SPEAKER_00: all right everybody it's my favorite time of the year i get to do startup basics what is startup basics very simple there are things you need to know that are simple and basic but they're important they're foundational in being a founder and if you get these things wrong whether it's accounting product market fit sales or legal they can have downstream effects that you will then spend 10 or 20 times the effort to clean up than if you had just known your basics

SPEAKER_01: we keep all of these at this week in startups.com slash basics so that you can remember and becky degraw is back with me she's from wilson soncini goodrich and rosati we call them wsgr here in the

SPEAKER_02: valley and we're going to talk today about founder and advisor equity becky welcome back to startup

SPEAKER_04: basics thank you thank you it's good to be back and always always love chatting about this stuff and this is a fun one this is always near and dear to our founders heart so yes so let's get started

Chamath Palihapitiya: here a founder starts a company they don't want to be on the venture track so they're a company you and i start uh becky and jason enterprises and we're building software all good you own 50 of the shares i own 50 probably you would own 41 i think you probably negotiate me i own 49 of the shares and here we are we're in business we got all our shares on day one we're rocking and rolling we make a bunch of money but at some point you come back to me and say hey you know i got this venture firm acme ventures wants to put a bunch of money in and now we have to reset the vesting of our shares and we have to have a whole nother discussion and then they want an employee stock option pool and esop what's that so let's take it like we do here on startup basics from first

SPEAKER_00: principles from the basics when you're on the venture track there is founder vesting what is it

SPEAKER_08: how does it work why does it exist as a founder you buy your shares you own your shares on day one you get all the voting rights associated with the shares but investors want to know that you're going to stay with the company so we put a vesting schedule on those shares so that they vest over time what does that mean if you were to leave the company before the shares are vested the company has a right to repurchase the unvested portion of the shares and usually it's at the lower of whatever the original

SPEAKER_14: cost was that you bought those shares at or the current fair market value for a founder if you're buying your shares at the earliest uh of days we're hopefully at the point where we can say these shares are worth a thousandth of the penny per share you want to write a really low check to buy those shares so the cost right is is nothing um and the company has the right to repurchase at at that cost if you leave before the shares are vested as you said if you're going to go out and seek any type of institutional funding particularly from dcs you're going to have to have vesting on your shares these are what we call the golden handcuffs okay for for the uh offenders and it makes sense in those early days right um when investors invest in a company at the pre-seed seed stage even at the a

SPEAKER_08: stage there probably isn't much there at the company level it's really the founders their ideas their vision that the investors are are excited about and putting their money in which means the investors

SPEAKER_14: want to make sure that those individuals are staying at the company to execute on that vision hmm i would i would also say that even if it's just you and i and we're we're doing this uh venture

SPEAKER_08: and we we we're gonna we're gonna backstop it we're not we're not gonna take that vc money because

SPEAKER_14: there's all the the bells and whistles that go with it there might be a reason i would argue to include vesting uh to protect amongst the founders themselves right if you have two or more co-founders

SPEAKER_08: one of them turns out maybe they're not pulling their weight or they decide whoa this startup

SPEAKER_14: stuff is crazy that's not that's not exactly it looked like it was fun this isn't what i had in mind or one of them gets lured away by some big comp package that one of the the tech giants is is throwing out you don't want them walking away with fully vested stock owning 50 of the company right so even if even if you're not going to pursue investor money you may want to think about it to

SPEAKER_00: protect yeah these each other and i hear you want it to be fair right you want it to be fair yeah both people get it and we have this incredible uh illustrative um example of this there were three founders of youtube most people say oh yeah you know i remember chad hurley and then there was steve uh who's the third and it was a really smart um gentleman named uh javid kareem i've met him a bunch of times really smart really thoughtful and uh when he this was 2006 2007 uh he went back to school he wanted to go back to stanford and finish up okay so he only got one-fifth of his founding shares and the company was bought like a year or two later by google famously for 1.6 billion in stock in google stock and so chad and steve got 300 and you know 30 40 million dollars each he got 64 million a fraction a fifth um now if you had kept that um and you didn't sell those google shares if in other words if chad and steve hadn't sold their google shares and who knows maybe they didn't maybe they did i don't know that's that's about a 10 billion dollar outcome and for for javid it's like 2 billion so these numbers matter these are very real numbers and you know it's listen i don't think anybody's crying for somebody becoming worth hundreds of millions or billions of dollars it's an incredible payday but this is why it matters this is why the basics matter not just when you grow the

SPEAKER_01: company and it becomes profitable you raise money but then there's sale and then what if that sale is in equity oh my lord these have compounding upon compounding effects like i said becky in the intro get it right folks from the beginning so um what are some blowback from venture capitalists when

SPEAKER_00: a founder says well i've been working on this for four years why do i gotta get do another four years

SPEAKER_01: i'm willing to do two is that a reasonable counter and how do vcs typically take something like that

SPEAKER_04: yeah i think it depends on where the company is at like what have you done in that four years

SPEAKER_14: you know if if you're now a series b company and you know you're you've got real revenue you've got

SPEAKER_08: real metrics you're on your way we're probably not going to have a conversation at all about your vesting but if you've been working on this for four years and this is your first priced round from first

SPEAKER_14: institutional investors coming in why did it take you so long to get this because it's kind of i

SPEAKER_08: understand that you might have vested but we're really at stage one it just took you longer to get to stage one than it did some others so i think that that's often how investors are going to see it is how much further do i have to go right does it doesn't it kind of doesn't so if you bootstrapped to

Chamath Palihapitiya: three million a year in revenue in three years okay that's interesting great yeah maybe we have a discussion about vesting is two years or three years or one year whatever it is or no vesting also life is based upon the number of offers you have a person can have multiple offers and then these kind of nuances can suddenly become negotiable when they weren't previously negotiable you've seen this up close and personal and you have to when there's multiple offers you got to sit with the founder and say okay this is a unique opportunity for you you have four term sheets these are the differences walk me through not a specific instance obviously you can't do that for confidentiality but

SPEAKER_00: make me paint me a picture if you will becky of what you would say to a founder with four different

SPEAKER_34: offers dealing with these kind of issues yeah i mean one you're sitting in a great spot this is exactly

SPEAKER_14: that your best opportunity to get the best terms um is leverage fomo right everybody has it somebody somebody else is interested in this oh three other people are interested in guess what my best offer i can do better right um so you want to be able to be strategic about how you do that you

SPEAKER_08: also don't want to burn bridges because as we all know yes this ecosystem is small still still small

SPEAKER_26: even as big as it's gotten still small yeah it's still small people talk people are always going

SPEAKER_14: to talk so you don't want to burn bridges but that doesn't mean you can't be strategic about trying to get the best terms for for what you're doing so you know balancing that but then it is you know going

SPEAKER_08: through and and looking at the terms and figuring out where the differences are and where you might be

SPEAKER_14: able to have levers to pull you know i often say and founders some of the early stage founders are like well valuation i'm just going to pick one with the highest valuation maybe but there might be other things to consider too right um in terms of who is it like if they're going to take a board seat most

SPEAKER_08: often in these early stages that term sheet is going to be coupled with i want a board seat too

SPEAKER_14: who is it that's going to sit on the board how valuable are they going to be to you are they going to show up and not read anything before and you know not be very helpful i don't know is that better than somebody who is like going to roll up their sleeves going to be in there going to be helpful going to be making introductions like they've got your back you have the same vision right like maybe that would be more valuable in the long term what opportunities does that fund have to continue funding the company because they'll say i can write one check but then i'm out

Chamath Palihapitiya: because now you have the leverage to ask these questions to even be able to ask without being nervous as a founder with one term sheet when you got those four sitting there and you say hey you know what i've got four term sheets i just want to be straightforward we're going to take a week to make this decision because sometimes there's a little pressure hey this term sheet is going to explode i can tell you when you've got four term sheets ain't nothing exploding you can say we're going to make our decision on the 15th today is the fifth we want to really make a thoughtful decision and yeah if you want it to be exploding then i guess i'm choosing between three so even that concept goes away and then all of a sudden you're left with the ability to ask questions hey i want to have a follow-up meeting okay great by the way they're coming to you now they're coming to your office they're going to come on your time and they're going to bring two partners with them so everything qualitatively changes that's why we really try to get founders to when you get that first term sheet please try to get a second or third and

SPEAKER_00: the way to do that we give them language and this is basic language hey we met twice um we just got a term sheet we're considering options we want to do our due diligence wondering if you'd like to get together and just get an update on the business i can come to you anytime 6 a.m to midnight just let me know where and when i can get you updated in 20 minutes if you say it like that how does that

Chamath Palihapitiya: sound how's my how's how's my uh i want to be for coffee this afternoon let's go let's go and i'll meet you anywhere see this is where like i think we really have to give specific language to founders

SPEAKER_01: at this early stage i like to give them that don't get nervous just tell them honestly and i could use your counsel if you ask for advice you get money you ask for money a lot of times you get advice is one of those nuances and when i had sequoia invest in my company let me tell you something you get a big big firm with a great reputation i got four three four offers after that i didn't know how people knew i got an offer and i had funds asking me can we meet uh we would like to give you a better offer than sequoia and i was like okay how did you know i have a script oh well you know everybody talks to your previous one everybody talks there's a lot of talking going on and i what i said to rule off at the time was listen i've got an offer that's a third more because you signed the stern sheet and uh they offered to fully vest me and he said okay and i said none of that matters to me but since i got three offers that are a little bit more um would you be able to go up like one or two million he's like okay and can we okay can we close today because i just don't want to be going back and forth over and over again is it that's reasonable he met me you know a third of the way or something and i was like okay i'm good i want sequoia i don't i don't want like you know maybe this firm will be sequoia if i make them successful so now let's move on to the uh situation of advisors uh now that i'm a successful investor i get offered advisor shares all the time uh but i don't have time for that and i it's not really what i do but there is this advice out there get get some advisors um that can help your credibility but then there's this other side of like am i just giving a free equity away and what if this person promises me they're going to talk about me on their podcast social media introduction me to everybody help me get patents whatever and they don't actually do the work so talking about advisor agreements like do these actually help and if they do help how are you supposed to structure them in the most basic fashion i have seen

SPEAKER_61: companies give out advisor grants like candy right it's like oh i've got this advisor that advisor this

SPEAKER_14: advisor and now i have 10 of them and even if you're only giving away a quarter percent maybe a half a percent for somebody that you perceive to you know give um greater credibility but are you maximizing the value of those advisors i think is what it comes down to you know you can um you can add performance uh based vesting instead of just purely monthly vesting um onto advisors if you go that direction i would say you want to use a very simple very clearly defined milestone not subjective at all anybody could pick up and read this and say yep that has been met or no it has not been that you put ambiguity around it of like you do a good job no that's not that's not that's not a good milestone

SPEAKER_08: right um you you you have any ambiguity whether the milestone has been met or not you now have ambiguity on your cap table which investors don't like so you just want it to be really crisp and

SPEAKER_14: clear um i would also caution about not going to over complicate things you know um literally just the other day i got a like three page performance vesting schedule that was clearly written by the ai

SPEAKER_70: model of their choice and was way too complex to where i'm like i can't even understand this yeah machines aren't exactly ready to give you the best advice ever i mean better than a google search

SPEAKER_76: sometimes sometimes right but in this situation i was like this is not the way to go um you know you

SPEAKER_14: so you can you can if you can boil it down to like what is the value that you really want from that advisor if they were to do x if they were to deliver on y is that going to be the value that

SPEAKER_08: you're hoping to get that's going to help you do whatever it is give you the credibility within an industry open up doors get you access to customer base whatever whatever it is that you're hoping to

SPEAKER_14: get be really clear about that objective and if they hit it great they they best the other alternative right if you don't want to necessarily get into that or you're having a hard time agreeing on it or maybe it's a little more wishy-washy in terms of i can't concretely say i want to do introductions to

SPEAKER_08: these five folks or whatever it is you can use simple time-based investing the thing to keep in mind with that is just be active about taking a look at it and saying then it's on you right as the

Chamath Palihapitiya: founder to check in and be like hey you know we've been doing this for 12 months and you were going to introduce us to a bunch of investors and customers and that hasn't happened so maybe it's time for us

SPEAKER_00: to wrap this up obviously you're too busy or you just have your lawyer send him a note hey we're going to discontinue this agreement um if you want the details on it you can go talk to jason um exactly

SPEAKER_14: right like advisor agreements typically have anywhere from a seven to 14 day notice period meaning if you're a founder you're staying on top of it you can probably in the first couple of months maybe maybe it is a little leeway but at a certain point it's like three months have gone by six months have gone by and i haven't gone anything you can terminate that relationship and you can get back you know your your equity and not let it set out there but you got to actually send a notice we get that all the time too oh they stopped working for us a year ago okay did you send any notice well no

SPEAKER_08: okay well they're still investing then is how most of the advisor agreements are drafted unless there is an active termination it just continues which means they've been sitting out there you think you're not

SPEAKER_92: using them but they're still they're still earning their equity i had the situation happen to me i had

SPEAKER_93: a founder years and years ago said hey i want to give you one percent of this new idea company you've

SPEAKER_00: been an inspiration here's what i want your help on i did all the help and then uh this vc joined looked at the thing and convinced the founder that we needed to cancel this he cancels it i call him i said

SPEAKER_01: okay your firm beep we'll bleep it out here i said this founder and his name i said i told i told the the founder like why would you screw me like i've done all this work for you whatever he said well he told me and it's not on my hands he's the board and i just told the guy and i emailed the founders of the firm i said just remember my name jason calaganis i don't know what i'm going to be able to do to earn this one percent back but every founder who mentions your firm's name to me for all time i'm going to tell them in detail this story so are you comfortable with that and they did and you know what there are three or four deals that they probably are not in now because i said i'm going to put it on record here tell that story and let them make their own decision and three out of i think probably three out of three times they just went with the other deal because they're like yeah this is a this is an issue of morality and basic ethics and doing what's right why would you try to screw somebody else trying to help the company bleep out the name please but i'll keep it a little spicy here that's why behaving at the highest character level matters in silicon valley always be on your best behavior be your best self and if you're not your best self all this vc would have said you know what i regret doing that i'm sorry and i would have been like okay i'll stand down now to this day we're sitting here 15 freaking years later i'm still perturbed by it becky it's like one of the few times i i ever somebody ever screwed me and it was like wow this really feels bad this makes me feel bad

SPEAKER_101: uh and for no reason no reason yeah back to it's a small world don't burn after all speaking of

Chamath Palihapitiya: disney you and i were just talking about this um all right listen character matters always be on your best behavior if you make a mistake hey you can own it and like maybe you could uh make it right you know it's always the opportunities here given how hot the market is right now this is also when you start to see baby people get a little bit uh chippy uh what's the best advice when you're dealing with this as a founder things are getting intense uh just broadly speaking what's your counsel to founders when everything starts getting intense and the investors all want more equity in your company and they want you to screw the other investors or you know it just gets very um intense like this how do you counsel founders for dealing with that high level engagement that can happen when people see a cap

SPEAKER_87: table and say oh my lord i gotta get more of it i would say the first thing is take the emotion out of

SPEAKER_14: it the emotions are are the worst like i can't believe it like this person did this or said that and then all of a sudden it's like okay what are we even talking about do we know what the issue is here emotions first try to like just get everybody to come down a little bit yes and i am always reminding clients of well we can't we said i don't know five ten times now it's a small world all these people are going to talk like however you handle yourself today in this situation will be remembered more than the you know last 10 board meetings you did or other conversations that you had with them if it appears to be kind of a more aggressive uh behavior or even perceived that way so you know taking a step back understanding it um oftentimes that's okay if you can't do that like i i can help by providing talking points of how you how you can approach it what you can say what you should try to avoid saying but if the emotions are too high it may be okay well business person you don't have the conversation just have the lawyers have the conversations we can just talk about it and not have those emotions tied to it and really get to to the bottom of it sometimes this is what i should have done in my situation people agree it's not that they're not that far apart um uh when we can

SPEAKER_49: actually have the conversation sometimes this is what i should have done becky i should have called you

Chamath Palihapitiya: i should have let my emotions calm down and i shouldn't let you just write that little email like you did for me in the other situation that was later and we worked that one out because i calmed my emotions down i said let's not take this personal

SPEAKER_00: and i went to you and got a little spicy and we'll talk about the situation but you cleaned it up for me and this is where having the right partner matters that's why becky is my

SPEAKER_117: partner wilson cincini wsgr this week in startups.com basics thank you becky thank you thank you for all the time words hey listen it's just you've been very strategic for me and you can i'm an emotional

SPEAKER_01: person most founders are a lot of people get into this they they have big emotions that's part of the superpower right it's a baby yeah and it's your baby and that's why having good counsel good attorney you know you got a good accountant over here just good counsel to say okay what is the goal what is the actual goal here let's work towards that goal and let's take the emotion out of it let's give you the tools you need to get there becky thanks again thank you thank you