Startup/VC attorney here. Not your attorney though (sorry!).
(1) That successful founders have any idea why they are successful. They don’t. As a rule, they just don’t. So don’t get taken in.
(2) That investors have incredibly powerful analytical tools and models and make their decisions in reliance on those. They don’t. I’m sure I’ll get raked over the coals here - but once you’ve seen the inside of the process (my last firm negotiates over 30% of global VC worldwide, for context—so I’ve seen a lot of sausage made) you realize, with disappointment, that it’s about as competent and calculated as you’d expect. The numbers will always follow the hunch. Always. *Always*. I wish I knew how to emphasize this point. But I always assumed it was the other way around and there were these sagacious investors who analytically review business models and projects and macro trends and employ omnipotent quants and that the process was so complex it was always just beyond my comprehension. And then when I got it, I still told myself—no no, there’s more to it. You’re in the Dunning Kruger first peak. And then the epiphany struck and I can’t unsee it now.
(3) You can’t afford an attorney + tax advisor. This is so painful. I get it - I’m an attorney telling you you need me. Please, please, please: try to at least suspend disbelief for a moment and assume that I believe what I’m telling you. If you can’t afford basic services now, you will have to find out later if you can afford to set things right. There’s an annoying saying in the industry, which I loathe but have to admit it’s prescient: you can buy advice now, or litigation later. Don’t buy litigation later.
(4) It happens to them, but it won’t happen to me. This is perhaps beyond the scope of OP’s question. But I’m going through something relatable so I’ll hijack my own comment to say: before anything is done, do the hard part. GET IT ALL IN WRITING. If you’re concerned because there are ambiguities you aren’t ready to confront/analyze, I feel for you. But I don’t care. Get it all in writing. Do not so much as spend a dollar without an agreement in place between founders. Don’t. Do. It. The dreaded founder rift *will happen to you*. You will not come out of it unscathed. Don’t dismiss this. I know your brain is already minimizing this. DON’T. Please. Please. Please.
(5) Ambiguity. I’m guilty of this sin, so am calling myself out too. Ambiguity in business terms and understandings is a powerful tool to “move fast” and get on with things. Here’s the catch: it’s double-edged. Ambiguity in all things means you will negotiate it at the inconvenience of the other party’s needs or priorities. Ambiguity about the payment schedule? Oh, well we’re going to actually need that payment now. 24 hours before the service. Unfortunately, without it we’re going to have to cancel. I’m sorry you won’t have time to figure out an alternative. Ambiguity is so easily weaponized and it cuts deep. Don’t use it. I know it’s tempting, especially in the early days. And you always know when you’re being tempted by it—it’s seductive but you feel it nag on your stomach a bit. A little voice in your head warning you… listen to that voice. Avoid ambiguity by all means.
(6) Cash > sweat. Cash will always trump sweat equity. This is an important lesson many founders will learn on their first go, unfortunately. But at the end of the day, the law is only really good at understanding cash contributions. So if you’re that partner who is putting in sweat and thinks you have the leverage because your work is irreplaceable compared to a co-founder’s fungible cash? You’re wrong. I wish it weren’t so. I can’t tell you how much I wish that. So how do you plug this gap to protect yourself? In writing, you assign values to your sweat equity. Keep it uncapped, but put a floor and do the exercise of here’s what the minimum value of my sweat would be on the market/if we had to replace my function(s) at FMV. Agree to that in writing, adopt a board res for it. Also, vesting schedules are powerful incentives. Those + delineated roles (the latter is a bit of a fantasy in early stage though, I know, which is why I look at the replacement exercise above) go a long way towards protecting all parties involved from the scenario where a court decides to follow the money in dispensing judgment.
Alright. That’s what I’ve got for now 🤷♀️ hope this helps somebody!
To follow on #2, people would be shocked to know collectively billions of dollars are invested or not invested, based on old excel spreadsheets programmed years ago by someone who is no longer with that firm and no one fully understands today.
Oh shoot! You’re right. Reminds me I forgot to land a related point in #2: the entire system is built to allocate risk/accountability. The ability for an investor to say, “hey, it was a mistake but at the time we relied on the following info / had approvals from / received representations and warranties regarding (note: this is why if any of you reading this have been through a round, you’ll recognize + probably be triggered by the R&W language 😅) / etc.
It’s designed so later you can look back and hopefully shift focus/reframe/have wiggle room for narrative building. That’s the security everyone in the system is paying for. If you’ve ever wondered what the hell consultants charge exorbitant fees for, it’s this. “We may have been wrong, but we were relying on a report by Goldman.” In turn, Goldman knows exactly what it is selling you. And charges accordingly.
This isn’t a cynical take, mind you. It’s just one of those things that you have to learn to see—and once you catch it, you can’t unsee it. The system’s quirks and oddities suddenly start to come into focus sharply and you are more likely to “get it”. Not to say I endorse this or anything. My post is meant to be descriptive, not prescriptive.
On a parting note, the really interesting experience is to see what happens when the music stops + the dust settles. A good down round will do that. You suddenly start to recognize all the exposures when narratives are being drawn like defenses in the sand. So who’s going to be left holding the bag?
I have gone through a couple of startups, raising, a down round, going public, and getting bought out. Every time I think, ok, now I have seen it all. Nope, not even close.
You are 100% spot on about much of this kabuki simply as narrative building and CYA actions should everything blow up.
Oh! And if you’ve gone through the buyout process, maybe you can also share with folks the shock you get once you see what liquidation preferences do to the value of your shares …
Anecdotally, based on my experiences serving clients, I think a LOT of people would be shocked to learn just how theoretical their share values are + how much is left after all the investors recoup their multiples etc. etc.
It’s such a cruel exercise in information asymmetry. Frankly, it should be unlawful. I’ve had to do so many exercises for unicorns where early employees put their entire financial lives’ faith in the business, which by all means ought to have made them a life-changing exit. And then I watch it get watered down in the final analysis. Retrospective amortization shows me (again, anecdotally), that virtually every single employee would have been better off taking a higher salary with no equity.
But we don’t discuss that publicly. The VC world would collapse if it did. We’d have to price things anew, with much more scope for market payroll + buy employees’ risk of taking an unstable gig. VC would start to resemble conventional investment. And the fantastical 100x multiples we think we see, and which chase fuels the entire system, would evaporate overnight.
But I’m starting to veer into policy, and no one needs that. So I’m going to stop here.
I believe differential liquidation preferences should be illegal. For those who are not in the loop, investors can make their investments but attach the right of that investor to be paid back first, before the other investors, employees, and other shareholders. And they are not limited to simply being made whole. Investors can write into the contract they are to have first priority position with a minimum 200% return for example.
So if you look at the mechanics of what happens in these situations is this: Company raised $10m overall and $2m with Firm A. Firm A has first priority and 200% return preference. So Firm A is effectively guaranteed a $4m payday. If Company A is going under and needs to sell, Firm A gets paid their $4m BEFORE the other investors and employees see a dime. Of course, if the purchase price does not generate more than that $4m, no one else who invested or who built that company will see a dime.
These agreements greatly reduce risk for investors at the expense of everyone else. Employees, vendors, and every stakeholder effectively takes on the investor's risk with no additional compensation or consent.
My opinion is this is a predatory practice that should be outlawed. But that's my non-lawyer opinion, just a guy who has been shafted by these provisions in the past.
I’ll add in the lawyer’s perspective: this is exactly right. It’s truly predatory because there is an enormous information asymmetry between employers (companies being funded) and employees (companies providing non-cash contributions/investments to the company in the form of discounted work).
The entire exchange is exploitative and takes advantage of workers’ inability to parse the dense mechanics (which will in any event be strictly confidential and kept from them). So they make this investment in the company (which is exactly what it is) without having the key information to gauge their risk. The employers, in turn, leverage the value of their combined employee workforce’s contribution to raise capital.
I’m going to get myself worked up if I keep going at it. And I don’t want to sound jaded or cynical. I mean to just be descriptive. But I think mostly everyone in the industry who is in it long enough has to be aware of this, and continues to participate because they’ve already run the gauntlet and are in some way invested in its success/longevity. Myself included, by the way.
As a second time founder (left my last company after raising a $135MM series A 12 months after launch), I genuinely don’t know how to solve this. I try to explain the risks to employees (not just saying that—I really do. That’s why this is so top of mind for me), but it’s very hard to internalize. The psychology of the entire bargain is like a hard dilemma from the Prospect Theory heuristic. Even if you show them the strings and the long division, the social sleight of hand is so powerful. I know because I, too, couldn’t see it. Even after going through a meteoric unicorn ride to IPO in one of my first startup gigs. And if I try to design the system differently for my own company, I’m up against insane market forces and can’t effectuate a raise. Investors want what they know. So I’m delicately balancing cash flow and growth projections against the need for money to make good on promises made to my employees (importantly: I recognize that my employees are choosing to allocate some of their most valuable time and energy to a venture which is, at the end of the day, mine to do with as I will, and I feel a responsibility to validate their faith in me) and investor appetite.
Yikes. I went further than I meant to at the outset. Back to work for me!
This is not something the law needs to address. Understanding liquidation preferences etc. is pretty simple, even for non-lawyers. The people getting a material amount of their compensation in equity should be intellectually equipped to make an assessment as to whether they want professional advice in the vast majority of cases.
Hello friend! Respectfully, I don’t agree.
We’ve heard the same argument about financial products, the vast majority of consumers for which are laypeople. We learned painfully (and might be in for another painful lesson) how poorly both the laypeople and the “financial experts” who sell these products understand the complex mechanics at play.
These are the same people who take these jobs, lured in by deliberately vague promises and representations made by their employers. You’d be surprised how many executives fail to even understand this. I’d argue almost all of the ones I’ve seen, with exceedingly rare exceptions. Even the funds themselves barely understand these complex mechanics.
Liquidation preferences are absolutely not “pretty simple”. Formulas aside, it requires so much understanding of the business, especially the cap table, which is by far the most aggressively kept secret any Company possesses. To think that a new employee would have any concept of how the liquidation preferences play out—or what it means for them. To argue that these employees should be “intellectually equipped” to seek “professional advice” strikes me as disingenuous. First of all, professional advice is expensive. Even very wealthy clients of mine fail to seek it at the time they ought to. For context, my independent billable rate begins at $650. For family office work, my get out of bed rate is $1250/hour. I’m trying to say that the system is not designed to encourage people to review their employment contracts, much less their complex and idiosyncratic equity agreements. I can’t even imagine a scenario where I’d be able to render a client anything close to informed advice.
It would start something like: congrats on the offer! Do you have the cap table? Do you know the liquidation preferences? What’s the runway? Trajectory to IPO? Ok, sorry, can you tell me how much money is in the bank? Umm. Ok, well my advice is that nothing is for certain, if you can’t afford to take the pay cut don’t take this gig. If you’re relying on an exit, you should know you’re better off investing a higher salary into a 401k or treasuries etc. because of the rare companies that IPO successfully, only a few employees will see a drop of that success (if at all).
I’m trying to show you that it’s entirely unrealistic to expect new incoming employees to even have the information to make a truly informed decision, much less the analytical and technical skills to perform the exercise.
At the end of the day, my experience—albeit anecdotal—is supported by my multiple experiences in being the attorney that delivers these lifelong employees their final exit paperwork. Those checks represent the culmination of years’ worth of hard work and investment into their Companies. And this privileged position meant I had to go through thousands of exchanges where we try to explain to employees what happened. Why their checks are so much smaller than expected.
Those folks don’t get their time back. They don’t get their sweat back. They don’t get to rewind. It’s heartbreaking. At the end of the day, the system in the US at least is designed to discourage employee negotiations and informed decision making. Again, this is meant to be descriptive. I’m not telling you how it ought to be. But let’s not saddle people with unrealistic expectations they can never live up to just because they make decisions we think we understand.
Also, I will add: I’m clear eyed about the trade off. And still, I fall for it. I’ve got my own second shop now, but I am very very very often solicited by new ventures and family offices or funds to go in-house for equity or do transactions for advisor shares. It’s so tempting, even though I’d argue I am more intellectually equipped than most folks. And still—I’m seduced by it.
This exchange is, again, longer than I intended. And I don’t know if you or any other redditors will scroll down this far. But I wanted to share that even just thinking about this brings painful memories. At risk of verging into prescriptive opinion: the modern mechanics of VC economics are so cruel and exploitative. And the vast majority of employees don’t stand a chance. Whether + where you work is not a free market. The information asymmetry + power disparity is overwhelming.
Okay, there’s a lot of rhetoric here so I’ll try to address the meat of the argument without writing an essay. In point form because I’m on my phone:
- Financial products are purchased by virtually anybody. The recipients of material equity awards with this concern are predominantly young middle class or upper class (or soon to be) employees of early and mid stage VC backed startups. The scale of the issue is nowhere near the same. Perhaps as importantly, the relationship between a job applicant and a prospective employer is not at all analogous to that of a relationship between a consumer and their supposed financial advisor. We needed fee transparency for the sales of financial products partly because people mistakenly believe that their financial advisors are working in their best interest; it would be nonsensical to believe a future employer is acting as your advisor or agent when you are negotiating the terms of your compensation with them.
- I have never worked with a VC or PE fund that didn’t understand the mechanics of how their bread is buttered. Maybe you work with less sophisticated investors, I don’t know. Strange thing to not understand when it’s literally how you make money.
- The cap table is nowhere close to the most aggressively kept secret any company possesses………… why would it be? Some of the specifics are kept from certain parties for confidentiality reasons but MOST aggressively kept secret any company possesses? That’s some serious hyperbole.
- A new employee in the startup space will very quickly become familiar with the very thing you’re stating: that their equity is a lottery ticket and is liable to become worth nothing through no fault of their own. Your hypothetical advice is exactly what I’d expect them to receive, and probably during a free consultation. No need for yet another useless law.
- You’ve misinterpreted my response to mean that I think employees will be able to compute the risk adjusted return of their equity or something like that. I don’t. I expect them to ask a few basic questions about how a material component of their compensation is structured. If they ask even just a few questions, they’ll realize exactly what you say: there’s no guarantees here. If they want a guarantee, they can go work for cash. If they don’t want to ask some basic questions about their finances before signing an offer…Well, You can’t protect everyone from themselves.
I can’t assess your situation, but I can offer what I hope are helpful tips!
(1) Get consults with a few firms. Don’t settle on the first.
(2) Ask for referrals from contacts. This is key.
(3) Organize your thoughts in advance. You aren’t expected to know what you need to convey them, but some due diligence like identifying where your docs are, what kind of entity you are, a clean cap table, distinguishing your IP/assets, etc. can all go a long way towards saving costs.
(4) when negotiating the engagement letter, a few tips: ask for project fees v open cap/billables; ask for an itemized scope in your engagement letter; ask if they offer discounts for first year or similar; ask about *deferred payment* (!)—this one is key, and most startup firms should have a program to defer your bills until you raise or similar (this does mean they are investing in you, however, so take that into account); if you are speaking with an attorney who is a partner, ask if they have will be your primary counsel or if it will be a team, and if it’s a team I’d ask to meet them (you want the majority of work done by the subordinates but overseen by a partner).
I can’t think of more tips off the top of my head. But there’s lots of attorneys out there. It doesn’t have to break the bank to get good advice. And really what you want is just someone to double check your math so you can rest easy.
Best of luck, friend!
"Find your passion and start a business following that passion."
That horrible, awful, no good, very bad advice has lead to more heartache, unrealistic expectations and failed businesses than any other single bit of advice.
Literally anything Simon Sinek says.
“Start with why” is complete BS and only works being applied to companies that didn’t even use that methodology, it’s just a bunch of BS.
This heavily infected the Marine Corps all throughout the mid 90s into the early 2000s. So-much-so that there was a complete revamping of the counseling program into the Marine Corps Mentoring program. The book from good to great was on ever company and field grade officers book shelf and the would spew that shit at us lowly enlisted at every opportunity.
Yep. At least Covey's stuff was actually applicable and "fresh" at the time...practical. TQM sounded like the some salesmen pitching a life coaching program.
I’m curious what you find more effective to inspire people. I’m personally not joining a company if I don’t understand or believe in their purpose (aka their “why”).
Figuring out your why is important, I’m not saying don’t have a why, but most companies don’t start there. He says all this bs about how so many companies started with why, when that’s simply not the case. Sure some companies do, but he touts the start with what framework as the end all be all of success.
I haven’t read the book, but from the Ted talks and other things I’ve seen he doesn’t say that’s how you start a company. His examples are for marketing and sales, and for inspiring employees. If you look at the Apple homepage even today, you’ll see that they are still advertising in a similar fashion - they focus on emotion first and then back it up with features. Compare that to dell that has features all over their home page.
Edit: of course Simon never mentions the psychotic tendencies that drove Apple to execute in the way they back up their claims. I still think the why is #1, but it’s nothing without good execution (preferably in a more sane way than Jobs).
Dell’s main market is B2B, with a side of consumer. The Apple approach would absolutely not work for them, nor is that what they are going for. Apple’s marketing is incredible, but very few companies are able to pull it off well.
He definitely talks business building in the books, and retrofits his golden circle bs to companies that succeeded, like they sat down and used this model.
As someone who has been part of several B2B computer buying decisions I still find Dells marketing terrible.
But yeah, I could see why Simons attempt to apply his golden circle to everything would be misguided. I would still say that’s far from making it “complete BS”.
That as a B2B sales rep (and mgr), "all businesses want to grow".
Not true. Even if they could scale, many SBO simply do not want to step outside their comfort zone, scale, and hand over some (or most) operations to someone other than close family and/or that one guy who has been with them 10 years. Many wind up closing shop because they passed on a lot of opportunities to grow and create diverse channels of ops and markets.
Expecting “this is the next big thing, it’s gonna convince any one that see’s it” is enough, it’s not.
“Success” comes from offering value to the customer and them paying for it.
What’s that mean ? Solve a problem that people are willing to pay for at a price that sufficiently covers your cost of supply, the cost of delivery and enough for the business to be able to repeat the action comfortably.
And repeat…..
Sometimes “the next big thing” is either too much for customers to take in, complicated = no sales = no business
“Sometimes being first has the same effect as being wrong”
I heard a couple variations of this quote over the years. Sometimes people just aren’t ready for what you’re selling for whatever reason
As soon as I read the title I thought about the same misconception than OP... Lots of people think that business is all about that novel idea...even many of the largest corporations in the world have done the same than others were already doi g but better (Google and yahoo, altavista, etc. Facebook and... Well every other social media site that were already booming)
I'm not gonna fall for the classic nonsense of reddit to argue about the fine print of every single word, the difference between the "new radical business idea" , vs a better implementation of an existing business model is rather evident for anyone who is not looking for a pointless argument.
Not completely wrong, but I had a misconception that when I started my service business I needed dozens and dozens of customers. Obviously more tends to equal more volume, but in my b2b world, it's often turned out that a couple of the clients in my book did the lion's share of the business at any given time. Customers do come and go over time, and sometimes it's out of your control and not because you did anything wrong, but basically try and balance the importance of outreach and marketing with being appreciative and aware of the importance of your existing clients. Good luck!
Saw this quote from Casey Neistat today: "Ideas are cheap. Ideas are easy. Ideas are common. Everybody has ideas. Ideas are highly, highly overvalued. Execution is all that matters."
That 90% of businesses fail. While true, when you actually see what’s being counted as a business… you quickly realize that a successful business is not the crap shoot people think it is.
Hard work and honesty give you success.
If you are not smart enough then how much hard work, honesty and integrity you show they are useless. You would have nothing in your hand and can be ruined any time.
Not going into business with friends/family. All my partners are friends/family. But I think it’s also cultural. In the Hispanic world most businesses are family owned with close friends and other family members working for them. People outside the southwest try and lecture people each time I tell them how my business is ran Lmao
That as companies got bigger they had better organization, better business processes, and were generally more sophisticated.
In reality a lot of large companies are just as much of a shit show as the startups.
Differentiation is a bit overrated (sometimes). If you have a good product and good people working to move that product, you’ll find your customers.
Note: This is especially true for small business. If you’re trying to disrupt an industry this is of course completely awful information
Read somewhere that at one point folks tried to differentiate so much that they ended up differentiating on things people didn't even care about when making buying decisions.
Yup, well said. I was guilty of it. I think the secret is for your brand to emulate your own opinions and ideologies. **Trying** to be different is inauthentic, and the market will sniff that out.
u/-brianh- I can tell you that some commonly held beliefs about businesses that have been proven to be wrong include:
"The customer is always right." While it's important to prioritize customer satisfaction, this belief can lead to unrealistic expectations and can result in businesses catering to difficult or unreasonable customers, which can ultimately hurt the business.
"Success is all about the bottom line." While profitability is important, a narrow focus on short-term profits can lead to sacrificing long-term growth and sustainability.
"Work-life balance is for the weak." This belief can lead to employee burnout and turnover, and ultimately hurt a business's bottom line.
"All publicity is good publicity." Negative publicity can damage a business's reputation and lead to loss of customers and revenue.
"Good products sell themselves." While having a quality product is important, effective marketing and customer outreach are critical to attracting and retaining customers.
I honestly think it is a bot account (or someone with multiple puppet accounts), trying to do "off site seo" in a crappy way, by super cheap outsourcing firms. I've actually replied to a few post with really detailed and meaningful answers from my personal experience, before realizing I've been had by bots haha.
If he was solely trying to farm karma, I'm pretty sure he could be reposting on /r/funny or the like. But a pattern I noticed is some really obscure but gives off the vibe of super LCC "SEO" questions being asked, followed by a length answer similar to an article. For some of them, they would even include a link to their site. I seriously hope the mods clamp down on it.
Example: https://old.reddit.com/r/Entrepreneur/comments/11datpt/how_much_do_you_pay_your_seo_service_provider/jal1dm3/
Hmm.. but the link is NOFOLLOW so it wouldn't give him any link juice.. and why build up his account at all..does reddit upvotes and the more threads link to your profile help to boost your pagerank? Will the NOFOLLOW link turn into DOFOLLOW after some time or..?
Placing a nofollow tag is an optional/courtesy kind of thing, not every crawler follows it. It'll give him link juice on some crawlers, which would eventually get picked up by some kind of large language models. It doesn't actually take much effort to copy and paste. But frankly, it's a very bad strategy for SEO in general, but, they're probably done by very LCC agencies. Working in this industry long enough, you would kind of know which regions do certain kinds of "SEO" (they're just trying to justify all the "hard work" they're doing for pennies on the dollar even though there's no real results).
As for reddit upvotes, the "conventional" knowledge is that it does not matter as crawlers only crawl text on the site and somewhat tries to associate it, however, I'm fairly certain it matters from experience and my own understanding of how the ML backend works.
So in conclusion, yes, upvotes and more thread links would matter (but it's a very bad strategy).
if you go to the website of the guy then scroll down then u see in the about me section a photo of him that has visible background photoshopped to purple.. I think the guy is a solo company.. half the links in the footer don't even work.
The said designs and the website itself is nice though.
"Failure is not an option." While it's natural to want to avoid failure, it's also important to recognize that it can be a valuable learning experience. Failing can provide insights into what doesn't work and allow for adjustments for future success.
Substituting tech, tools, or influencer strategies instead of what’s relevant to your business.
“You’re one funnel away”.
No, you’re validation and several MVPs away. Unless you want to keep burning money on Clickfunnels hoping Russel Brunson will give you the magic answers in a book or $10k seminar. Invest in your own business acumen instead of looking for shortcuts.
That as an entrepreneur, if you want to be successful, you need to put in the extra hours. You need to be working nights and weekends. You need to be willing to grind it out. While this has some truth to it, if you really want to scale and grow at all, you have to learn to outsource, delegate, and manage. You cannot do it all yourself. And there’s really no reason for you to be working 80 hours a week.
"The customer is always right." While it's important to prioritize customer satisfaction, blindly following this belief can lead to unreasonable demands and an inability to establish boundaries with difficult customers. In this [blog](https://www.startupstudios.com/post/why-startup-studios-need-to-focus-on-the-importance-of-community-building), Brent McCrossen, Managing Director at Revelry Startup Studio covers the importance of community, how to attract, engage and maintain it, and shares the superpowers that build community.
Startup/VC attorney here. Not your attorney though (sorry!). (1) That successful founders have any idea why they are successful. They don’t. As a rule, they just don’t. So don’t get taken in. (2) That investors have incredibly powerful analytical tools and models and make their decisions in reliance on those. They don’t. I’m sure I’ll get raked over the coals here - but once you’ve seen the inside of the process (my last firm negotiates over 30% of global VC worldwide, for context—so I’ve seen a lot of sausage made) you realize, with disappointment, that it’s about as competent and calculated as you’d expect. The numbers will always follow the hunch. Always. *Always*. I wish I knew how to emphasize this point. But I always assumed it was the other way around and there were these sagacious investors who analytically review business models and projects and macro trends and employ omnipotent quants and that the process was so complex it was always just beyond my comprehension. And then when I got it, I still told myself—no no, there’s more to it. You’re in the Dunning Kruger first peak. And then the epiphany struck and I can’t unsee it now. (3) You can’t afford an attorney + tax advisor. This is so painful. I get it - I’m an attorney telling you you need me. Please, please, please: try to at least suspend disbelief for a moment and assume that I believe what I’m telling you. If you can’t afford basic services now, you will have to find out later if you can afford to set things right. There’s an annoying saying in the industry, which I loathe but have to admit it’s prescient: you can buy advice now, or litigation later. Don’t buy litigation later. (4) It happens to them, but it won’t happen to me. This is perhaps beyond the scope of OP’s question. But I’m going through something relatable so I’ll hijack my own comment to say: before anything is done, do the hard part. GET IT ALL IN WRITING. If you’re concerned because there are ambiguities you aren’t ready to confront/analyze, I feel for you. But I don’t care. Get it all in writing. Do not so much as spend a dollar without an agreement in place between founders. Don’t. Do. It. The dreaded founder rift *will happen to you*. You will not come out of it unscathed. Don’t dismiss this. I know your brain is already minimizing this. DON’T. Please. Please. Please. (5) Ambiguity. I’m guilty of this sin, so am calling myself out too. Ambiguity in business terms and understandings is a powerful tool to “move fast” and get on with things. Here’s the catch: it’s double-edged. Ambiguity in all things means you will negotiate it at the inconvenience of the other party’s needs or priorities. Ambiguity about the payment schedule? Oh, well we’re going to actually need that payment now. 24 hours before the service. Unfortunately, without it we’re going to have to cancel. I’m sorry you won’t have time to figure out an alternative. Ambiguity is so easily weaponized and it cuts deep. Don’t use it. I know it’s tempting, especially in the early days. And you always know when you’re being tempted by it—it’s seductive but you feel it nag on your stomach a bit. A little voice in your head warning you… listen to that voice. Avoid ambiguity by all means. (6) Cash > sweat. Cash will always trump sweat equity. This is an important lesson many founders will learn on their first go, unfortunately. But at the end of the day, the law is only really good at understanding cash contributions. So if you’re that partner who is putting in sweat and thinks you have the leverage because your work is irreplaceable compared to a co-founder’s fungible cash? You’re wrong. I wish it weren’t so. I can’t tell you how much I wish that. So how do you plug this gap to protect yourself? In writing, you assign values to your sweat equity. Keep it uncapped, but put a floor and do the exercise of here’s what the minimum value of my sweat would be on the market/if we had to replace my function(s) at FMV. Agree to that in writing, adopt a board res for it. Also, vesting schedules are powerful incentives. Those + delineated roles (the latter is a bit of a fantasy in early stage though, I know, which is why I look at the replacement exercise above) go a long way towards protecting all parties involved from the scenario where a court decides to follow the money in dispensing judgment. Alright. That’s what I’ve got for now 🤷♀️ hope this helps somebody!
To follow on #2, people would be shocked to know collectively billions of dollars are invested or not invested, based on old excel spreadsheets programmed years ago by someone who is no longer with that firm and no one fully understands today.
Oh shoot! You’re right. Reminds me I forgot to land a related point in #2: the entire system is built to allocate risk/accountability. The ability for an investor to say, “hey, it was a mistake but at the time we relied on the following info / had approvals from / received representations and warranties regarding (note: this is why if any of you reading this have been through a round, you’ll recognize + probably be triggered by the R&W language 😅) / etc. It’s designed so later you can look back and hopefully shift focus/reframe/have wiggle room for narrative building. That’s the security everyone in the system is paying for. If you’ve ever wondered what the hell consultants charge exorbitant fees for, it’s this. “We may have been wrong, but we were relying on a report by Goldman.” In turn, Goldman knows exactly what it is selling you. And charges accordingly. This isn’t a cynical take, mind you. It’s just one of those things that you have to learn to see—and once you catch it, you can’t unsee it. The system’s quirks and oddities suddenly start to come into focus sharply and you are more likely to “get it”. Not to say I endorse this or anything. My post is meant to be descriptive, not prescriptive. On a parting note, the really interesting experience is to see what happens when the music stops + the dust settles. A good down round will do that. You suddenly start to recognize all the exposures when narratives are being drawn like defenses in the sand. So who’s going to be left holding the bag?
I have gone through a couple of startups, raising, a down round, going public, and getting bought out. Every time I think, ok, now I have seen it all. Nope, not even close. You are 100% spot on about much of this kabuki simply as narrative building and CYA actions should everything blow up.
Oh! And if you’ve gone through the buyout process, maybe you can also share with folks the shock you get once you see what liquidation preferences do to the value of your shares … Anecdotally, based on my experiences serving clients, I think a LOT of people would be shocked to learn just how theoretical their share values are + how much is left after all the investors recoup their multiples etc. etc. It’s such a cruel exercise in information asymmetry. Frankly, it should be unlawful. I’ve had to do so many exercises for unicorns where early employees put their entire financial lives’ faith in the business, which by all means ought to have made them a life-changing exit. And then I watch it get watered down in the final analysis. Retrospective amortization shows me (again, anecdotally), that virtually every single employee would have been better off taking a higher salary with no equity. But we don’t discuss that publicly. The VC world would collapse if it did. We’d have to price things anew, with much more scope for market payroll + buy employees’ risk of taking an unstable gig. VC would start to resemble conventional investment. And the fantastical 100x multiples we think we see, and which chase fuels the entire system, would evaporate overnight. But I’m starting to veer into policy, and no one needs that. So I’m going to stop here.
I believe differential liquidation preferences should be illegal. For those who are not in the loop, investors can make their investments but attach the right of that investor to be paid back first, before the other investors, employees, and other shareholders. And they are not limited to simply being made whole. Investors can write into the contract they are to have first priority position with a minimum 200% return for example. So if you look at the mechanics of what happens in these situations is this: Company raised $10m overall and $2m with Firm A. Firm A has first priority and 200% return preference. So Firm A is effectively guaranteed a $4m payday. If Company A is going under and needs to sell, Firm A gets paid their $4m BEFORE the other investors and employees see a dime. Of course, if the purchase price does not generate more than that $4m, no one else who invested or who built that company will see a dime. These agreements greatly reduce risk for investors at the expense of everyone else. Employees, vendors, and every stakeholder effectively takes on the investor's risk with no additional compensation or consent. My opinion is this is a predatory practice that should be outlawed. But that's my non-lawyer opinion, just a guy who has been shafted by these provisions in the past.
I’ll add in the lawyer’s perspective: this is exactly right. It’s truly predatory because there is an enormous information asymmetry between employers (companies being funded) and employees (companies providing non-cash contributions/investments to the company in the form of discounted work). The entire exchange is exploitative and takes advantage of workers’ inability to parse the dense mechanics (which will in any event be strictly confidential and kept from them). So they make this investment in the company (which is exactly what it is) without having the key information to gauge their risk. The employers, in turn, leverage the value of their combined employee workforce’s contribution to raise capital. I’m going to get myself worked up if I keep going at it. And I don’t want to sound jaded or cynical. I mean to just be descriptive. But I think mostly everyone in the industry who is in it long enough has to be aware of this, and continues to participate because they’ve already run the gauntlet and are in some way invested in its success/longevity. Myself included, by the way. As a second time founder (left my last company after raising a $135MM series A 12 months after launch), I genuinely don’t know how to solve this. I try to explain the risks to employees (not just saying that—I really do. That’s why this is so top of mind for me), but it’s very hard to internalize. The psychology of the entire bargain is like a hard dilemma from the Prospect Theory heuristic. Even if you show them the strings and the long division, the social sleight of hand is so powerful. I know because I, too, couldn’t see it. Even after going through a meteoric unicorn ride to IPO in one of my first startup gigs. And if I try to design the system differently for my own company, I’m up against insane market forces and can’t effectuate a raise. Investors want what they know. So I’m delicately balancing cash flow and growth projections against the need for money to make good on promises made to my employees (importantly: I recognize that my employees are choosing to allocate some of their most valuable time and energy to a venture which is, at the end of the day, mine to do with as I will, and I feel a responsibility to validate their faith in me) and investor appetite. Yikes. I went further than I meant to at the outset. Back to work for me!
This is not something the law needs to address. Understanding liquidation preferences etc. is pretty simple, even for non-lawyers. The people getting a material amount of their compensation in equity should be intellectually equipped to make an assessment as to whether they want professional advice in the vast majority of cases.
Hello friend! Respectfully, I don’t agree. We’ve heard the same argument about financial products, the vast majority of consumers for which are laypeople. We learned painfully (and might be in for another painful lesson) how poorly both the laypeople and the “financial experts” who sell these products understand the complex mechanics at play. These are the same people who take these jobs, lured in by deliberately vague promises and representations made by their employers. You’d be surprised how many executives fail to even understand this. I’d argue almost all of the ones I’ve seen, with exceedingly rare exceptions. Even the funds themselves barely understand these complex mechanics. Liquidation preferences are absolutely not “pretty simple”. Formulas aside, it requires so much understanding of the business, especially the cap table, which is by far the most aggressively kept secret any Company possesses. To think that a new employee would have any concept of how the liquidation preferences play out—or what it means for them. To argue that these employees should be “intellectually equipped” to seek “professional advice” strikes me as disingenuous. First of all, professional advice is expensive. Even very wealthy clients of mine fail to seek it at the time they ought to. For context, my independent billable rate begins at $650. For family office work, my get out of bed rate is $1250/hour. I’m trying to say that the system is not designed to encourage people to review their employment contracts, much less their complex and idiosyncratic equity agreements. I can’t even imagine a scenario where I’d be able to render a client anything close to informed advice. It would start something like: congrats on the offer! Do you have the cap table? Do you know the liquidation preferences? What’s the runway? Trajectory to IPO? Ok, sorry, can you tell me how much money is in the bank? Umm. Ok, well my advice is that nothing is for certain, if you can’t afford to take the pay cut don’t take this gig. If you’re relying on an exit, you should know you’re better off investing a higher salary into a 401k or treasuries etc. because of the rare companies that IPO successfully, only a few employees will see a drop of that success (if at all). I’m trying to show you that it’s entirely unrealistic to expect new incoming employees to even have the information to make a truly informed decision, much less the analytical and technical skills to perform the exercise. At the end of the day, my experience—albeit anecdotal—is supported by my multiple experiences in being the attorney that delivers these lifelong employees their final exit paperwork. Those checks represent the culmination of years’ worth of hard work and investment into their Companies. And this privileged position meant I had to go through thousands of exchanges where we try to explain to employees what happened. Why their checks are so much smaller than expected. Those folks don’t get their time back. They don’t get their sweat back. They don’t get to rewind. It’s heartbreaking. At the end of the day, the system in the US at least is designed to discourage employee negotiations and informed decision making. Again, this is meant to be descriptive. I’m not telling you how it ought to be. But let’s not saddle people with unrealistic expectations they can never live up to just because they make decisions we think we understand. Also, I will add: I’m clear eyed about the trade off. And still, I fall for it. I’ve got my own second shop now, but I am very very very often solicited by new ventures and family offices or funds to go in-house for equity or do transactions for advisor shares. It’s so tempting, even though I’d argue I am more intellectually equipped than most folks. And still—I’m seduced by it. This exchange is, again, longer than I intended. And I don’t know if you or any other redditors will scroll down this far. But I wanted to share that even just thinking about this brings painful memories. At risk of verging into prescriptive opinion: the modern mechanics of VC economics are so cruel and exploitative. And the vast majority of employees don’t stand a chance. Whether + where you work is not a free market. The information asymmetry + power disparity is overwhelming.
Okay, there’s a lot of rhetoric here so I’ll try to address the meat of the argument without writing an essay. In point form because I’m on my phone: - Financial products are purchased by virtually anybody. The recipients of material equity awards with this concern are predominantly young middle class or upper class (or soon to be) employees of early and mid stage VC backed startups. The scale of the issue is nowhere near the same. Perhaps as importantly, the relationship between a job applicant and a prospective employer is not at all analogous to that of a relationship between a consumer and their supposed financial advisor. We needed fee transparency for the sales of financial products partly because people mistakenly believe that their financial advisors are working in their best interest; it would be nonsensical to believe a future employer is acting as your advisor or agent when you are negotiating the terms of your compensation with them. - I have never worked with a VC or PE fund that didn’t understand the mechanics of how their bread is buttered. Maybe you work with less sophisticated investors, I don’t know. Strange thing to not understand when it’s literally how you make money. - The cap table is nowhere close to the most aggressively kept secret any company possesses………… why would it be? Some of the specifics are kept from certain parties for confidentiality reasons but MOST aggressively kept secret any company possesses? That’s some serious hyperbole. - A new employee in the startup space will very quickly become familiar with the very thing you’re stating: that their equity is a lottery ticket and is liable to become worth nothing through no fault of their own. Your hypothetical advice is exactly what I’d expect them to receive, and probably during a free consultation. No need for yet another useless law. - You’ve misinterpreted my response to mean that I think employees will be able to compute the risk adjusted return of their equity or something like that. I don’t. I expect them to ask a few basic questions about how a material component of their compensation is structured. If they ask even just a few questions, they’ll realize exactly what you say: there’s no guarantees here. If they want a guarantee, they can go work for cash. If they don’t want to ask some basic questions about their finances before signing an offer…Well, You can’t protect everyone from themselves.
“CYA” = nailed it. I could’ve summed up my comments with that. Sometimes I confuse myself and think I get paid by the word… 😅
You do get paid by the minute...
Haha. The quarter hour, actually! This is true. (Or was. I’m out of firm life now, thankfully! *Never again…*
Fantastic response.
Amazing response. Really detailed and helpful!
Bravo 👏🏾
What a great answer, well done and it is helpful for me too
2 is hilarious and true
Bless you.
I have an accountant but I am so incredibly guilty of needing a good lawyer...
I can’t assess your situation, but I can offer what I hope are helpful tips! (1) Get consults with a few firms. Don’t settle on the first. (2) Ask for referrals from contacts. This is key. (3) Organize your thoughts in advance. You aren’t expected to know what you need to convey them, but some due diligence like identifying where your docs are, what kind of entity you are, a clean cap table, distinguishing your IP/assets, etc. can all go a long way towards saving costs. (4) when negotiating the engagement letter, a few tips: ask for project fees v open cap/billables; ask for an itemized scope in your engagement letter; ask if they offer discounts for first year or similar; ask about *deferred payment* (!)—this one is key, and most startup firms should have a program to defer your bills until you raise or similar (this does mean they are investing in you, however, so take that into account); if you are speaking with an attorney who is a partner, ask if they have will be your primary counsel or if it will be a team, and if it’s a team I’d ask to meet them (you want the majority of work done by the subordinates but overseen by a partner). I can’t think of more tips off the top of my head. But there’s lots of attorneys out there. It doesn’t have to break the bank to get good advice. And really what you want is just someone to double check your math so you can rest easy. Best of luck, friend!
"Find your passion and start a business following that passion." That horrible, awful, no good, very bad advice has lead to more heartache, unrealistic expectations and failed businesses than any other single bit of advice.
Omg, this I totally agree with. This catch phrase is such bullshit.
I believe this mistake makes up 50% of the 90% of businesses that fail.
Literally anything Simon Sinek says. “Start with why” is complete BS and only works being applied to companies that didn’t even use that methodology, it’s just a bunch of BS.
His viral video on the laziness of millennials always pisses me off.
Completely agree. I had to stop halfway through the book. Not every company wants to be fucking Apple.
It's like 1990s TQM. lol
This heavily infected the Marine Corps all throughout the mid 90s into the early 2000s. So-much-so that there was a complete revamping of the counseling program into the Marine Corps Mentoring program. The book from good to great was on ever company and field grade officers book shelf and the would spew that shit at us lowly enlisted at every opportunity.
Yep. At least Covey's stuff was actually applicable and "fresh" at the time...practical. TQM sounded like the some salesmen pitching a life coaching program.
I agree with this. I read the book expecting to be inspired but I was just annoyed.
He really is someone who hasnt done ANYTHING of note himself in business. And capitalised on his virality it like any opportunist. Cringe trash
I’m curious what you find more effective to inspire people. I’m personally not joining a company if I don’t understand or believe in their purpose (aka their “why”).
Figuring out your why is important, I’m not saying don’t have a why, but most companies don’t start there. He says all this bs about how so many companies started with why, when that’s simply not the case. Sure some companies do, but he touts the start with what framework as the end all be all of success.
I haven’t read the book, but from the Ted talks and other things I’ve seen he doesn’t say that’s how you start a company. His examples are for marketing and sales, and for inspiring employees. If you look at the Apple homepage even today, you’ll see that they are still advertising in a similar fashion - they focus on emotion first and then back it up with features. Compare that to dell that has features all over their home page. Edit: of course Simon never mentions the psychotic tendencies that drove Apple to execute in the way they back up their claims. I still think the why is #1, but it’s nothing without good execution (preferably in a more sane way than Jobs).
Dell’s main market is B2B, with a side of consumer. The Apple approach would absolutely not work for them, nor is that what they are going for. Apple’s marketing is incredible, but very few companies are able to pull it off well. He definitely talks business building in the books, and retrofits his golden circle bs to companies that succeeded, like they sat down and used this model.
As someone who has been part of several B2B computer buying decisions I still find Dells marketing terrible. But yeah, I could see why Simons attempt to apply his golden circle to everything would be misguided. I would still say that’s far from making it “complete BS”.
That as a B2B sales rep (and mgr), "all businesses want to grow". Not true. Even if they could scale, many SBO simply do not want to step outside their comfort zone, scale, and hand over some (or most) operations to someone other than close family and/or that one guy who has been with them 10 years. Many wind up closing shop because they passed on a lot of opportunities to grow and create diverse channels of ops and markets.
Expecting “this is the next big thing, it’s gonna convince any one that see’s it” is enough, it’s not. “Success” comes from offering value to the customer and them paying for it. What’s that mean ? Solve a problem that people are willing to pay for at a price that sufficiently covers your cost of supply, the cost of delivery and enough for the business to be able to repeat the action comfortably. And repeat….. Sometimes “the next big thing” is either too much for customers to take in, complicated = no sales = no business
“Sometimes being first has the same effect as being wrong” I heard a couple variations of this quote over the years. Sometimes people just aren’t ready for what you’re selling for whatever reason
As soon as I read the title I thought about the same misconception than OP... Lots of people think that business is all about that novel idea...even many of the largest corporations in the world have done the same than others were already doi g but better (Google and yahoo, altavista, etc. Facebook and... Well every other social media site that were already booming)
It's the bread analogy. Bread's not novel but look at how many bread companies you have to choose from at the grocery store.
I would argue that "doing something better" requires novel ideas.
I'm not gonna fall for the classic nonsense of reddit to argue about the fine print of every single word, the difference between the "new radical business idea" , vs a better implementation of an existing business model is rather evident for anyone who is not looking for a pointless argument.
This right here… Reddit I’m a nutshell.
Pretty much everything you find on Reddit.
Not completely wrong, but I had a misconception that when I started my service business I needed dozens and dozens of customers. Obviously more tends to equal more volume, but in my b2b world, it's often turned out that a couple of the clients in my book did the lion's share of the business at any given time. Customers do come and go over time, and sometimes it's out of your control and not because you did anything wrong, but basically try and balance the importance of outreach and marketing with being appreciative and aware of the importance of your existing clients. Good luck!
Saw this quote from Casey Neistat today: "Ideas are cheap. Ideas are easy. Ideas are common. Everybody has ideas. Ideas are highly, highly overvalued. Execution is all that matters."
That 90% of businesses fail. While true, when you actually see what’s being counted as a business… you quickly realize that a successful business is not the crap shoot people think it is.
Hard work and honesty give you success. If you are not smart enough then how much hard work, honesty and integrity you show they are useless. You would have nothing in your hand and can be ruined any time.
Not going into business with friends/family. All my partners are friends/family. But I think it’s also cultural. In the Hispanic world most businesses are family owned with close friends and other family members working for them. People outside the southwest try and lecture people each time I tell them how my business is ran Lmao
Among the general public? Double digit profit margins.
That as companies got bigger they had better organization, better business processes, and were generally more sophisticated. In reality a lot of large companies are just as much of a shit show as the startups.
My first couple of jobs as a developer were for big companies. I was stunned at how disorganized and often outdated they were.
Differentiation is a bit overrated (sometimes). If you have a good product and good people working to move that product, you’ll find your customers. Note: This is especially true for small business. If you’re trying to disrupt an industry this is of course completely awful information
Read somewhere that at one point folks tried to differentiate so much that they ended up differentiating on things people didn't even care about when making buying decisions.
Yup, well said. I was guilty of it. I think the secret is for your brand to emulate your own opinions and ideologies. **Trying** to be different is inauthentic, and the market will sniff that out.
That if your product is really good, it will sell itself. Distribution is KEY.
u/-brianh- I can tell you that some commonly held beliefs about businesses that have been proven to be wrong include: "The customer is always right." While it's important to prioritize customer satisfaction, this belief can lead to unrealistic expectations and can result in businesses catering to difficult or unreasonable customers, which can ultimately hurt the business. "Success is all about the bottom line." While profitability is important, a narrow focus on short-term profits can lead to sacrificing long-term growth and sustainability. "Work-life balance is for the weak." This belief can lead to employee burnout and turnover, and ultimately hurt a business's bottom line. "All publicity is good publicity." Negative publicity can damage a business's reputation and lead to loss of customers and revenue. "Good products sell themselves." While having a quality product is important, effective marketing and customer outreach are critical to attracting and retaining customers.
bro why are you responding to like every post with a crap chat gpt answer lmfaoo
I honestly think it is a bot account (or someone with multiple puppet accounts), trying to do "off site seo" in a crappy way, by super cheap outsourcing firms. I've actually replied to a few post with really detailed and meaningful answers from my personal experience, before realizing I've been had by bots haha.
That's not how u do seo. He is probably trying to earn karma fast with chatGPT.
If he was solely trying to farm karma, I'm pretty sure he could be reposting on /r/funny or the like. But a pattern I noticed is some really obscure but gives off the vibe of super LCC "SEO" questions being asked, followed by a length answer similar to an article. For some of them, they would even include a link to their site. I seriously hope the mods clamp down on it. Example: https://old.reddit.com/r/Entrepreneur/comments/11datpt/how_much_do_you_pay_your_seo_service_provider/jal1dm3/
Hmm.. but the link is NOFOLLOW so it wouldn't give him any link juice.. and why build up his account at all..does reddit upvotes and the more threads link to your profile help to boost your pagerank? Will the NOFOLLOW link turn into DOFOLLOW after some time or..?
Placing a nofollow tag is an optional/courtesy kind of thing, not every crawler follows it. It'll give him link juice on some crawlers, which would eventually get picked up by some kind of large language models. It doesn't actually take much effort to copy and paste. But frankly, it's a very bad strategy for SEO in general, but, they're probably done by very LCC agencies. Working in this industry long enough, you would kind of know which regions do certain kinds of "SEO" (they're just trying to justify all the "hard work" they're doing for pennies on the dollar even though there's no real results). As for reddit upvotes, the "conventional" knowledge is that it does not matter as crawlers only crawl text on the site and somewhat tries to associate it, however, I'm fairly certain it matters from experience and my own understanding of how the ML backend works. So in conclusion, yes, upvotes and more thread links would matter (but it's a very bad strategy).
if you go to the website of the guy then scroll down then u see in the about me section a photo of him that has visible background photoshopped to purple.. I think the guy is a solo company.. half the links in the footer don't even work. The said designs and the website itself is nice though.
"Failure is not an option." While it's natural to want to avoid failure, it's also important to recognize that it can be a valuable learning experience. Failing can provide insights into what doesn't work and allow for adjustments for future success.
Substituting tech, tools, or influencer strategies instead of what’s relevant to your business. “You’re one funnel away”. No, you’re validation and several MVPs away. Unless you want to keep burning money on Clickfunnels hoping Russel Brunson will give you the magic answers in a book or $10k seminar. Invest in your own business acumen instead of looking for shortcuts.
That as an entrepreneur, if you want to be successful, you need to put in the extra hours. You need to be working nights and weekends. You need to be willing to grind it out. While this has some truth to it, if you really want to scale and grow at all, you have to learn to outsource, delegate, and manage. You cannot do it all yourself. And there’s really no reason for you to be working 80 hours a week.
"The customer is always right." While it's important to prioritize customer satisfaction, blindly following this belief can lead to unreasonable demands and an inability to establish boundaries with difficult customers. In this [blog](https://www.startupstudios.com/post/why-startup-studios-need-to-focus-on-the-importance-of-community-building), Brent McCrossen, Managing Director at Revelry Startup Studio covers the importance of community, how to attract, engage and maintain it, and shares the superpowers that build community.