
Early Stage Startups: The Biggest Killers - katm
http://www.forbes.com/sites/hollieslade/2014/04/15/early-stage-startups-the-biggest-killers/
======
jl
I found myself saying to the reporter over and over, "This may seem obvious,
but..." and it's true that many of ideas don't seem like anything new. But
because I see them happen over and over again, I thought they were important
to highlight for anyone starting a startup.

~~~
technotony
Thanks for the really great advice. I'm interested in the unequal equity. We
have a 60-40 split which seemed fair as I'd worked full time on the company
and raised a significant Kickstarter funding before my co-founder committed
100%. Could you comment more on issues you see this brings down the line and
how this plays out? Also, does this conflict a little with your next point
about clear leadership?

~~~
johnrob
I'd give yourself a gift for getting the company off the ground. 5% seems
right, but I suppose 10% is not out of the question. Then split the remainder
with your co-founder. This process would lead to 52.5/47.5 and 55/45 splits
respectively. 60/40 is a 20% gift; I think that's a little high but it could
be justified if significant progress has been made. Also, your vesting should
of course have an earlier start date.

~~~
tptacek
5% is an enormous amount of equity to grant for anything. Recruited executives
might get 5%. First technical hire often gets that.

~~~
7Figures2Commas
> 5% is an enormous amount of equity to grant for anything.

No, it isn't. At a company that has raised capital or generates revenue, 5%
might be enormous, or it might not be. It all depends on the company's
valuation.

The fundamental problem many early-stage startups run in to is that they
haven't raised capital, don't have revenue _and_ they try to use equity as an
alternative to monetary compensation.

In these situations, "sweat equity" is almost always a poor alternative
because the math rarely makes sense for the recipient. For instance, if you're
an experienced developer who can make $125,000/year and a friend wants you to
become a co-founder of his business, forgoing salary until some future date or
event, how much equity in a business worth $0 today do you need to make up for
your salary? It's a trick question, and the answer is not 5%.

Equity can be a very complex matter, but it's also very simple when someone
suggests that it be used as a substitute for cash. If somebody wants to pay
you for your services using equity, forget percentages. Determine what it's
reasonably worth in dollars, if anything, _today_. If you are willing to
accept less than the dollar value of your services, you're being generous to
the company, not the other way around.

~~~
tptacek
5% is a _gigantic_ grant for an employee.

I don't actually disagree with you about employees asked to work on equity-
only and deferred salary. It's just that I call those people "cofounders".

~~~
7Figures2Commas
While you probably won't receive a 5% grant as a non-executive hire at a
venture-backed startup, my point still stands for salaried employees. If you
can make $125,000/year, a company offers you $80,000/year and suggests that
it's making up the difference in equity, you should still run the numbers. For
5% to compensate you for your sacrifice in this scenario, the company would
need to be worth $900,000.

One of the problems employees face in Silicon Valley is that the valuations on
angel and venture-backed startups are exorbitant, so the equity is overpriced.
Seed stage startups with no traction (and sometimes no launched product) can
still sport million-plus valuations. As an employee, it takes a leap of faith
to believe in these valuations and use them as the basis for valuing your
equity. Fortunately for these startups, enough individuals are willing to take
that leap of faith.

------
Theodores
Regarding the co-founder problem, time for a music analogy...

As a student there is this idea that you should be in a band, making music.
Getting there needs lots of brainstorming to come up with the songs, lots of
practice, jamming sessions, rehearsals, going out to try and get gigs, musical
collaborations, partnerships with DJ's and support acts, getting gigs and
publicising the gigs. Then there is the dream of getting signed by a record
label.

The idea that you could do all of this on your own is quite laughable, isn't
it? Even solo artists usually have a producer or a song-writer that is in
effect a 'co-founder'.

Yet some get there on there own. Take for example Cliff Richard. The Shadows
were his band but also mere hired hands with no equity. Cliff Richard didn't
even have to write songs, those could be acquired somewhere else much like how
a developer can pick up frameworks and make them their own.

In music there is an understanding that an artist can be solo. Just because
they are not in a band does not mean nobody believed in them. Record labels
don't tell them to go away and come back when they are in a band, if the
talent is there then they will sort out whatever is needed, whether that be
session musicians, songwriting or production.

This music analogy may appear a long way off software MVPs, however, it isn't.
Another thing to learn from the music industry is that people don't expect a
product (a song) to be number one on the hit parade for eternity. New shiny
things on the web should be seen that way too, expected to be popular for a
while in the 'top 40' and then to 'sell' consistently as back catalogue.

~~~
robomartin
You seem to be confusing "solo founder" with "single person company". A solo
founder can go and hire ten people, build an amazing team and knock it out of
the park. A "single person company" is severely bandwidth limited across all
required disciplines. That's the case of your music example.

------
gms
It's striking that choosing a cofounder one barely knows is a common problem.
I'm trying to get something going with my best friend (I've known him since we
were six years old), and people we meet will sometimes ask us if we would
consider bringing on some guy they know as a third cofounder.

The people who band together for a startup after having known each other for a
month would never marry someone they have only known for a month. Clearly the
message that startups are a big deal for any relationship hasn't sunk in as it
has with marriages.

~~~
balls187
Choosing your best-friend isn't a guarantee that you won't have co-founder
issues either. One of you has to be the CEO, and if you are both used to being
equals, the one who isn't CEO has to deal with the fact that their role is
less than the CEO.

There will be times where the demands for your time will be greater than
theirs, and vice versa, and if one of you is strongly technical, while the
other isn't, you may see an imbalance of work, especially when you're building
your MVP.

Business & startups in particular, come with an enormous amount of stress, and
may put you two at odds with each other, which can be tough, as the two of
you, under different circumstances, might have been each others coping
mechanism.

~~~
gms
You are absolutely correct. I made a mistake in not mentioning these potential
pitfalls.

------
ilamont
I like Jessica, but it would be nice to get a perspective outside of the Y
Combinator philosophy on starting a company.

~~~
balls187
This article mirrors what is considered conventional wisdom du juor w.r.t.
startup success.

Running out of Money.

Co-Founder Issues

Lack of Traction

Those are the startup failure trifecta.

~~~
funkyy
IMO biggest issue - creating a product no one really wants. How many startups
create "next Facebook or Google" that no one really needs/use.

~~~
adrianhoward
Surely that's implicit in 'lack of traction'?

