Welcome back to another episode of the Startup Therapy podcast.
This is Ryan Rutan, joined as always by my friend,
the founder and CEO of Startups.com, Will Schroeder.
Will, we watch founders fight like hell over giving
an investor 15%, and then turn around and hand a
co-founder 50 cen- or 50% like it's a free breadstick,
or like it's 50 cents, right?
The truth is, man, investor dilution is usually the
cleanest equity we give away because at least we
know what we got for it.
Yep.
Why, in your opinion, are founders so disciplined with
investor equity and so wildly emotional with everybody else?
It blows my mind.
It blows my mind that given how expensive these other
decisions are, how, like, just frivolously, like, people- Yeah
give, give away their stock to a co-founder-
Yeah … which, which, you know, is always m- my, my gripe.
I'm not anti-co-founder, but dude, you paid a lot for it.
Or employees, early employees, you know, who
may or may not contribute.
Or advisors, who I think if you did the math, are gonna wind
up being the highest priced advice you could possibly find-
much less would pay for.
Yep.
Right?
Founders, w- when we say, like you said, "Hey, you're
gonna give up 15% of the company." "Oh, maybe it
could be 12," or whatever.
I'm like- Right … "You're gonna get actual money, man."
There's an inbound wire that justifies that decision,
right?
Yeah.
So- That one's okay
… so how are you okay with giving some guy you met on- Yeah
Craigslist 50% of the company because- Yeah … he could
build a mobile app, right?
Right.
How are you
okay with that part?
Yeah.
Equity is not a thank you note, right?
Yeah, yeah.
It's, it's the most expensive currency a startup has, but we
don't treat it that way, right?
I, I'm gonna, I'm gonna echo back to something you said,
I think on the podcast, but it's been, like, six
or seven years ago now.
And, and you said that, "Yes, today it feels, it
feels valueless," right?
Yeah.
The company's at, at a state where, like, it doesn't
feel like it's worth much.
But remind yourselves that represents 100% of the
future value of your company.
Yep.
Let me say that again- … in case anybody choked and
spit their coffee out.
It represents 100% of the future value of your company.
And so when you are handing it out like, I don't know,
Halloween candy, might wanna reconsider that.
When I look back at all the startups that I've done
and kinda how I've, you know, distributed equity
in the past, and I, I'm not terribly upset about it, of
all the decisions I made.
In other words, like I, when I looked at, at… Like, I never
looked back and say, "Oh my God, that person got too much,"
or, "I got ripped off," or, you know, something like that.
Yeah.
Nothing like that.
What I'm upset about is how poorly I valued the equity.
This is me saying I think, you know, people more or
less earned, you know, what they earned, but I think
my, my internal compass, where I, I wish- Yeah
that I had been more disciplined about how I
thought about that equity.
You know, kinda, you know, what we talk about now, which
is, oh, damn, it, it's, it's worth real money now, right?
And I think what happens in the early, early days- is
we're on the opposite side.
We can't believe anybody will do anything for these
magic beans that we have called equity, right?
We're like, "Wait, you'll do- Yeah.
Seriously?
Yeah.
Like, you, you'll take- Yeah … you'll take this Monopoly money?
Seriously?
Right.
Yeah.
Yeah, it'd be like, yeah, it's, it's like walking into
a car dealer and being like, "I just printed this out."
They're like, "No problem.
No problem.
Just go ahead.
Take anything you want off the lot and just leave us a
stack of your fresh-printed bills right there."
What throws us off is because we feel like we got it for free,
'cause we just came up with this idea nine seconds ago, that we
can just give it away for what we perceive to be real value,
that it must be free currency.
Yeah.
And that's why in the early days, which is why we're
doing this episode, which is why in the early days when y-
that first year, that first 18 months, when startups
founders don't realize how vulnerable they are, that we
start giving this away, again, because we're so blown away.
I'm gonna go back to the co-founder one for a second.
Sure.
The most common instance, and we will dig into
this, but the most common instance is I got this idea.
If anybody will agree that it's also a good idea, vis-a-vis
validate me, and- Yeah … join me on this insane journey so I'm
not alone- Yeah … I'll kind of agree to just about anything.
Yeah, yeah.
Yep.
T- terms?
Yep.
terms.
We don't need a term sheet.
Here's half the company.
And I always remember, 'cause we always saw this live at
the startup weekend events.
You know, where in one weekend everybody came together.
Any hackathon or anything else like that.
And it would always be the same thing.
The weekend goes, it goes from a Friday to Sunday,
and then on Monday everyone would be like, "Okay.
Well, we kind of just divided up the company, like, in
thirds on Saturday morning, 'cause that's when we decided
we were gonna work together.
Yeah.
And now it's Monday, and like, that guy's kind of an idiot.
I don't think I want to give him a third of this company.
Just 'cause he showed up at this event.
He's not even from
here.
He just flew back to somewhere else.
Like,
what are we gonna do
now?
Yeah, yeah, yeah.
I always remember that, 'cause Ryan, you remember, we
used to meet with all these folks on a regular basis.
Oh, yeah.
We were really involved in, in those events.
And I remember the hangover on Monday morning, where the,
usually the person who had the idea was like, "Man, I just
gave that guy that just happened to be in the room, like, a
third of my company." Yeah.
Because he was the only person that, that could write code
on Saturday morning, right?
Which is like- Yeah
you know, when they started to work in earnest.
And I was like, "You know can undo that, right?
Like, you can go start another company, whatever."
And but I always remember the look on the founder's
face, where they're like, "I think I made a huge mistake."
Yeah.
' Cause you did.
Yeah.
You, you gave a third or half your company to essentially a
stranger for what they might do someday, and probably won't.
That is bananas.
Yeah.
Why are you freaking out- It is … about that?
Yeah.
Right, I know.
That's the thing.
It's, it's, yeah, like we, we treat investor equity like
it's some kind of fine china.
Yeah.
And co-founder equity is like bar peanuts.
Just everybody stick your hand in and get what you want.
Uh, don't worry about it.
Yeah.
It, it- Half the company isn't a gesture.
It's a life sentence on your cap table, for God's sake.
A life sentence.
Like, you are doing so much to the company- It's crazy
… by making that decision.
Yeah.
With objectively very little information.
And unlike investor equity, which comes with
a receipt, nothing, right?
Yeah.
Investors pay in cash.
Everybody else pays in maybe.
In maybes and promises, right?
Yeah.
And to be fair, I want folks to hear this.
Most of the people you're about to give equity to, or have given
equity to, will not perform.
They will not perform, right?
And it's not because-
It's math.
Right.
It's, uh… And, and, but here's why they won't perform.
Number one, because startups are transient and hard, right?
Like most- Yeah … people, once the, the fog and pixie dust off,
I wanna go join a startup wears off, and like- Yeah … oh,
it doesn't pay anything, and I have to, you know, consume all-
Which takes about two weeks,
by the
way.
Yeah, yeah, yeah.
It's, once people sober up basically, they realize
it's a terrible idea.
Right?
Which is fair, okay?
Another reason is the startup changes so fast that what-
So fast … you thought you were gonna do, or what they-
Yeah … thought they were gonna do, or whatever the
conditions were when you made this pact Just don't apply in
three, six, 12 months, right?
Right.
So nobody's fault, but the playing field
changed completely.
The game changed completely.
The other thing that you run into is that for a
lot of people, what they think their value will be
and what it actually is, is dramatically different.
Yeah, yeah.
It would be like me saying that I wanna play for the Columbus
Blue Jackets in the NHL, right?
Like, I'm a pretty good hockey player, right?
Um, I can skate pretty well.
Yeah.
I can… You know, you've played hockey with me, Amari.
I'm okay, right?
Yeah, yeah.
You left some bruises on me.
Yeah.
But if I took that same impression of myself and
took it to that next level, I wouldn't make it off the bench
before getting leveled, right?
Like, and, and that would be the shortest hockey career ever.
Yeah.
And I use this to say my s- You're
not getting into the stadium without a ticket, let's put it
that way.
Yeah, yeah, exactly.
So m- my self-assessment of what I think my performance is
going to be- Yeah … doesn't mean jack shit, and that's
what I'm getting paid on.
Because I'm gonna tell you, I'm gonna go out
there and nail goals.
I'm probably gonna have a hat trick- Yeah … you
know, every single time.
Yep.
And I can say whatever I wanna say, but I also have to
show up and do those things, and most people just in
life can't do those things.
They, they can't, you know, execute onto the best of their
ability, which is why- Yep … there's a delta in performance.
Yeah, I mean, how often do we see this, Will?
Founder gives 50% to, let's say, a technical co-founder,
'cause I think that's one of the, one of the, the biggest
ways we see- Yep … people part with equity, because they
need someone to build it, right?
Yep.
And they, they can't do it themselves.
They don't have the money to do it.
Six months later, the product's barely shipped
or not shipped at all.
The relationship is really strained.
The founder's now negotiating with someone
who owns half the company-
Yeah
… and maybe isn't even full-time emotional.
It, it, like, and they're not even there emotionally anymore.
Mm-hmm.
Maybe they are, they're there, maybe they're not.
But it puts you in such a weird position as a founder.
Yeah.
Right?
The wrong co-founder doesn't just cost you equity.
I think that's something really important here.
Yes, it costs you the equity, but it also
costs you optionality.
Big time.
It costs you speed.
It costs you sanity, and it can just, it can
absolutely wreck things.
Yep.
And so I think we have to be careful here that this doesn't
stop with the equity, right?
The term sheet isn't the end of your suffering, unfortunately.
Right.
Well, and, and I think, you know, with the, the
co-founder, to your point, you can get other investors.
Getting another- Yeah … co-founder, not unheard of.
It does happen.
Yeah.
Co-founder cycle.
But it's pretty painful, and it's pretty expensive.
Yeah.
But most importantly, there is a guarantee of nothing, and
this is just with humans, right?
At least with the- Yeah, yeah … investor, there's a
guarantee of cash, you know?
Say what you will- Right … about the equity- So-
that you're gonna give up.
You are going to get market value cash.
Yeah.
With all of these other resources, the co-founders, the
employees, the advisors, you know, humans in general, you're
gambling every single time.
It'd be the- Exactly … equivalent of this if the
investor came in and said, "Hey, here's the deal.
I'm gonna give you a million dollars for 20% of the company,
okay?" And you're like, "Okay."
Yep.
" Sure.
But I may not give it to you." Yeah. "But you are gonna
give me 20% of the company.
And over the next- Yeah … two to five years, every day you'll
come to me and say, 'Hey, will you give me the money?'" And
every day I'll think about it.
I want to, right?
I'll say that I want to.
Yeah.
But I probably won't.
But you're gonna give me the million dollars anyway.
How many people would be like, "That's a great idea.
Where do I sign up for that?" That does sound perfect.
And yet they do it every single day- Yeah … with people.
Right.
Every single day.
Yeah.
And yet they'll haggle with an investor over a couple
of points- Yeah … who will actually wire the money.
Yeah.
Right?
And then they'll turn around and give half the company,
so in, in, based on your math, that would be $2.5
million worth of equity-
Yeah
… to someone who might do something.
Who might do something.
Right?
And probably won't.
But l- let me stick with that, though.
Let's say it's, it's the equivalent of $2.5
million worth of equity.
Now- Yeah … of course I wanna lay the foundation, everything
we're about to talk about, in the fact that right now you
don't actually have that money.
However, if you did, if you had $2.5 million, would you
give it to that person- Yeah
in addition to what you're gonna pay them for whatever
intangible value that you think that they're gonna provide?
The answer's almost always no, right?
Always no.
Yep.
If I had $2.5 million, I would never give you that money.
Well, guess what?
Yep.
That's called an employee.
Uh-huh.
Yep.
Like, that's what employers are for, where you just pay
them to do their jobs, and they do their jobs, right?
Yep.
Giving some, like, disproportionate massive
amount of, of money to somebody for what they might do,
especially in the early years, we have no freaking idea-
Yeah
… is a dangerous gambit.
It is.
But nobody sees it that way,
right?
That's, that's what I'm saying.
What, what they're looking at, what they're looking at at the
beginning is, like, well, it's worth nothing, and I'm asking
so much of them, all right?
And so, so what do we have to do?
What would be fair, right?
Oh my God, this is the word that enters the conversation that
absolutely blows everything up.
Co-founder grants should be priced like an investment,
like you just said, right?
Yeah.
Not a wedding vow, right?
Yep,
yep.
Till death do we part, and if we do, you get 50%.
Yeah.
Um, because how many times have we seen this, man?
And they're rarely
memorialized.
Yeah, right.
Yeah.
Fairness at the start, right, it, it feels like
the right thing to do.
Right.
But how often have we watched fairness at the
start- Absolutely rot into resentment at scale once
they start moving, right?
It just, it happens so often because as you said,
right, the businesses move fast, and not everybody
moves at the same pace.
Not everyone is gonna keep up.
Not everybody's gonna stay there, right?
Just because you're in early doesn't mean you were in equal.
Right.
Yeah.
And, and I think that's where this goes wrong.
We got equal shares for what end up being really, really
imbalanced inputs and, and outcomes, and it, it achieves
a, a real huge problem a couple months or a couple years down
the line when all of a sudden the one who is putting in most
of the time and has exactly the same amount of equity and is
creating most of the outcomes and has exactly the same amount
of equity starts to kind of go, "Hmm, why is it like this?
Oh, yeah, that was fair two years ago,
three years ago." Yep.
And, and now it no longer is.
I gotta tell you, I was on the other side of this where
I was the unfair co-founder.
Let me give you an example.
This is actually, uh, last company I did before
startups.com very long time ago, like 15 years ago.
I'd started a company called unsubscribe.com, and I had
the idea for the company.
Um, I had some people in town in Santa Monica that I w- I
wanted to start it with, and I'd kind of like a, a game
plan for how it would go.
And so I recruited two other co-founders, right?
And at the time, I don't remember exactly what the equity
split was, but, you know, l- let's say it was like I had,
like, 50% or 40% and they, the other two had, like, 30%, right?
So- Okay … I had the majority, but it was my company, my idea.
However, and this is, this is where it turns, I had
no intention of running it, which is why I recruited
the other two, right?
Uh-huh.
One was a CEO candidate, the other was a CTO candidate.
That company ended up raising money, like, overnight.
Like, overnight, right?
Like, from, like, super brand name investors like Charles
River Ventures, et cetera.
Uh-huh.
The other two co-founders came to me- And they were like,
"Hey, Will, like, we totally recognize that, like, you
brought us together, it was your idea," and blah, blah, blah.
Uh-huh.
" But we're gonna be all in on this." What is
it that you do here
exactly?
Yeah, exactly.
That's exactly.
What do you do here exactly?
And I remember having this very long, very
uncomfortable conversation-
Oh, yeah
… with these other two co-founders, right?
It wasn't that they were wrong, okay?
It wasn't that they were wrong, it's that
I didn't like it, okay?
I want to point out, like, we assume that there's a
rationality that goes forward, and there is not, right?
Like, I was like, "Fuck you guys.
This was my idea.
I literally brought… You guys are the reason, like,
that you're here, or I'm the reason that you guys are here.
How… And we just raised money.
Like, how am I the one getting fired?"
Because
of you.
Right?
Yeah, yeah, exactly.
Yeah.
Now, now in retrospect, they weren't wrong.
But also you have to fight with for what's yours or
people will gladly take it.
But I guess what I'm trying to say is, this is a case where
we equally s- uh, split things up, not perfectly equally,
but close enough, right?
And as soon as they realized that I was on the wrong
end of the cap table, if you will, they came to me.
And to be fair, they were very professional about it,
and they were very cogent.
And, and eventually I relented, right?
However, however, this is one of those cases where I
recognized for the first time that I was the problem, right?
Like, I was- Yeah … the thing kinda like holding
it back, so to speak.
And to be fair, I wasn't planning on working
there, so like, I only had so much leverage.
I'm like, "Oh, you guys wanna work on this full-time and
make money?" What do you mean,
guys?
This is going exactly to plan.
Yeah, exactly.
It is the case, even if you're well-intentioned, even if you're
the goddamn founder, that you could be the- Yeah … wrong
person in that equation.
Yes.
Right?
And not easy to unwind.
That's something really interesting, 'cause, like, when
we get into the are co-founders worth it piece, it'd be fun
to go back and actually look at, like, original idea versus
founder who actually really was the one that carried it,
and see how often it is that, like, it's the original founder.
'Cause we often think of the co-founders kinda like second,
and sometimes things do start, like, they, they start so early.
Yeah.
And I think you and I would both agree on this.
Yeah.
That at that early idea stage- The idea's really
not worth that much, right?
Right.
It is the execution.
It's all the other stuff that, that actually makes it valuable.
And to see really, like, how often kind of the, the
second and the non-idea person is the one who actually
creates a lot of the value.
Yeah.
But let's do something here, because I don't wanna
leave this up in the air for founders who are just sitting
out there like, "I would give up 50% of my company
for the right co-founder," because we hear this a lot.
Yeah.
I got a couple things that I, I, I generally wanna
say to them when, when I hear these kind of things.
Yeah.
And I'd be curious what then you'd add to the list.
It's start with vesting.
Always vest.
Add some cliffs.
Mm-hmm.
Tie additional equity to actual value creation.
Define what happens if they stop contributing, and put some
breakup terms in writing before there's anything to fight about.
Because once the fighting starts, there's gonna
be no fairness left.
There's gonna be no- Yep … no coming to terms at that point.
What, what would you add to that list?
Here's what I would say.
The best thing about that conversation is it forces
expectations to the table.
Oh, yeah.
And for both sides.
And I think if you wanna set up that conversation properly,
I think the conversation has to be bidirectional.
It has to be-
Oh, yeah.
Gotta be … I need to know what your expectations are, right?
Yep.
If things were to go wrong, if I were to be the shitty
co-founder, like, you know, let's say I'm talking to my
two partners at Unsubscribe.
If I'm the shitty partner, I need to know
what your expectations would be of me, right?
And if you're the shitty partner, uh, vice versa.
One of my first partners in my first business said this to me
when we were doing the deal.
I was, like, 22 at the time, so I didn't know a lot about stuff.
And I said, "Man, these feel like, like, feels like a really
onerous conversation." We were merging our two agencies.
Yeah.
And he said, "Look, we always start by writing the divorce
papers first, 'cause if we can't agree- Yeah … on how it'll
end, we don't know how it's gonna start." Like, for some
reason, that always stuck in my head, and it was a very friendly
conversation, but just like a term sheet- Yeah … about
super onerous shit, right?
Like, what happens if- Yeah … you're convicted, right?
Like, crazy stuff.
And, um, anyway, I really thought in those, those early
conversations that whenever you say, "I need to address
your concerns or your desires or your needs," it didn't
feel like, "Let me draft up your execution papers," right?
Yeah.
It, it drafted up, "Let's figure out so you know ironclad
what's fair to you- Yeah
ahead of time." You know, again, what your
expectations are, et cetera.
Yeah.
And I, I found that worked very well.
Because I think when other people see it from, "Oh
wait, I might get screwed? You're not just worried
about you getting screwed?"
Yeah.
" Yeah, all of a sudden I'm, I'm real interested in kind
of what this looks like."
Yeah, no, I think it is super important.
I mean, I think that, that is actually what fairness looks
like at that early stage.
Yeah, right, right.
Not 50% of the company.
Fairness is, "Let's have a conversation around this.
Let's, let's talk about exactly what happens in,
in the unlikely event of a water landing," right?
Right.
That's a great
way to put it.
So those things do need to be addressed.
Early employees, same issue, right?
I was… That's where I was going.
On average, startups are gonna give up 15
to 20% of the company.
In an option pool.
Now, now typically option pools are a little bit
smaller when they come from investors, between 5 to 15%.
I went up- Yeah … to 20 just because a lot of times
you've got a lot of early employees that are granted,
like pre-option pool, et cetera.
So the option pool- Yeah … isn't always exclusively,
you know, just what was set aside on serious seed funding
or something like that.
But let's, let's use just a, a simple number of 15%.
That's a huge bit of the company, and it's super hard to
ever get back or unwind because it's tied into so many people,
which is where the problem is.
Yeah.
Yep.
Lots of, lots of little fights.
Yeah, exactly.
If someone's gonna take 15% of your company as an investor,
you have a term sheet which has all the terms that,
that they're gonna invest, like at all the rules and
regulations, so to speak.
You've got, that'll transfer to an operating agreement,
which will then memorialize all of those terms.
You kind of know what you're getting.
Yeah.
Here's the cash and here are the terms, right?
Yep.
And it's, so long as you understand those, the
deal has, doesn't have a lot of questions to it.
Employees don't work that way.
Employees show up, and it's just like a co-founder, "Here's
what I'm gonna do. I'm gonna do blah, blah, blah." Right?
And statistically they will not.
Right?
Just Yeah … the nature of people.
Otherwise, every company would just keep the people
that they had forever and there would, there would
never be a termination or a turnover, right?
Doesn't work that way.
Uh, life works a little bit differently.
But here's the challenge.
There's management of people, right?
But there's a big difference between, "Hey, you're not
doing a good job," and, "Hey, you're fired." Okay?
Here's- Yeah … and here's why I say that.
"Hey, you're not doing a good job," can keep you around
long enough to make it through your vest period, right?
"Hey, you're fired," sometimes even has an acceleration to it.
Yeah.
But a vast majority of people can earn the same amount
of equity Whether they do a good job or a bad job, so
long as they don't get fired.
I was seeing the scene from, uh, is it Office Space?
Where he's sitting in there with the two, the two hatchet
men, and he's like, "What that'll do, Bob, is you'll,
you'll end up doing just enough to not get fired."
Yeah.
Right?
And, and that's, it's kind of it, right?
Exactly.
It's, because look, if, if equity's making up
for, for below-market cash comp, great, right?
Yeah.
And sometimes, and that's a real trade.
Yeah.
I would argue it, it can be a really bad trade still.
But at least it's a trade.
For both sides.
Yeah, yeah, yeah.
But I was talking, yeah, that's exactly it.
I was talking to a founder two weeks ago and they had
layered equity on top of really strong market comp.
Right.
Without any kind of performance accountability.
Right.
Which just ends up being silent overpayment and, and they were
at this point now complaining, it's like, "Yeah, the team
just isn't motivated and I did all this stuff for them."
It's like, when did you do it?
At the very beginning.
And what do they have to do to maintain it?
And it just went dead silent.
Not get fired.
It's like- Right
… well, they, they got it.
Not get, and- Right?
Like, no.
It's, in, in some of these cases, there
wasn't even vesting.
So they were just handed pieces of the company.
Oh,
shit.
Yeah, and, and- And they have them now
… and look, man, I'm gonna make a few arguments having been
in this game for a long time.
And, and Ryan, you've watched a lot of pr- people
come through our company- Oh, yeah … over the last
15 years, so you, you've seen it firsthand as well.
For sure.
But it's not exclusive to folks that have worked for us.
First things first is we give out equity as an incentive
for the future, right?
And, and everybody's like, "Okay, I'll take it." Now,
what you said a moment ago, some people are using it to
actually, like, be a part of their cash comp, right?
I would argue at which point you can't pay someone.
Let's say somebody makes $200,000 a year, and you
can only pay them 100,000 and they're gonna take the
other 100,000 in equity.
Totally fair trade.
Yep.
That's money you didn't have- Yep … that you would've
otherwise paid them, okay?
Paid
somebody.
Totally fair.
Yep.
Right.
Yeah, yeah.
In that case, I would argue that they've earned every bit
of it because that was what- Yep … they were gonna earn anyway.
You just couldn't pay them, right?
Yeah,
exactly.
Straight up.
Uh, I get that one.
There's a different version which you just said, which
is we're kind of gonna pay you what you're gonna get
paid anyway, and you're gonna get a whole bunch of stock.
And-
Whether you perform or not, which is where I wanna take this
What's missing in this deal, and this goes back to the premise,
you know, of this episode, which is why don't founders
look at the other places they're giving equity as stringently
as they do with investors?
If I say to you, "Hey, you get paid $150,000 for whatever job
it is, and you're gonna get a- an extra $200,000, let's say, in
equity." First question is why?
Like, like- Yeah … what exactly, how are they
gonna perform differently than they would've
otherwise performed, right?
In other words, if they go to another company and they don't
have equity, are they just gonna not show up for work?
Like, what, what- Yeah … is it about that, that equity?
I have not seen, in my years, a dramatic difference,
a dramatic difference.
I've seen a difference, not a, a dramatic difference
the way people think it is, between someone who makes a
good m- you know, market rate salary, like they're well-paid
and someone who has equity.
Now- Yeah … a few caveats there.
Very few companies ever get to a point where
equity is valuable, right?
I mean, like, it's, it's statistically tiny.
Bit of a lottery ticket.
Yeah.
Which is, which is why I said a moment ago that at what
point you're paying people a full salary and then paying
people on top is very different than if you're actually
subsidizing their comp, you know, with your equity.
At that point, it's not a lottery ticket anymore.
Yeah, man.
If your employee's
getting paid market rate and gets equity too, that
equity needs to go get a job.
Yeah.
Like, come on.
You know, something that's really funny about everything
we talk about here is that none of it is new.
Everything you're dealing with right now has been
done a thousand times before you, which means the answer
already exists, you may just not know it, but that's okay.
That's kind of what we're here to do.
We talk about this stuff on the show, but we actually
solve these problems all
day long at groups.startups.com.
So if any of this sounds familiar, stop guessing
about what to do.
Let us just give you the answers to the test and be done with it.
So, yeah, here's what I'm saying.
From the employee's standpoint, I think for a lot of employees,
they look at it as, "Oh, I'm working for a startup company.
I, you know, I deserve a piece of the thing." Every single
person that's ever worked for us has been g- has been given
an, an equity grant, right?
It's vested over time, but, uh, you know, they've
been given an equity grant.
Because I do believe, I… You know, when, when and if
that payday comes, I want everybody to take, to get a
piece of it, and that's great.
Yes.
However, however, there's also a side of it which is,
wait a minute, if we were to sell today, the people
that work really hard and the people that just didn't
get fired get paid equally.
Everybody gets a Super Bowl ring, right?
There is a great, uh… I told you about this guy.
Uh, there was a great entrepreneur that I was
meeting with maybe, like, a year and a half ago.
Uh, we're at a, a restaurant, and, uh, he's pitching me
on this, uh, on his idea.
And he's, like, notably athletic, right?
Uh-huh.
You can just tell, like, when some people are like…
There's athletes who, like, go to the gym a little bit, and
then there's a professional athlete sitting- Yeah … next
to people who don't, who just go to the gym a little bit.
Yeah.
And this guy was the professional athlete, right?
He was like, like- Uh-huh … 6'4", like 4% body fat, right?
Like- … not just a dude, right?
A dude, right?
Right.
Anyway, as he's sitting there talking, I see this giant
thing flashing on his, on his ring, or on his, his finger,
which is a ring, right?
Uh-huh.
And I'm like, "I, I gotta pause for a second. Is that what
I think it is-" What is it?
"… on your ring?"
Yeah.
" Or on your finger?" And he's like, "Oh, yeah,
it's a Super Bowl ring."
And I was like, "And you failed to mention that -" Yeah.
"… in this conversation?" He's like, "Yeah, I won this
with the Broncos." And I was like, "Dude, that would've
been the first thing I said in every conversation-"
Yeah "… I've ever had."
Yeah, "Will, why do you wear that ring in the middle of
your forehead? Isn't that supposed to go on your finger?"
Yeah.
But here's what he said, which I thought was interesting.
He's like, "I never stepped o- on the field one time," right?
Like, "I, I-" Yeah "… was like second, third string.
E- everybody gets a ring." He's like, "You know, whether you
play or not." And I use that.
He's a great guy, by the way.
And I use that as a metaphor- For this, right?
Like, if we were to sell today, every person that's ever worked
for us that has equity, whether they performed well or not,
is going to get paid the same.
Paid the same meaning like, you know, that their equity's
gonna convert the same way.
And I'm like, "Well, shit."
What happened to fair?
Didn't we s- wasn't fair where we started with all of this?
Right, right.
Yeah.
And so my, my point with employees is you're paying
employees equity not because they're, they're gonna
perform so well, because they're not gonna get fired.
And I use the latter- Yeah … to say I know the incentive is
that they'll work harder, and that might apply, but the cost
is gonna be exactly the same whether they work harder or not.
You know, same with salary, but certainly with equity.
Here's what I've seen over time.
It does work with some people.
Ironically, those are the same people who would've worked
and compounded value for the company whether you give
them equity or not, right?
That,
that, that's
my
point.
The, the value add players are always gonna be
value add players, right?
A- a- and unfortunately, I think we too often treat
early employee equity as a signing bonus when it really
needs to be treated like a value exchange, right?
Because if it's just, if it's just a signing bonus
and it's granted at the beginning, even if there's
vesting involved, right?
Like, vesting isn't value creation, it is just
time passing, right?
That happens whether we do a damn thing or not.
Showing up is not the same as compounding the company, right?
Right.
In, in my opinion, equity should do, should reward three things.
Three things and three things only.
Risk, sacrifice, and impact.
Ideally, all three.
Yeah.
But it has to have some semblance of at least one
of those things for it to really be a fair exchange.
On that note, let's move to advisors.
So we're just, got like the third leg of the
stool, if you will.
Uh-huh.
Advisors crack me up as a category that, that
gets, uh, equity, not because they get so much.
I mean, honestly, uh, advisors, like, don't, don't
ever really compose that big of the cap table, right?
You know, as far as the- Right … slice of the pie.
No, but it is, but it's another great illustration of
how easily founders will part with it and really not think
through, "What am I actually getting in return for this?
Would I pay the same thing for it if it was a cash
payment?" And the answer is almost always no.
Let me lay this out, 'cause I, I think we just have
great data to run this, okay?
So currently, uh, this is, this is coming from, uh,
Carta, I believe, you know, who does cap table management.
Advisors are currently getting between .10 to .25% of the
company for their advisory work.
So for, for those of you that, that are following at home,
that means a 10th of, of 1%.
That is per advisor, not,
not as a- Uh, correct, correct.
Per advisors.
Yep.
Right?
And so, you know, l- let's say you've got, you know,
three to five advisors, you know, that could easily cost
you a full point of equity.
Which- Yep
here's where this gets dangerous.
Numerically, that's a very small amount.
That's less than 99%- Yeah … of the rest
of the company, right?
Yeah, yeah.
However, however, where it gets hilarious is when you
start to do the math of what it actually buys you.
Here are the categories that investors usually
get recruited under, okay?
Most popular, category A, sage-like wisdom.
They have, they have some sort of sage-like wisdom on
either an industry- Oh … or a- Yeah … particular, um,
skill set, you know, marketing, things like that It tends to
be the biggest one, right?
Like, I need somebody… It used to be back in the day,
like, like the oldy-timey boards that you put together,
advisory boards- Yeah
were like a doctor, an accountant, and a priest, right?
I'm kidding, but like- Uh-huh … it was always like the same-
Cover the basics … like, g- gaggle of G.I. Joe characters
that you, that you'd- Yeah … go out and recruit, right?
'Cause you needed those, those skills.
People often found attorneys 'cause they need legal in the
early days, things like that.
Anyway, regardless of who it is, the problem is the same.
You're trying to tap that wealth of knowledge, and you don't,
you don't know what it's worth.
Second thing that I see is, "I wanna tap a network."
Introductions to customers- Yeah … introductions to
investors, intro… And by the way, those can be valuable.
Yeah, yeah.
They can be.
There is an opportunity for value.
But it doesn't mean- Yeah … there's value.
Now, so what's interesting about advisors, unlike employees,
and why we get to them last, is because they're probably the
most unaccountable part of the entire cap table distribution.
I know so few advisors that have actually done the things
that startups thought they would do, myself included.
Yeah.
I've been asked a billion times, I know you have, to
be advisors for startups.
I always tell them the same thing.
I said, "Look, I can be valuable, but I won't be
valuable." And they go, "Well, what does that mean?" Yeah.
Right?
I was like, "In your mind, how you think I'm going to help
you isn't how I- Yeah … plan on helping you," right?
We were like, "Oh, we- we'll open up his Rolodex and m-
introduce you to, to all his investors." No, I won't.
No.
Nope.
That doesn't sound like a lot of fun for me.
Or, "Will's gonna get involved in our team and he's gonna
help us daily, you know, to, to make some decisions." Nope.
Nope.
I got shit to do, man.
That's called employee.
Yeah, yeah, yeah.
Yep.
It's not that I don't wanna be helpful.
We literally advise startups for a living, right?
Which is why- Yes … I don't wanna do more of it.
But it's, it's, I think the expectations of what
advisors can or will do pale in comparison to
what they actually do.
Yeah, man.
Like, we, we see people make mistakes with this all the time.
Mm-hmm.
And, and I think it starts- Yeah … with, with founders confusing
reputation with contribution.
Right.
A famous advisor who does nothing is just really
expensive wallpaper, right?
Or the most expensive LinkedIn endorsement you'll ever get.
Advice is only valuable if it does a couple things.
One, changes decisions-
Yep
opens doors, or reduces mistakes.
And I think that where we end up in this trap is that as, as
founders early stage, we find people who do those things.
We talk to somebody once and they give us some
valuable advice- Yep … and it changes one of our
decisions for the better.
And then we go- Amazing … "Great, we should make
them an advisor," right?
Most of the time, that's the one piece of valuable advice
they had, and now we've just permanently attached
them to our cap table and paid them what could end
up being tens or hundreds of thousands of dollars, or
millions of dollars, depending on how big the company is.
You have a, you know, a, a big, big exit, that 1% all
of a sudden becomes worth a lot of money, right?
This isn't take a penny, need, need a penny, take
one, have a penny, leave one- … kind of thing, right?
It's, I think advisor equity is, is one of those places
where tiny percentages hide giant waste, right?
We see this in lots of places in a startup.
Yep.
Um, but this is one of those where it's just,
it's so glaring to me.
It's interesting because from the advisor's standpoint, I
think they're well-meaning.
I definitely don't wanna paint advisors, right, as some, like,
shysters or something like that.
That's not it.
It's not the advisor's fault.
It's the founder's fault.
The, the founder loses this in a few ways and, and again,
y- you learn as you go.
The first place you lose is you don't clearly define what you
expect the return to be, right?
Yeah.
Ryan, I'm gonna give you .25% of the company.
Here's bullet points of exactly what you need to
deliver in order to earn that.
Uh-huh.
If you don't nail all of these, you won't get your equity.
I guarantee the number of advisors that agree to that
is geometrically lower.
Think about why for a second.
Here, here's, here's an example.
Take this from the same standpoint if you were
hiring somebody, okay?
Yeah.
And the person sitting across from you, the interview
candidate, and you're like, "I need you to show
up for work every day." They're like, "No." "I need
you to come to meetings."
"No." "I need you to work for the company eight hours a day."
"Nope, not gonna do that." And you're like, "You're hired."
That's essentially, like, the mismatch of expectations.
And so- Yeah … now, I will also say, similar
to employees, advisors want to be those things.
They want to be this fountain- Yeah, of
course … of knowledge.
They want to be this helping hand.
They wanna be, you know, make a good connection
that works out for you.
They want to do all of those things.
It doesn't mean that they can or will, right?
Right.
Like, I've got a pretty big Rolodex of investors.
I theoretically could introduce you to them, but now, when
it comes time to actually do it, here's how the math
changes very quickly, right?
I look at all of my, my, uh, contacts.
On the one end I've got Roelof Botha, who's the managing
partner of Sequoia, right?
I've known Roelof for 20- Yeah … something years, right?
He'll take my call once.
Uh-huh.
Like, he's pretty busy.
Actually, I don't think he's the managing partner anymore.
Yeah.
Anyway, uh, and on the other end it's, like, just some rich
dude that I know that, you know, I, I could introduce you to.
I want to make these introductions, but I'm not going
to if it's gonna burn social capital that I can't get back.
Right.
Yep.
If I introduce you to, to Sequoia and that goes horribly,
there's a fairly good chance that I've, you know, soured
my relationship with Sequoia, and I don't get it back.
Yep.
No skin off your back.
Over 0.25% of what is still monopoly money.
Right.
This is… All I'm trying to say is that technically I could
make all of these introductions.
It doesn't mean that I can or will.
So your perception of what my value is doesn't
necessarily align with what my ongoing value is.
Which brings me to point two, ongoing value.
Yeah.
I have a million things that I can tell you about your
business that are gonna be like magic tricks to you.
I can tell you about- Yep … like how to update
your, your pitch deck.
I can tell you about what to say in a pitch meeting, et cetera.
But once you don't need those specific markers,
those specific, uh, moments in the journey- Yeah
I might be useless to you.
We have late-stage people that come to us, right?
And they're like, "Hey, yeah, I've, I've solved
all the early-stage stuff.
I've got some late-stage problems where I'm trying to
let, like, uh, refocus the cap table, or, or I'm trying
to figure out what expansion rounds look like." And I'm
like, "I can offer some advice.
I can't offer- Yeah … the best advice." Right.
Because when you get to that stage, different skill set,
different, a different world.
I'm certainly fluent in it, like I understand it-
Yep
… but there are people that are better at that.
Conversely, those people aren't good at the early-stage stuff
like you and I are, right?
Correct.
So, like-
Yeah
… my point is, you hitting us up for early-stage value and
expecting us to be perennially u- useful is probably unlikely.
And of course everybody wants to be, right?
And I guess, again, like, like you said, the, the advisors
would hope that they can be.
Yep.
Uh, but I think in, in reality it's just the, it's
time diluting value, right?
There's gonna be a curve at which they're, they're no
longer as valuable to you as they were in the beginning,
and yet you've now tied them to yourself permanently,
which is the problem.
Do you remember who, who Jim Grote is?
I do.
Um- Wow.
Yeah.
Yeah, all right, uh, hear me out, right?
Jim Grote's the founder of Donato's Pizza,
for, for folks- Yeah
who don't know.
He's also a, a local legend in Columbus, Ohio,
where- Yeah, yeah … Brian and I went to school.
Damn it, now I want Donato's Pizza.
Yeah, I
know.
I
know.
I know.
Do you know how far I am from a Donato's Pizza?
I can get a Papa John's here.
Not quite the same thing.
Yep.
I met Jim, uh, 20-some odd years ago, and w- we were
at, at some event together, and I got talking to him.
He's like super nice guy.
And I remember thinking, someone at the time was asking
me for an intro to Jim, uh, usually like, like within the
year, and they wanted to, to, to tap into his knowledge.
Uh-huh.
And I remember something that he and I talked about, and he
said something to the effect of like, "Well, I've done a
lot of this, but I haven't done a lot of this lately."
And it always stuck in my head.
I thought it was-
Yeah, yeah, yeah
… his level of self-awareness was extraordinary, okay?
That's incredible.
Yeah.
E- exactly.
Most people don't realize their knowledge has a shelf life.
Correct.
Right?
Yeah.
And you know who doesn't realize this?
Fucking advisors, right?
Yeah, the advisors.
No, that's what I mean.
That's what I mean.
Yeah, I, I think that, in fact I think that's more often
spotted by founders than it is the advisors themselves.
Yeah.
I think once you've, you've achieved guru level, once
you've- Yeah … if somebody's told you that you're a
sage, you're forever a sage.
Yep.
It's, it's tough.
I try to be mindful of that because, like when I'm
dispensing advice, and you and I do this for a living.
Yes.
I always try to like play my own filter and bias to be able
to say, "Is what I'm about to tell this person current?"
Like, and, and how can I validate that it's current?
Yeah.
Right?
And so I always try to be mindful of that.
And I think that for a lot of people when they seek out
advice, what happens is they get an audience with guru.
You know, whoever the guru happens to be
in, in their space.
Yes.
Right?
And that guru knows a ton about that space for
their moment in time.
They drop some, some incredible nuggets, right?
And you're like- Right
"Oh my God, if I could have access- Yeah … to this oracle
of knowledge all the time."
Imagine what else is in their head, right?
Mostly ore, unfortunately.
Yeah.
You, you, you saw the gold.
And it turns out for most people, they're just not
like a bottomless fountain of freaking wisdom, right?
Right.
They know a couple things that you don't know right now.
Yeah.
And then once you know them- And guess what?
They tend to lead with those, too.
Yeah, exactly.
They, they, they lead with their best shots.
Yeah.
When I was starting my agency, like m- like 19 years
old, I met this guy, right?
This guy named Don.
He, he's a great guy.
And he was a consultant, and he was a marketing
consultant.
Okay.
And he was the first person that I had met that
understood what marketing was.
I had no goddamn clue, right?
Right.
Even though I was starting essentially a marketing agency.
He had gray hair, and he presented well, and I
just thought- Yeah … he was freaking Yoda, right?
Uh-huh.
Now, I owe him a huge, huge debt, and he knows it, and
he, he reminds me every single time I see him.
Because he- … he's the one that introduced me to the agency
that, that ended up, uh, we ended up merging with, right?
But at the time, uh, and he, he and I have been
friends for a very long time.
At the time, he would say to me, he'd be like, "You know,
this is the way things work, and this is how you charge,"
and everything else like that.
And I remember, Ryan, working for him for
pennies on the dollar.
I think my effective- Uh-huh … billable rate for how much
he pimped me out was, like, nine cents an hour, okay?
Because I thought he was this fountain of knowledge, and I,
I was willing to- Yeah … you know, give up and to learn
and everything else like that.
In, in retrospect, probably a good idea, but
I wouldn't recommend it.
Yeah.
Many years later, 20 years later.
Don and I get together for lunch, and, uh, and I'm like,
"Don, did you know at the time that I was working for, like,
nine cents an hour?" He's like, "Oh, hell yeah, I did."
Yeah.
He's like, "I was so upset when you ended up doing that deal
and all, your rate went up."
You know, he's, I was like- Yeah, that's hysterical … "So
you're just gonna keep taking advantage of me?" He's like,
"Yep." He was saying it like, you know, in jest, but
I always thought about that moment where I'm like, damn,
dude, the only reason I was willing to do that is 'cause
he knew something that I didn't know at a time, you know, I
wasn't, I wasn't capable of getting more of that knowledge.
And I was will- Right … willing to pay a massive
premium in retrospect to get it.
And I was like, these founders are easily misled.
And look, it is tough, 'cause you are making a
bit of a bet there, right?
And sometimes the bet does pay off.
Right.
Right?
So i- in that case, that investment that you made in
Don, it was an investment that he made back into you.
It did.
In tro.
Yeah.
It all worked out quite well.
But it's not like that went to plan.
It wasn't like there was- Right … a plan there.
You're just looking at it- Right … and going, "You seem
to know a lot more than I do, so I am going to, uh, pin myself
to you, and, and we're gonna see what happens." It's a long
shot bet, and I would say for every time it works out as
you've just described, there are 20, 30, 40, 50, 60 that don't.
Think of the cost, okay?
So, so let- let's put this out there.
Yeah, that's fair.
So if you've got, if you're giving up a quarter point, let's
say, to an advisor, which is a little bit on the higher end,
but let's use that, but you're also doing it at a $10 million
valuation, which is usually, you know, a good deal for a
pre-seed, uh, raise these days.
But you're paying that person $25,000.
Now again, you're paying them in equity future value,
which will probably turn out to be nothing, so it's
not exactly $25,000, okay?
This has nothing to do with whether that $25,000 is the
same as the investor money.
It's the fact that you're haggling more over the investor
money than, than you are over, over this, this 25K.
Yep.
And so think of how many times you wind up pinging
that person in the time that you work with them.
In your mind, you're talking to them all the time, and
then they're always up in your world, et cetera.
We have advisors at Startups.com.
I won't name names- Yeah … 'cause they're
all great people, right?
But big brand names that you've probably never heard of 'cause
we failed to mention it, right?
Yeah.
Who I think maybe- I have given three requests to ever, right?
Uh-huh.
In the 15 years that we've been around, like ever.
And I think on average, I probably paid for each email
or phone call at least $10,000.
Yeah.
Right?
It ends up being a pretty expensive email.
It is.
And I can't even remember what the requests were.
If we look back, you know, we own a platform, uh, called
Clarity, which of course is, is, uh, an expert exchange.
This is ironic- Yeah … that we're talking about
this because, like, we actually know exactly what
advisors get paid- Yes
for actual real world startup advice.
Yeah, yeah, yeah.
Because we write those checks to the advisors
every time the startups ask.
Ryan, you've done hundreds and hundreds and
hundreds of these calls.
Yes.
How many times have you gotten paid $5,000
for a call?
For a call, exactly zero times.
Yeah, exactly zero times.
Exactly zero times.
Now, I have had tell, people tell me the, the call was
worth $100,000 or that it saved them two years to their life.
Yeah.
Awesome.
Which I would equate to several hundred thousand dollars.
So value is there, right?
But nobody ever offered to actually pay me the
full value of the call.
Yeah.
No.
Nobody was like, "You know what? So we're gonna send you
half of that $100,000 you saved us. We really appreciate it."
Right.
Never happened.
And on average, these advisors who are getting paid by the
minute from startups to, to give their advice- Yeah … and
they're great advisors.
I mean, I, I highly recommend going on there and, and
finding some great people.
But are getting paid hundreds of dollars for the advice.
Now, to be fair- Yes … it's not because they're trying
to get rich off of Clarity.
We always said that Clarity is iPhone money, right?
Like, it's, it… For, for the advisors- Yeah … it's,
it's not all the money that you, you'll make to make a
living, but it's enough to buy a free iPhone, right?
But most advisors, yourself included, are doing it 'cause
they wanna be helpful, but they wanna, like, have s- like a
metric of their time, right?
Like- Yeah … hey, if you're gonna take up 20 minutes
on a call with me, like, it should have some friction
for you too, 'cause it definitely has friction for me.
It saves you from the Googleable advice- Yeah
uh, syndrome.
Yep.
Or at least you're getting paid to Google for people.
Yeah.
Um, yeah, yeah.
Yeah, I, I did, I got, I got called out once, uh, I don't
remember if it was on X or on LinkedIn, but somebody was
like, "Hey, asshole, how can you charge $400 an hour to…
What, what makes you think you can charge $400 an hour to
talk to people on the phone?"
And I said, "Well- I pasted back the two comments around,
"You saved two years of my life," or 100, you know,
"Helped us make $200,000."
Yeah.
And said, "So, so there's part of it." I was like, "The other
part is I started at 100, and I got too many calls, and I
went to 200, and I got too many calls, and I put to 300 and
I got a little less calls."
Yeah.
"And I put to 400, I got exactly the number of calls
I wanted, which wasn't too many, but people-
Yep … showed up really, really well prepared." Yep.
"So here's the booking link." He never called me.
Yeah, it comes back to here's, here's the value of my time,
and here's the explicit cost.
But my point is- Yeah
even at $400 an hour, no one would've gotten
to $25,000, right?
Right.
And, and that's just one example.
That'd be a lot of hours.
It would take a lot of hours to consume 25K, and that's
a lot of hours you're not gonna get out an advisor.
You just aren't.
So here's what I would say.
I love the fact that founders are really well
conditioned to price their equity and hold onto it.
I hate the fact that they only apply that rubric to investors.
Sometimes.
Right?
Which is the only person- To
the one place where there's actually a clear
value exchange, right?
I know.
Now, you can argue whether it's an equitable value exchange or
not, but at least it's clear.
You know exactly what
you're getting.
You will get it, right?
Like, like you will- Yeah … get the money, right?
Yeah, yeah.
It'll be conditional and everything else like
that, so it's- If you don't, you won't give
up the equity, right?
Right.
Yeah.
Versus all these other buckets where like, ah,
what could go wrong, right?
And like, you're just like, like saying, it goes back to
what I said a moment ago, which is you're literally saying
to, quote, "an investor", "I am gonna give you the equity.
You might give me money.
Let's shake on it."
Yep.
Like, what?
So-
Yeah
… all I wanna say is like, we have to use equity to pay for stuff.
If there's nothing wrong with doing a co-founder
deal or obviously giving employees equity or, or
giving advisors equity, that's not the argument here.
No.
The argument is how you treat it.
The argument is how you- Yeah … focus on that value
and how you pay for it.
If you're looking at that value as amorphous, and you're just
willing to give up half the company or a quarter point to
somebody and not be sure that you're extracting that same kind
of value as you would from an investor, you're leaving way
too much equity on the table.
There's never- Yeah … gonna be a point ever in the history
of you building your company where you're like, "Man, I wish
I gave away more equity," right?
"I wish I gave Brian more equity- Yeah … for
those calls," right?
That'll never happen.
Yep.
What will happen is you're gonna look at every one of those
transactions, and you'll say to yourself, "Man, I really wish
at that moment I had treated every single share that I ever
gave away exactly like a dollar that I was taking back for
it and extracted that value, because that's the only thing
I have left to show for it.
And in the end, that's all that matters."
Overthinking your startup because you're going it alone?
You don't have to, and honestly, you shouldn't,
because instead, you can learn directly from peers
who have been in your shoes.
Connect with bootstrapped founders and the advisors
helping them win in the Startups.com Community.
Check out the Startups.com Community at www.startups.com
to see if it's for you.
Could be just the thing you need.
I hope to see you inside.