My first Eat Your Own Dog Food (EYOF) post talked about things I am doing to make my start up investor friendly. The Founder title, ownership, etc. You can read it here if you haven’t already.
Many people have asked for specific details on how I dealt with particular issues so I’m going to cover a few of those in various blog posts. I am creating a clean set of closing documents for your review but in the meantime I’ll be blogging some details on points I’ve been asked about.
Everybody loves this one. First, this notion of “Founder Vesting” is actually bad language that has crept into the financing world. What it really should be called is “Investor Buyback Rights” because that is exactly what it is.
The basic thesis is this: An investor (Angel, VC, etc) places a bet on the founder(s) and the associated risk with these people should, in theory, decrease over time. In other words, once a company has shipping product, a good team, bench strength, etc, the founder getting hit by a bus has less impact. This impact decreases over time.
The notable exception being Steve Jobs, yeah, but the rest of us are not Mr. Jobs.
If, while the company is getting started, getting the team built, etc, the founder punches out, it is reasonable to assume the impact to the company is going to be meaningful and bad.
Investors know that an impaired asset (the founder just quit, got fired, etc) means a potentially problematic investment result and they want to find a way to compensate/mitigate this issue; ie lower value given the impairment. One way has been the notion of being able to buy the founder’s shares for nominal value which effectively lets the investors have more of the company for the same price. As a VC I’ve agreed with this thinking and in the spirit of EYODF, offered it right up.
My simple deal is that, for the next 2 years, the investors have a right to buy all of my shares under two conditions; I either quit or get fired for cause. That right decreases over time. In other words, it can be thought of as a type of vesting in that every month the amount of shares that can be bought back goes down. It goes down because it is assumed that I am a) creating value and b) lowering the dependency on me.
Here’s why I am not fussed about this at all.
If I quit after I take money which was given to me to execute an idea I had, I’ve just screwed people. It’s unethical, unprofessional, and just plain bad. So the recourse of being forced to sell all my shares for nominal value is the least the investors are entitled to. When somebody say “We’re making a bet on you”, it should mean something and there should be repercussions if that bet/trust is broken.
If I get fired for cause, which is stealing, backing the truck up to the office, heading out with all the money, etc, again, I’ve screwed people and same thing applies; investors should have a mechanism to get the shares at nominal value.
Reality shows that almost nobody gets fired for cause and founders just up and quitting for no real (i.e. medical) reason is also a rare occurrence. This, of course, leaves fired without cause.
There are, for sure, cases of VCs ‘screwing’ founders by getting into an investment deciding they know better, they have their own ideas/team, and putting the founder in a “special projects” slot. It’s rare. Extremely rare.
The raw truth about most VCs is they want to do an investment and go play tennis. In fact, the very best VCs do charity work, lobby governments, speak, help young people, start foundations, look for the next great ideas, etc. And play tennis. A lot of tennis. This is not the case of Angels and funds that are seed stage stuff. Those guys work their butts off in the companies on an almost daily basis and are generally the unsung heroes of the investment business.
Again, this isn’t a shot a VCs. They are supposed to be making investments and letting them grow, not be in weekly meetings meddling with colors on web pages.
The best compliment you can get is your investors telling you a) let’s do the board meetings quarterly and b) two of them can be phone calls. Remember, they are betting on you. This isn’t a debate/issue on VC value add, etc, just the macro point about what VCs really want: Amazing entrepreneurs that know what they are doing.
In my case it is simple, fire me anytime you want without cause but you don’t have an automatic right to buy my shares at a nominal value. If the investors decide they want to go in another direction, change the game, do whatever, fine, but my shares are mine. They might make me an offer for the shares and I might sell but I don’t have to.
So, yes, I’m willing to take the risk of working hard for X number of months, seeing rocket ship/hockey stick success only to wake up on a Thursday and get fired. I’m good with that risk. Why? Because it statistically never ever happens. No board/set of investors is going to come into a company, get some positive cash flow or milestone passing success and decide, cool, now that it is an amazing company, let’s bring in Bob from AccountTemps and fire the founder. It never (almost never) happens. There are always other reasons and almost always the reasons management/founders are getting replaced/re-aligned is because of the lack of progress.
And the bonus for my investors: I’m NOT the CEO, I’m the founder. Let’s get the best people and I’m happy to play to my strengths. In other words, there is no constructive dismissal nonsense if we get a “CEO” and I’m doing something else. Everybody stays on message about getting the best people to make this a success.
So, yes, if I suck/steal/quit, throw me out the door and get the shares back; I failed you. If you want to grab the steering wheel and drive down a different road leaving me at the Stuckeys rest stop, your call, my shares are mine.
Lesson/Message for you:
Make it easy for your investors to get behind you and believe. First, there is the idea/story and second, there is you. I’d argue that YOU are the more important part of the equation.
The second lesson/message: Trust. I trust my seed investors. I trust them to challenge me and hold me accountable for the success (or failure) of the business. I also trust them to do the right thing and be professional business people. I trust that if I am firing on all cylinders, off to the tennis courts/golf course they go.
They, by their checkbooks, trust me to give it 100%, accept that accountability, and share in the success.