- BRW Lists
Published 02 July 2012 04:26, Updated 12 July 2012 05:31
Got an idea to disrupt a billion-dollar industry? Good, so it’s time to assemble a crack team. First stop, the founders. Founders are the heart and soul of the company. They come up with the idea, stick together through thick and thin, have a burning desire to change the world and will crawl over broken glass to make it happen. Don’t think of considering anyone who whinges about leaving their current job, needing to be home at 5pm to look after the family, the risk involved, or their initial salary.
Two founders are best, no more than four else the equity pie (shares) gets split too many ways. The founding team need to be handsomely rewarded in the end for giving up their social life, friends, family and health. After dilution, the total founder’s pie reduces to 40 per cent or less at the time of exit.
Your co-founder must be easy to get along with. You are proposing marriage and if you divorce, it’s potentially destruction of the company.
At best, one of you will lose big time and the friendship will be over. I’m not keen on husband/wife or boyfriend/girlfriend teams. It always goes wrong and it’s impossible for employees to work for them (you can’t complain about them, you can’t fire them). If you start a business with friends, you’re bound to end up enemies. It’s far better to start with business colleagues with which you already have a tried and tested working relationship, socialise with occasionally but are not “best friends”.
One founder must be deeply technical with very strong product knowledge. The other must be a confident leader, speaker, marketer (they are the chief salesman and CEO designate), but don’t pick a founder because they solely have “business skills”. I am a big fan of the founder CEO. No one else will ever have the passion you have. I prefer all founders to be technical. You might end up being a good CEO but you will never be great unless you are deep on product and technology. Your customers, users and investors won’t respect you.
Picking up the business is easy. Just talk to lots of customers. Choose the worst ones first, that you don’t care if you blow. By the time you get to the ones you really want you’ll have a refined pitch and be super confident.
Split equity among the founders. Equal shares will lead to fewer arguments and bad feelings down the track. It’s best to use it as a starting point then modify for contribution to the company and, more importantly, timing of the others coming in. More risk equals more reward.
Always put a vesting agreement in place for any equity or option issuance. A vesting agreement allows you to allocate shares to someone, but they don’t “earn” them until you stay a certain amount of time with the company. Search Google for a template. A typical “silicon valley” style vesting agreement is four years with a one-year cliff. This means that you get your allocation but nothing happens for a year. On that anniversary, you get 25 per cent of your shares. After that, each month you get 1/36th, until your shares are fully vested after four years.
If a founder is going to leave within 12 months. they get nothing and they don’t screw up the cap table for those who stay on.
Do this before you speak to investors. Start the vesting clock now, not at the closing. Always put employment agreements/contracts in place upfront for everyone that works a day or more otherwise your intellectual property will be messy and you’ll get held to ransom later. You can put zero dollars now as your salary, but also another reasonable figure on hitting a sales or financing target. That way you’re not in a three-way negotiation with investors over a good valuation being traded off over job title, position and pay.
Always issue equity for founders at company formation, when it doesn’t cost anything. If you issue later when there is value in the company you might have to pay a lot of money to buy your shares.
Always hire people smarter than you, the best you can afford. Look for PhDs (poor, hungry, driven) and reward them well. Hire slow, fire fast. I’m more comfortable making a 24 year-old who is smart, passionate, and easy to get on with, vice-president before an experienced, veteran.
Start the job titles low and increase them as they prove their worth. There’s less risk of catastrophe.
Next week: Brumby’s Bakeries’ co-founder Michael Sherlock