One of the most common mistakes I see in startups is making decisions that lose sight of the context, including the past, present, and future.
The New York Times reported on August 9, 2017, that dealing with Confederate remembrances on its campus has “put the University of Mississippi … near the forefront of a movement called contextualization … it’s better to educate and contextualize rather than remove or move or erase, said the school’s chancellor.” This was my first realization that my topic of the week is a movement, although I’m only addressing it with respect to startups and not treading on history.
Early stage startups have to survive one day at a time and are often presented with limited choices of the moment that enable them to continue. But, later on they often wish they had the ability to “remove or move or erase” many of them. Let’s look at some specifics:
- Hiring is a chapter unto itself, but it deserves to lead off any discussion of context. If you intend to accomplish anything of substance with your startup, you are no better than your ability to choose the right members of your team. There are many ways to measure technical skills and check work histories and achievements, but assessment of team chemistry is a high art form. You can conduct group interviews, get your candidate “liquored up” (not a recommendation), and even have a trial period on the job to see if there’s a good match. You also must give thought to the priorities of tasks at hand. At early stages you probably don’t have an assembly line and can’t clearly define any particular job. You should be particularly mindful of trying to attract people who fit into startup uncertainty and who can roll with limited direct supervision and often limited specifications for any given assignment. This is the context of your world, and it’s not for everybody. And, if there’s a spouse or significant other involved, you better make sure that person also can tolerate this ride.
- Compensation decisions obviously affect hiring and retention. Sooner or later everybody in a startup knows what everyone else is getting paid. They also observe who is pulling his or her weight and who is not. What will most upset them is what they perceive as unfair treatment. They’re looking to be paid properly in the context of the overall salary structure, including cash, benefits, and equity, and to be paid commensurate with performance. It’s an ancient saying that money is a de-motivator more so than a motivator, and that holds true. You can’t be too careful in determining comp packages for your new hires. Are they consistent with your founding team, are they competitive in the market, and will they not create precedents that you’ll regret in the next round of hiring? If you shoot from the hip, you’ll be shooting your own foot most of the time. Of all your hires, if you have commissioned sales people, those will give you the most problems if they’re not all given an equal chance to make their quotas and achieve their personal earnings goals.
- Your Cap Table is something that deserves constant care and attention. Startups often hand out shares, options, and warrants for employees and for contractors rendering needed services. You can print shares all day long even if you have no cash, so I get the need for that from time to time. You will do yourself a great favor if you can maintain some uniformity in that endeavor. Keep the valuations consistent with company progress. Set any vesting schedules and expiration dates on roughly similar terms, if for no other reason just so you can track all of them correctly. Messy cap tables can come back to haunt you when you do a financing or sell the company. Your investors or buyers may want everyone to sign off the deal to be sure there are no lingering complaints out there. If you’ve handed out equity in some form to 100 people and have done so under a wide range of “sporting propositions,” you may have a very difficult time finding all those folks when you need them, much less getting them to sign. You risk being held prisoner by some long-forgotten shareholder who painted your office when you first opened in exchange for a few shares. And, there are potential tax traps as well, especially when Non Qualified options are traded for services. Even for ISO’s, have you heard of form 83(b)?
- How about your Investors? At this writing, the first salvos have been fired in Gurley v. Kalanick, former investor BFF turned highly disappointed by founder behavior. That will keep the Silicon Valley wags buzzing for some time to come. It’s high drama at the highest levels of the Unicorn economy. In your case, you should strive to engage investors who will support you through all phases, and you should never give them an excuse to take you to court. That goes without saying. It’s so hard to raise money that your predisposition is to take the first offer that comes along. But, if that investor has an “impedance mismatch” with you or your concept, you’ll wish you kept on looking. The ideal investor is someone who not only provides you money but whom you also put to work on your team by calling on that person for connections, introductions, and advice. You should choose smart money, i.e. startup investing experience and knowledge of your space, over dumb money, i.e. cash to blow with no particular methodology. And, you should choose ones that fit your context and get along well with each other. If you get enough smart money to create a solid foundation, letting some dumb money close out a deal can be fine, if that money comes from people you know and you can trust to tolerate your ups and downs. The bottom line is that the pedigree of your investors will have much to do with your ultimate valuation and with your enjoyment of the startup experience. Work hard to give yourself some decisions to make on who’s in and who’s out. Your investors, the smart ones at least, are certainly making decisions the other way among competing deals.
- Board and Governance issues arise from day one in most startups. Usually the founders duke it out among themselves as to titles and responsibilities and relative shareholdings. If you’ve chosen to take the plunge with a group of people and can’t quickly get beyond these fundamentals, trouble lies ahead. If you are the lead founder, if behooves you to sort all this out and get started with a clean organization. One or more of your founders won’t work out as the company goes through successive stages of maturation. New skills are needed, personalities no longer mesh, outside issues like family problems start interfering, and hundreds of other things can go wrong. Between day one and your first confrontations with those issues, particularly if you’ve raised any outside capital, you will have formed a board and stocked it with people you can really get to work on your behalf. Investors, particularly if you have institutional money, are obvious choices and may be entitled to board seats as part of their investment terms. Ohers should be chosen based on what they bring to the context of your company, not based on your enjoyment of knowing them socially. They will become the referees when you have internal disputes; they’ll be mentors; they’ll be door openers; and they’ll steady the ship. Make your choices only after you’ve done some due diligence with other companies where they’ve served. Then, keep them aware and keep yourself and your startup relatively top of mind for them at all times.
- Self-Awareness will conclude this list for today. This chapter will be expanded in a subsequent post, but I am deciding to end on an important consideration. You must choose what and how to measure yourself as a founder and your company. Your original business plan will probably go out the window when you land your first customer. You did your best in creating it, but it consists of assumptions piled on other assumptions, and there are too many equations with too many unknowns until you actually have something ready to deliver to the market and can witness the reaction. My recommendation is that early on you decide to measure your achievements from the outside in. Keep a close eye on your competitors but also on your peer entrepreneurs in your town; they provide the context relevant to you. Keep yourself visible and keep your ears open for honest feedback. Are you progressing at the same rate as the best of them? Is your personal valuation of your company in line with what you see in your “control group” – or are you letting your natural optimism push the bounds of reality? Does the rest of your team measure progress the way you are? Do your investors and board members? If you have become accustomed to making all your choices in context, you’ll more likely have positive answers to these questions.