820
thing he owned his voting
rights and everything else.

1097
00:33:23,820 --> 00:33:24,659
No one cares.

1098
00:33:24,920 --> 00:33:25,190
Yeah.

1099
00:33:25,250 --> 00:33:25,580
Right.

1100
00:33:25,850 --> 00:33:28,460
Because at that point
he's lost sentiment.

1101
00:33:28,520 --> 00:33:29,600
He's lost trust.

1102
00:33:29,900 --> 00:33:32,750
And again, if the board or
the activist shareholders, et

1103
00:33:32,750 --> 00:33:36,380
cetera, are actively conspiring
against his performance,

1104
00:33:36,740 --> 00:33:39,740
almost no amount control is
gonna say, save you from it

1105
00:33:40,100 --> 00:33:41,060
at that level of operation.

1106
00:33:41,060 --> 00:33:44,720
I would say the your control
strategy is just stay funded

1107
00:33:44,720 --> 00:33:46,130
and stay credible, right?

1108
00:33:46,460 --> 00:33:46,910
That's right.

1109
00:33:46,910 --> 00:33:47,240
And so

1110
00:33:47,240 --> 00:33:48,260
that's all you
need at that point.

1111
00:33:48,540 --> 00:33:50,430
Think about other,
like, famous examples.

1112
00:33:50,760 --> 00:33:53,490
So back in the day, I was at
late eighties, early nineties,

1113
00:33:53,639 --> 00:33:56,159
uh, Steve Jobs got fired
from Apple by John Scully.

1114
00:33:56,460 --> 00:33:56,790
Right?

1115
00:33:57,030 --> 00:33:58,560
Uh, and that was, you
know, a very famous moment.

1116
00:33:58,560 --> 00:34:02,700
Now, he didn't have the voting
control to maintain his, his job

1117
00:34:02,700 --> 00:34:05,220
or, or even, you know, a stake,
meaningful stake in the company.

1118
00:34:05,580 --> 00:34:07,050
And so he was able
to be pushed out.

1119
00:34:07,139 --> 00:34:07,919
Now, a couple things.

1120
00:34:08,400 --> 00:34:09,870
This is Steve Jobs, right?

1121
00:34:09,870 --> 00:34:11,460
Uhhuh, like arguably
one of the greatest

1122
00:34:11,460 --> 00:34:12,480
entrepreneurs of all time.

1123
00:34:12,630 --> 00:34:12,810
Yep.

1124
00:34:12,989 --> 00:34:14,489
He got pushed outta
the company also.

1125
00:34:14,489 --> 00:34:15,570
Not a pushover by the way.

1126
00:34:15,620 --> 00:34:15,679
Yeah.

1127
00:34:16,040 --> 00:34:16,310
Yeah.

1128
00:34:16,310 --> 00:34:17,449
Also one of the biggest NAS of

1129
00:34:17,745 --> 00:34:17,864
all time.

1130
00:34:17,864 --> 00:34:19,759
Not just, he wasn't just
like, oh, you want me to go?

1131
00:34:19,759 --> 00:34:20,540
Okay, cool.

1132
00:34:20,569 --> 00:34:20,750
Yeah.

1133
00:34:20,750 --> 00:34:20,989
See you.

1134
00:34:21,290 --> 00:34:21,799
Okay, here,

1135
00:34:21,799 --> 00:34:22,429
send me, have a box.

1136
00:34:22,429 --> 00:34:23,299
I can put my stuff in.

1137
00:34:23,540 --> 00:34:25,250
I can't think of a
harder person to fire.

1138
00:34:25,670 --> 00:34:28,069
But again, even he
lost the leverage.

1139
00:34:28,370 --> 00:34:28,429
Yeah.

1140
00:34:28,429 --> 00:34:29,330
So he gets pushed out now.

1141
00:34:29,630 --> 00:34:32,330
Now flip it around years later,
he gets famously brought back

1142
00:34:32,330 --> 00:34:34,580
and you know, brings about
one of the greatest, what

1143
00:34:34,580 --> 00:34:35,779
I'd argue to be turnarounds.

1144
00:34:35,810 --> 00:34:38,389
Apple is actually already a good
company, but, uh, turnarounds

1145
00:34:38,389 --> 00:34:39,199
in corporate history.

1146
00:34:40,125 --> 00:34:41,895
Now that man can do no wrong.

1147
00:34:41,900 --> 00:34:42,070
Right?

1148
00:34:42,075 --> 00:34:42,315
Right.

1149
00:34:42,315 --> 00:34:45,465
This is at the time right When
the company's doing well, you

1150
00:34:45,465 --> 00:34:46,815
are god damned invincible.

1151
00:34:46,815 --> 00:34:46,875
Yeah.

1152
00:34:47,025 --> 00:34:50,205
When Tesla's doing well, Elon
Musk is god damned invincible.

1153
00:34:50,235 --> 00:34:50,355
Yeah.

1154
00:34:50,505 --> 00:34:53,055
And the reason for that is
because so long as you're making

1155
00:34:53,055 --> 00:34:56,175
them money control provisions
just don't get invoked.

1156
00:34:56,265 --> 00:34:57,255
They don't, they
don't get invoked.

1157
00:34:57,255 --> 00:34:58,515
That's kind of like
the hiring thing.

1158
00:34:58,515 --> 00:35:00,345
If you're not making a
really stupid hiring decision

1159
00:35:00,345 --> 00:35:01,905
over a hundred k, no one's
gonna try to stop you.

1160
00:35:01,995 --> 00:35:02,325
Right.

1161
00:35:02,325 --> 00:35:03,495
They're not, they don't want to

1162
00:35:03,675 --> 00:35:04,185
stick with that.

1163
00:35:04,515 --> 00:35:06,435
The whole point of
control provisions are

1164
00:35:06,435 --> 00:35:07,725
when things go wrong.

1165
00:35:07,875 --> 00:35:08,145
Yes.

1166
00:35:08,150 --> 00:35:08,430
Right.

1167
00:35:08,835 --> 00:35:08,865
Okay.

1168
00:35:10,035 --> 00:35:12,375
Things can be going
right and people can

1169
00:35:12,375 --> 00:35:13,335
maybe not agree with you.

1170
00:35:13,335 --> 00:35:16,755
Like I can't fathom that
any of the people that are

1171
00:35:16,755 --> 00:35:20,415
meaningfully invested in
Tesla watch Elon's actions

1172
00:35:20,415 --> 00:35:23,805
on any given day and say to
themselves, there's no other way

1173
00:35:23,805 --> 00:35:24,825
we could hope this was going.

1174
00:35:25,935 --> 00:35:27,855
Like the outcomes
are incredible.

1175
00:35:27,855 --> 00:35:28,215
Like what?

1176
00:35:28,215 --> 00:35:30,525
What the guy can do is
incredible, but the behavior

1177
00:35:30,525 --> 00:35:33,495
that gets you there yeah,
is just batshit crazy.

1178
00:35:33,765 --> 00:35:36,945
And so again, as long
as he's doing well.

1179
00:35:37,510 --> 00:35:37,870
Okay.

1180
00:35:38,260 --> 00:35:42,280
As soon as that changes, that's
when control provisions come in.

1181
00:35:42,610 --> 00:35:42,820
Yep.

1182
00:35:42,820 --> 00:35:44,380
But that's also when people
are trying to protect

1183
00:35:44,380 --> 00:35:46,030
themselves from crazy shit.

1184
00:35:46,420 --> 00:35:47,830
Let's talk about it from
the founder's perspective.

1185
00:35:48,160 --> 00:35:48,430
Yeah.

1186
00:35:48,610 --> 00:35:50,590
What do we actually
need to protect.

1187
00:35:50,985 --> 00:35:52,605
What is it we should
be protecting?

1188
00:35:52,635 --> 00:35:52,815
Right?

1189
00:35:52,815 --> 00:35:54,045
What actually matters here?

1190
00:35:54,045 --> 00:35:58,185
Because I think that control
is way too broad of a,

1191
00:35:58,185 --> 00:35:59,325
we can't have control.

1192
00:35:59,325 --> 00:36:00,135
We've already talked about that.

1193
00:36:00,135 --> 00:36:00,735
So yeah.

1194
00:36:00,735 --> 00:36:03,135
What are the specific
things, specific rights,

1195
00:36:03,135 --> 00:36:06,975
the non-negotiables that
we really want to have?

1196
00:36:07,610 --> 00:36:10,700
At least somewhat locked
down before we're negotiating

1197
00:36:10,700 --> 00:36:13,370
under pressure right before
we're at six months of runway

1198
00:36:13,640 --> 00:36:15,860
and only enough cash for
the next, uh, five payrolls.

1199
00:36:15,980 --> 00:36:17,870
So let's dial that in a bit.

1200
00:36:17,870 --> 00:36:18,920
I think it's a great question.

1201
00:36:19,310 --> 00:36:22,400
Let's agree that we can't
control the company, per se,

1202
00:36:22,400 --> 00:36:24,950
this amorphous thing that says I
have supreme leadership, right?

1203
00:36:25,340 --> 00:36:28,430
But we can control
particular provisions,

1204
00:36:28,670 --> 00:36:31,520
particular conditions
that are important to us.

1205
00:36:31,610 --> 00:36:32,000
Okay?

1206
00:36:32,330 --> 00:36:35,570
And what I would also argue
is, while these might be like

1207
00:36:35,570 --> 00:36:36,570
things that we'd love to have.

1208
00:36:37,210 --> 00:36:39,880
They also might just not
be realistic, for example.

1209
00:36:40,470 --> 00:36:42,450
Any entrepreneur that
gives us five seconds of

1210
00:36:42,450 --> 00:36:45,000
thought is gonna say, one
provision I want more than

1211
00:36:45,000 --> 00:36:46,620
anything, I cannot be fired.

1212
00:36:46,890 --> 00:36:46,980
Mm-hmm.

1213
00:36:47,220 --> 00:36:48,780
I mean, 'cause you know,
we think about that as as

1214
00:36:48,780 --> 00:36:50,280
very personal and secure.

1215
00:36:50,460 --> 00:36:50,790
Right.

1216
00:36:51,060 --> 00:36:55,200
And I would argue there's
rarely going to be a case where

1217
00:36:55,200 --> 00:36:56,520
there's no way to fire you.

1218
00:36:56,790 --> 00:37:00,000
I mean, there's a hundred things
that you could do wrong that

1219
00:37:00,000 --> 00:37:01,110
would be like straight up.

1220
00:37:01,935 --> 00:37:03,255
Of course we fired this person.

1221
00:37:03,255 --> 00:37:03,315
Yeah.

1222
00:37:03,435 --> 00:37:06,255
You know, what we consider
to be for cause fraud, theft,

1223
00:37:06,345 --> 00:37:07,275
you know, things like that.

1224
00:37:07,305 --> 00:37:07,365
Yeah.

1225
00:37:07,365 --> 00:37:12,404
Like there's no co-founder
or investor in the world

1226
00:37:12,825 --> 00:37:16,365
that wants to be joined at
the hip with someone who can

1227
00:37:16,365 --> 00:37:19,125
do anything that they want
and still not get fired.

1228
00:37:19,185 --> 00:37:19,424
Like

1229
00:37:19,560 --> 00:37:19,910
Right.

1230
00:37:20,115 --> 00:37:21,765
To me, that's a selfish clause.

1231
00:37:22,154 --> 00:37:22,545
So.

1232
00:37:22,779 --> 00:37:24,460
If you're willing to
concede that and say,

1233
00:37:24,460 --> 00:37:25,360
okay, well, yeah, I get it.

1234
00:37:25,365 --> 00:37:27,490
I, I don't, I don't mean it
that way, like, I do awful shit.

1235
00:37:27,490 --> 00:37:28,540
Of course I shouldn't be there.

1236
00:37:28,660 --> 00:37:30,310
Or people should
have protections.

1237
00:37:30,850 --> 00:37:33,069
Then what you're really saying
is, I don't want to take

1238
00:37:33,069 --> 00:37:34,990
on, not take on investors,
so I don't wanna be fired.

1239
00:37:35,650 --> 00:37:38,890
I only wanna be able to get
fired for these reasons.

1240
00:37:39,069 --> 00:37:39,370
Correct.

1241
00:37:40,870 --> 00:37:42,069
These are my non-negotiables.

1242
00:37:42,069 --> 00:37:42,310
Right.

1243
00:37:42,310 --> 00:37:44,620
Like, like if I hold up
a bank, like I get it.

1244
00:37:44,620 --> 00:37:46,240
Anything short of that,
you can't touch me.

1245
00:37:46,480 --> 00:37:49,180
If I deposited the company
accounts though, like, I mean,

1246
00:37:49,299 --> 00:37:50,830
was the company really harmed?

1247
00:37:51,250 --> 00:37:51,580
Mm-hmm.

1248
00:37:51,660 --> 00:37:55,109
I had a case last Friday
out to dinner with a founder

1249
00:37:55,259 --> 00:37:58,710
reached out to me and he said,
my co-founder just cleared

1250
00:37:58,710 --> 00:38:01,350
out the bank account, cleared
it out, and was like, yeah,

1251
00:38:01,350 --> 00:38:02,399
it's just not working out.

1252
00:38:02,700 --> 00:38:03,359
Can you imagine that?

1253
00:38:03,420 --> 00:38:04,950
I mean, like, you know
what's crazy, right?

1254
00:38:04,950 --> 00:38:06,270
Is we get to see everything.

1255
00:38:06,359 --> 00:38:06,600
Yeah.

1256
00:38:07,020 --> 00:38:09,899
And this isn't the first time
I've seen this, but to see the

1257
00:38:09,899 --> 00:38:12,120
look on his face when he was
describing and that had just

1258
00:38:12,120 --> 00:38:13,560
gone down like a few days prior.

1259
00:38:13,920 --> 00:38:15,660
Emergency called me to come
in and try to figure it out.

1260
00:38:16,109 --> 00:38:19,290
And I'm thinking to myself,
you guys did this deal

1261
00:38:19,290 --> 00:38:21,210
together in good conscience.

1262
00:38:21,359 --> 00:38:23,549
You both thought you were
gonna grow a great company, and

1263
00:38:23,549 --> 00:38:27,509
then one day your co-founder
decided that you were no

1264
00:38:27,509 --> 00:38:30,600
longer going to be part of
this company without your say.

1265
00:38:31,049 --> 00:38:31,259
Right?

1266
00:38:31,740 --> 00:38:31,830
Yeah.

1267
00:38:31,830 --> 00:38:31,840
Like.

1268
00:38:32,250 --> 00:38:34,650
How could you have
ever predicted that?

1269
00:38:34,650 --> 00:38:35,580
Imagine that was coming.

1270
00:38:35,580 --> 00:38:35,850
Yep.

1271
00:38:36,150 --> 00:38:36,510
You don't,

1272
00:38:36,510 --> 00:38:38,700
and so what I said to him, I
was like, have you read the

1273
00:38:38,700 --> 00:38:42,090
operating agreement or have
they the other co-founder

1274
00:38:42,120 --> 00:38:43,320
read the operating agreement?

1275
00:38:43,320 --> 00:38:47,160
'cause I'm, if you have one,
I guarantee this isn't okay.

1276
00:38:47,400 --> 00:38:47,700
Right.

1277
00:38:47,700 --> 00:38:50,640
And it turns out they had, they
didn't, you know, dig in and I'm

1278
00:38:50,640 --> 00:38:54,210
guessing they didn't have a very
like strong operating agreement.

1279
00:38:55,020 --> 00:38:57,360
But there's just, there's
some fundamental protections

1280
00:38:57,360 --> 00:38:59,339
that say you can't just
steal from the company and

1281
00:38:59,339 --> 00:39:00,390
get away from it scot free.

1282
00:39:00,390 --> 00:39:00,990
Like, like that.

1283
00:39:00,990 --> 00:39:03,420
That's almost 0% chance
you're, you're gonna correct.

1284
00:39:03,420 --> 00:39:04,145
Hold that, that provision.

1285
00:39:04,725 --> 00:39:05,055
Yeah.

1286
00:39:05,340 --> 00:39:06,615
And, and why would you want to,

1287
00:39:07,575 --> 00:39:07,815
right?

1288
00:39:07,815 --> 00:39:08,475
Well, right, right.

1289
00:39:09,165 --> 00:39:10,995
Who would you expect to
accept it if you did?

1290
00:39:10,995 --> 00:39:14,505
You're like, there is a,
a non-litigation clause

1291
00:39:14,505 --> 00:39:17,235
against me absconding with
funds to the Virgin Islands.

1292
00:39:18,160 --> 00:39:18,920
I, you guys are

1293
00:39:18,920 --> 00:39:19,545
okay with that, right?

1294
00:39:20,205 --> 00:39:20,475
Yeah.

1295
00:39:20,475 --> 00:39:23,924
I mean, so again, everyone
says, well, no, if I do bad

1296
00:39:23,924 --> 00:39:26,115
things, I don't want to, I
don't wanna protect myself,

1297
00:39:26,115 --> 00:39:27,075
so to speak against that.

1298
00:39:27,285 --> 00:39:29,955
But remember what you
think are bad things.

1299
00:39:30,315 --> 00:39:32,504
Are different than what other
people think are bad things.

1300
00:39:32,654 --> 00:39:32,805
Yeah.

1301
00:39:32,835 --> 00:39:33,645
Here's a good example.

1302
00:39:33,944 --> 00:39:38,355
Your lack of performance to
someone else is a bad thing.

1303
00:39:38,685 --> 00:39:38,775
Yeah.

1304
00:39:38,775 --> 00:39:41,025
But you're like, I'm in
every day killing it.

1305
00:39:41,174 --> 00:39:41,295
Yeah.

1306
00:39:41,295 --> 00:39:41,384
Right.

1307
00:39:41,384 --> 00:39:42,585
Like I'm, I'm
working non Do what?

1308
00:39:42,585 --> 00:39:42,884
I can't

1309
00:39:42,975 --> 00:39:43,484
figure it out.

1310
00:39:43,484 --> 00:39:44,055
I'm getting there.

1311
00:39:44,055 --> 00:39:45,615
Little by little I'm
making the progress.

1312
00:39:45,615 --> 00:39:45,855
Right?

1313
00:39:45,884 --> 00:39:46,245
Yeah, you

1314
00:39:46,245 --> 00:39:46,424
bet.

1315
00:39:46,424 --> 00:39:46,725
Like I

1316
00:39:46,964 --> 00:39:49,245
still not where we need it to
be from a company standpoint.

1317
00:39:49,424 --> 00:39:49,694
Yeah.

1318
00:39:49,815 --> 00:39:52,875
I'm running as fast as
I possibly can, but your

1319
00:39:52,875 --> 00:39:54,825
co-founder is looking at
you going, yeah, but you're

1320
00:39:54,825 --> 00:39:55,634
still losing the race.

1321
00:39:55,665 --> 00:39:56,565
It does not matter.

1322
00:39:56,924 --> 00:39:57,915
Now think about how.

1323
00:39:58,455 --> 00:40:00,015
Giant, those perceptions
are different.

1324
00:40:00,075 --> 00:40:00,315
Yep.

1325
00:40:00,315 --> 00:40:00,615
Right.

1326
00:40:01,125 --> 00:40:03,765
I'm working so hard or I'm
contributing so much, and the

1327
00:40:03,765 --> 00:40:06,405
other person's like I, I'm about
to clear out the entire bank

1328
00:40:06,405 --> 00:40:08,805
account because this person has
such a liability and I'm willing

1329
00:40:08,805 --> 00:40:09,645
to go to quarter over it.

1330
00:40:10,005 --> 00:40:10,125
Yeah.

1331
00:40:10,125 --> 00:40:12,045
Think of how dramatically
different those

1332
00:40:12,045 --> 00:40:12,945
expectations are.

1333
00:40:13,365 --> 00:40:16,245
So again, we go into and
we're like, Hey, I wanna

1334
00:40:16,245 --> 00:40:18,165
make sure that, you know, I
can't be fired or anything

1335
00:40:18,165 --> 00:40:20,205
else like that unless you
do something really bad.

1336
00:40:21,030 --> 00:40:24,300
What I'm saying is, hey
man, what you think is

1337
00:40:24,300 --> 00:40:25,350
really bad is one thing.

1338
00:40:25,350 --> 00:40:26,670
What other people are
gonna think is really

1339
00:40:26,670 --> 00:40:27,810
bad is way different.

1340
00:40:28,200 --> 00:40:31,050
And so going back to, you
know, protecting what matters,

1341
00:40:31,500 --> 00:40:34,080
we have to be able to say, I
wanna be able to protect my,

1342
00:40:34,110 --> 00:40:36,960
my employment up until these
provisions that I think any

1343
00:40:36,960 --> 00:40:38,310
reasonable person would agree.

1344
00:40:38,610 --> 00:40:41,970
And I have to know going in that
those provisions can be invoked

1345
00:40:41,970 --> 00:40:42,900
in ways I'm not expecting.

1346
00:40:43,320 --> 00:40:44,610
Okay, so that's one.

1347
00:40:45,570 --> 00:40:50,310
The second is anything these,
again, the big ones, anything.

1348
00:40:50,715 --> 00:40:53,535
That would drive a change
in control of the company.

1349
00:40:55,320 --> 00:40:57,390
Yeah, change in control could,
could mean a litany of things.

1350
00:40:57,420 --> 00:40:59,670
It could mean, uh, we get
bought by somebody else.

1351
00:40:59,670 --> 00:41:02,370
It could mean someone else
Now has like the majority

1352
00:41:02,370 --> 00:41:04,440
control of the company and
there's a lot of ways to, to

1353
00:41:04,440 --> 00:41:07,590
get to change in control when
and if those things happen.

1354
00:41:08,040 --> 00:41:10,830
There have to be provisions
that we care about that say

1355
00:41:10,860 --> 00:41:12,060
we can't get overridden.

1356
00:41:12,660 --> 00:41:13,980
Doesn't mean we're gonna
get 'em, by the way.

1357
00:41:14,220 --> 00:41:14,490
Right?

1358
00:41:14,490 --> 00:41:15,870
Like we'd like them
to be in there.

1359
00:41:15,870 --> 00:41:17,040
It doesn't mean everybody's
gonna greet 'em.

1360
00:41:17,220 --> 00:41:19,259
Investors are gonna have
a very strong say in that

1361
00:41:19,259 --> 00:41:21,450
one, but that's the shit you
should be paying attention to.

1362
00:41:21,839 --> 00:41:22,740
Anything else come to mind?

1363
00:41:22,740 --> 00:41:25,020
Or like when you think
about building a company,

1364
00:41:25,020 --> 00:41:26,025
what are the things you're
most concerned about?

1365
00:41:27,105 --> 00:41:29,085
I, I think it does go back
to a few little things,

1366
00:41:29,085 --> 00:41:31,965
but it's really just
understanding kind of what

1367
00:41:31,965 --> 00:41:33,195
those non-negotiables are.

1368
00:41:33,375 --> 00:41:34,665
It's gonna depend on
the type of company that

1369
00:41:34,665 --> 00:41:35,445
you're building, right?

1370
00:41:35,445 --> 00:41:37,665
If you're building something
you intend to have, you know,

1371
00:41:37,665 --> 00:41:40,455
just a, a co-founder and team
of AI agents at this point.

1372
00:41:40,455 --> 00:41:42,945
Like, do you really care
about hiring protocols

1373
00:41:42,945 --> 00:41:43,425
or anything like that?

1374
00:41:43,425 --> 00:41:44,055
Maybe you're not
gonna hire Yeah,

1375
00:41:44,115 --> 00:41:44,295
right.

1376
00:41:44,535 --> 00:41:45,375
Or not gonna be
something that's.

1377
00:41:45,850 --> 00:41:46,450
Really meaningful.

1378
00:41:46,450 --> 00:41:48,220
So to me it's fairly nuanced.

1379
00:41:48,550 --> 00:41:51,070
What I would say is just
make sure that you are

1380
00:41:51,070 --> 00:41:54,280
thinking through those things
and that you are choosing

1381
00:41:54,280 --> 00:41:55,960
your trade-offs, right?

1382
00:41:55,960 --> 00:41:58,060
Understanding where you're being
flexible, where you're not,

1383
00:41:58,330 --> 00:42:00,700
because if you don't choose your
trade-offs, the term sheet's

1384
00:42:00,700 --> 00:42:01,930
going to choose them for you.

1385
00:42:01,930 --> 00:42:04,900
And I think that's where we see
most founders get into trouble.

1386
00:42:04,900 --> 00:42:06,940
It's not that they failed
to do anything, right?

1387
00:42:06,940 --> 00:42:08,080
They failed to plan at all.

1388
00:42:08,080 --> 00:42:08,680
They just didn't.

1389
00:42:08,680 --> 00:42:08,800
Yep.

1390
00:42:08,865 --> 00:42:10,814
Put anything into the term
sheet, anything into the

1391
00:42:10,814 --> 00:42:13,814
operating agreement around
controls like this, and then

1392
00:42:13,845 --> 00:42:15,854
later, uh, re regret it.

1393
00:42:16,125 --> 00:42:19,125
I also, Ryan, I think there's
a lot of things that people you

1394
00:42:19,125 --> 00:42:21,314
can't maintain control over.

1395
00:42:21,375 --> 00:42:23,475
Like, you can't, like
operating your agreement

1396
00:42:23,475 --> 00:42:26,415
way into, for example, you
can't maintain control of the

1397
00:42:26,415 --> 00:42:28,095
product direction, unilateral.

1398
00:42:29,265 --> 00:42:31,665
Again, you could try to,
like, I've never even

1399
00:42:31,665 --> 00:42:32,355
seen someone do this.

1400
00:42:32,355 --> 00:42:34,365
You could try to force a
provision in your operating

1401
00:42:34,365 --> 00:42:37,185
agreement that says, you know,
product direction will always be

1402
00:42:37,185 --> 00:42:38,775
made by this person, et cetera.

1403
00:42:38,865 --> 00:42:41,535
Or, you know, these co-founders,
first off, no one would agree

1404
00:42:41,535 --> 00:42:44,770
to it, and second off, it's such
a. Amorphous term that you'd

1405
00:42:44,770 --> 00:42:45,730
never be able to uphold it.

1406
00:42:46,090 --> 00:42:48,970
And by the way, if you're doing
well, the company's doing well.

1407
00:42:49,060 --> 00:42:49,810
You get that anyway.

1408
00:42:49,810 --> 00:42:52,150
If you're doing poorly, no
one's gonna wanna be able to

1409
00:42:52,150 --> 00:42:54,340
say, oh, I know we're doing
poorly and losing a bunch

1410
00:42:54,340 --> 00:42:56,290
of money, but let's glad
you got that provision that

1411
00:42:56,290 --> 00:42:57,520
says we can't change course.

1412
00:42:57,790 --> 00:42:59,710
By the way, like again, to
go back and talk about the

1413
00:42:59,710 --> 00:43:00,820
reality of these situations.

1414
00:43:00,820 --> 00:43:03,850
We've talked to some other
podcast episodes, but no

1415
00:43:03,850 --> 00:43:06,250
one wants to come in and
do that either, right?

1416
00:43:06,610 --> 00:43:06,670
No.

1417
00:43:06,670 --> 00:43:08,680
There is no board
member, no investor who's

1418
00:43:08,680 --> 00:43:09,640
like, you know what?

1419
00:43:10,245 --> 00:43:13,545
I really want is to have to
take control over product

1420
00:43:13,545 --> 00:43:17,715
direction to save this
sinking burning, about to

1421
00:43:17,715 --> 00:43:19,065
go down a whirlpool ship.

1422
00:43:19,065 --> 00:43:19,275
Right.

1423
00:43:19,275 --> 00:43:21,285
That's nobody's idea
of a great time.

1424
00:43:21,285 --> 00:43:23,745
They're not coming in and trying
to take away your control.

1425
00:43:24,090 --> 00:43:27,645
I, I think that's really
like, for me, control and,

1426
00:43:27,645 --> 00:43:30,165
and the losing control, that's
when it actually happens.

1427
00:43:30,495 --> 00:43:30,555
Yeah.

1428
00:43:30,555 --> 00:43:32,895
Investors don't
generally take control.

1429
00:43:33,285 --> 00:43:36,674
You lose control of something
and they're forced to step

1430
00:43:36,674 --> 00:43:38,505
in and assert control.

1431
00:43:38,535 --> 00:43:39,404
It's very different,

1432
00:43:39,525 --> 00:43:39,615
right?

1433
00:43:39,615 --> 00:43:40,815
They're trying to
save the asset now.

1434
00:43:40,815 --> 00:43:41,775
You never see it that way.

1435
00:43:41,775 --> 00:43:42,105
Yeah, right.

1436
00:43:42,105 --> 00:43:43,545
You look at it like
they're meddling.

1437
00:43:43,545 --> 00:43:43,815
Right?

1438
00:43:43,875 --> 00:43:45,045
They're telling me
what to do, right?

1439
00:43:45,045 --> 00:43:45,194
Yeah.

1440
00:43:45,255 --> 00:43:47,955
Well, you're not doing it
right, so someone has to.

1441
00:43:48,050 --> 00:43:49,970
Things going bad and
meddling tend to go in

1442
00:43:50,030 --> 00:43:50,990
hand in hand, right.

1443
00:43:50,990 --> 00:43:53,060
It's kinda like when people
think about the police, right?

1444
00:43:53,060 --> 00:43:53,240
Yeah.

1445
00:43:53,330 --> 00:43:55,370
Like, oh, the police are
harassing me, not if you're

1446
00:43:55,430 --> 00:43:56,240
not breaking the law.

1447
00:43:56,475 --> 00:43:56,555
Yeah.

1448
00:43:56,750 --> 00:43:57,050
Yeah.

1449
00:43:57,470 --> 00:43:57,800
And not

1450
00:43:57,800 --> 00:44:00,200
to those two things is things
tend to go hand in hand.

1451
00:44:00,320 --> 00:44:02,990
So when I think about putting a
deal together, right, what I'm

1452
00:44:02,990 --> 00:44:06,230
actually most concerned about
isn't the day-to-day operations.

1453
00:44:06,410 --> 00:44:07,460
It's how this ends.

1454
00:44:08,145 --> 00:44:10,455
In other words, like what are
the requirements if I wanna

1455
00:44:10,455 --> 00:44:14,295
sell this thing, get liquidity,
et cetera, because those are

1456
00:44:14,295 --> 00:44:18,105
the life changing things that
if and when it comes to that,

1457
00:44:18,375 --> 00:44:21,315
I'm screwed if that provision
doesn't, you know, work

1458
00:44:21,315 --> 00:44:22,515
in my favor or support me.

1459
00:44:22,845 --> 00:44:25,545
Most common example, and I can
name 10 people off the top of my

1460
00:44:25,545 --> 00:44:29,295
head right now that are dealing
with this, is we've got an offer

1461
00:44:29,295 --> 00:44:32,654
to sell the company or get some
liquidity, et cetera, and the

1462
00:44:32,654 --> 00:44:35,504
investors don't want to take it
because it doesn't benefit them.

1463
00:44:36,045 --> 00:44:36,825
We see this all the time.

1464
00:44:37,125 --> 00:44:39,615
You and I start this company,
we raise 2 million bucks.

1465
00:44:39,945 --> 00:44:41,745
X amount of years later,
we get an offer to sell

1466
00:44:41,745 --> 00:44:42,855
it for 5 million bucks.

1467
00:44:43,245 --> 00:44:44,775
And the investors
were like, well, we'll

1468
00:44:44,775 --> 00:44:45,645
make no money on that.

1469
00:44:45,645 --> 00:44:47,565
Like, yeah, but Ryan, I'm,
you know, make over a million

1470
00:44:47,565 --> 00:44:50,025
dollars a piece like that
is life changing to us.

1471
00:44:50,175 --> 00:44:50,325
Yeah.

1472
00:44:50,325 --> 00:44:51,915
It's a at best of base hit.

1473
00:44:52,245 --> 00:44:55,575
Now, I'm not saying at all
that the investors don't

1474
00:44:55,575 --> 00:44:56,505
deserve their return.

1475
00:44:56,505 --> 00:44:57,915
That's, that's why
they do what they do.

1476
00:44:58,215 --> 00:45:01,515
But I'm saying it's moments
like that where the delta.

1477
00:45:02,100 --> 00:45:03,570
Outcome is massive.

1478
00:45:03,570 --> 00:45:06,210
If I can't hire my buddy
for 200 grand a year, okay,

1479
00:45:06,210 --> 00:45:07,290
it sucks, but I get it.

1480
00:45:07,800 --> 00:45:10,170
But if I can't fundamentally
make a decision, that'll

1481
00:45:10,170 --> 00:45:11,415
change the trajectory in life.

1482
00:45:12,165 --> 00:45:14,294
Of me and my co-founder,
that's a pretty big problem.

1483
00:45:14,294 --> 00:45:14,774
You know what I mean?

1484
00:45:15,075 --> 00:45:15,435
For sure.

1485
00:45:15,439 --> 00:45:17,924
And, and I think that's where
these, these things tend

1486
00:45:17,924 --> 00:45:19,004
to go off the rails, right?

1487
00:45:19,004 --> 00:45:20,984
And I guess again, like
we have to define these

1488
00:45:20,984 --> 00:45:21,765
things from the beginning.

1489
00:45:22,154 --> 00:45:25,245
And I think that's where if,
if we don't fight for the right

1490
00:45:25,245 --> 00:45:26,984
things at the beginning, and I
think that's a big part of why

1491
00:45:26,984 --> 00:45:28,575
you and I get so frustrated.

1492
00:45:28,575 --> 00:45:30,495
We're trying to find that,
like we're trying to get them

1493
00:45:30,495 --> 00:45:32,895
to agree to this valuation
because we want, and again,

1494
00:45:33,075 --> 00:45:35,055
fight for the valuation for
the right reasons, right?

1495
00:45:35,055 --> 00:45:35,774
Fight for the valuation.

1496
00:45:35,774 --> 00:45:37,694
So you're getting the most
money for the least equity

1497
00:45:37,694 --> 00:45:38,415
that you have to give up.

1498
00:45:38,714 --> 00:45:40,245
But it's not about control.

1499
00:45:40,625 --> 00:45:43,805
Right, and so I think this is
what we so often see founders

1500
00:45:43,805 --> 00:45:47,315
spending energy on things that
just don't really matter, right?

1501
00:45:47,315 --> 00:45:48,815
Founders don't lose
control because they

1502
00:45:48,815 --> 00:45:49,805
diluted too much, right?

1503
00:45:49,865 --> 00:45:52,115
They lose control because they
didn't define what mattered.

1504
00:45:52,385 --> 00:45:54,215
They didn't negotiate
it clearly, and then

1505
00:45:54,215 --> 00:45:55,175
they ran outta cash.

1506
00:45:55,265 --> 00:45:57,245
Ergo, they ran outta
leverage, right?

1507
00:45:57,245 --> 00:45:58,020
Equity is a scorecard.

1508
00:45:58,335 --> 00:45:58,425
Right.

1509
00:45:58,665 --> 00:46:01,365
Governance and runway are the
steering wheel, so if you want

1510
00:46:01,365 --> 00:46:05,235
control, stop obsessing over
percent ownership and start

1511
00:46:05,235 --> 00:46:08,715
obsessing over decision rights
board math, staying funded

1512
00:46:08,715 --> 00:46:11,205
long enough to actually have
your choice in this thing.

1513
00:46:12,345 --> 00:46:14,175
Overthinking your startup
because you're going it alone.

1514
00:46:14,595 --> 00:46:17,475
You don't have to, and honestly,
you shouldn't because instead,

1515
00:46:17,475 --> 00:46:20,445
you can learn directly from
peers who've been in your shoes.

1516
00:46:20,655 --> 00:46:22,995
Connect with bootstrap
founders and the advisors

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helping them win in the
startups.com community.

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Check out the startups.com
community@www.startups.com

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to see if it's for you.

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Could be just the
thing you need.

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I hope to see you inside.