The reason this period was so useful was that it helped me develop a really thick skin.  I came to realize that employers weren’t really rejecting me as a person or on my potential – they were rejecting a resume.  As it became depersonalized, I became bolder in my tactics. I eventually landed a job at Bessemer (thanks to their willingness to take chances and look beyond resumes), which led to getting my first VC-backed startup funded, and things got better from there.

One of the great things about looking for a job is that your “payoff” is almost always a max function (the best of all attempts), not an average. This is also generally true for raising VC financing, doing bizdev partnerships, hiring programmers, finding good advisors/mentors, even blogging and marketing.  I probably got rejected by someone once a day last week alone. In one case a friend who tried to help called me to console me. He seemed surprised when I told him: “no worries – this is a daily occurrence – we’ll just keep trying.”  If you aren’t getting rejected on a daily basis, your goals aren’t ambitious enough.

Then take the spreadsheet and show it to every smart person you can get a meeting with and walk through each idea.  Talk to VCs, entrepreneurs, potential customers, and people working at big companies in relevant industries. You’ll be surprised how much you’ll learn.  The odds that someone will hear an idea and go start a competitor are close to zero.  The odds you’ll learn which ideas are good and bad and how to improve them are very high.

Every conversation will contain some signal and some noise. Separating the two is tricky. Here are some broad rules of thumb I’ve developed for how to filter feedback based to the profession of the person giving it to you.

1) Employees at relevant big companies. These people are great at providing facts (“Google has 100 people working on that problem”) but their judgment about the quality of startup ideas is generally bad. They tend to have goggles on that makes them think every good idea in their industry is already being built within their company.  For example, every security industry person I talked to thought SiteAdvisor was a bad idea.  (If it wasn’t, they think, someone at McAfee or Symantec company would have already built it!)

2) VCs. VCs are good at telling you about similar companies in the past and present and critiquing your idea in an “MBA-like” way:  will it scale? what are the economics? what is the best marketing strategy?  I would listen to them on these topics but pretty much ignore whether they think your idea is good or bad.

3) Potential customers.  If your product is B2B, remember you’ll be selling to that person 2-3 years from now and by then the world and their priorities will likely have radically changed.  If your product is B2C, it’s interesting to hear how regular consumers think about your product but often they really need to use it fully built and in the proper context to really judge it.

4) Entrepreneurs. This is the one group I listen to without a filter.

Even though I have no intention of starting a new company for a long time (if ever), I still keep my idea spreadsheet and update it periodically.  Some of the ideas I wrote down a few years ago are now companies started by other people (some successful, some not).  A few I had the chance to invest in. It’s interesting to compare my notes and ratings of each idea with how those companies have actually performed. I also keep a list of “on the beach” ideas in case I have time in between startups. These are mostly non-profit ideas.  I don’t know if I’ll ever get to those but they are particularly fun to think about.

* Thanks to James Cham for inspiring & contributing ideas to this post!

For example, Fred Wilson says about VC:

You cannot invest $25bn per year and generate the kinds of returns investors seek from the asset class. If $100bn per year in exits is a steady state number, then we need to work back from that and determine how much the asset class can manage…. I think “back to the future” is the answer to most of the venture capital asset class problems. Less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals, and smaller exits

Similarly, Bill Gurley writes:

There are many reasons to believe that a reduction in the size of the VC industry will be healthy for the industry overall and should lead to above average returns in the future.

All of these analyses start with the assumption that aggregate venture-backed exits (acquisition and IPOs) will remain roughly constant. I don’t see why we need to accept that assumption. The aggregate value of venture-backed startups, like all valuations, is a function of profits generated (or predicted to be generated). In technology, profits are driven by innovation. I don’t see any reason we should assume venture-backed innovation can’t be dramatically increased.

For example, innovation has varied widely across times and places – the most innovative region in the world for the last 50 years being Silicon Valley. What if, say, Steve Jobs hadn’t grown up in Silicon Valley? What if he had gone to work for another company? Does anyone really think Apple – and all the innovation and wealth it created – would exist if Jobs hadn’t happened to grow up in a culture that was so startup friendly? Jobs is obviously a remarkable person, but there are probably 100 Steve Jobs born every year. The vast majority just never have a chance or give a thought to starting a revolutionary new company.

Some people blame our education system, or assume that there is some fixed number of entrepreneurs born every year. I think the problem is cultural. As much as we like to think of our culture as being entrepreneurial, the reality is 99% of our top talent doesn’t seriously contemplate starting companies. Colleges crank out tons of extremely smart and well-educated kids every year. The vast majority go into “administrative” careers that don’t really produce anything – law, banking and consulting. Most of the rest join big companies. As I’ve argued many times before, big companies (with a few notable exceptions) aren’t nearly as successful as startups at creating new products.  The bigger the company, the more likely it suffers from agency issues, strategy taxes, and myopia. But most of all: nothing is more motivating and inspiring than the sense of ownership and self-direction only a startup can provide.

Whenever I see a brilliant kid decide to join Goldman Sachs, McKinsey, or Google, I think to myself: a startup just died, and as a result our world is a little less wealthy, innovative, and interesting.

How entrepreneurs handle shutting down is very important.  First, try to return as much capital to your investors as you can (after paying off employees and other important debts – but don’t waste money on an expensive legal process). Second, if you’ve developed IP, spend a few months trying to sell it to recover as much capital as you can (often investors will offer a “carve out” to incentivize entrepreneurs since the likely return to investors will be under total number of preferences).  Don’t go off starting a new venture before you’ve properly closed down your current one (I’ve seen this twice recently – very bad form).  Finally, for your own learning as well as your reputation, write a detailed post-mortem about what went right and wrong and send it to your investors, and then try to follow up with in-person discussions.

Here’s the good news.  One of the great things about angel and venture investors is that failure is accepted, as long as you do it in the right way. Venture investors will often fund entrepreneurs who’ve lost their money in the past. They understand that if you build an interesting product and, say, market forces turn dramatically against you, that’s a risk they took — and the type of risk they will take a again. Also, entrepreneurs tend to be judged by their wins (max() function), not their average.  You’d be surprised how many entrepreneurs have failures in their past that no one remembers once they have some success.

The most important question to ask before taking seed money link

The challenge of creating a new category link

Man and superman link

The new economy link

Why content sites are getting ripped off link

Software patents should be abolished link

Climbing the wrong hill link

Google and newspapers: the false choice of opting out link

New York City is poised for a tech revival link

To make smarter systems, it’s all about the data link

The one number you should know about your equity grant link

Why you shouldn’t keep your startup idea secret link

Ideal first round funding terms link

In the startup world, the latter approach dominates.  It is almost unheard of, for example, to see entrepreneurs or VCs sue each other.  The ones who do tend to leave the startup world, either by choice or by having ruined their reputation.  It is very rare to see someone in the startup world break a verbal agreement.  And, in most cases, employees and employers show loyalty far beyond what is seen in larger companies or what is economically “rational.”   (Most startups do spend considerable legal fees on financing, employee, and IP documents, but that is mostly because they know that those are necessary if they decide to sell themselves to a large company where the legalistic approach dominates.)

For this reason, if you are an employee working at a startup where the managers are honest, inclusive and fair, you should disregard everything you’ve learned about proper behavior from people outside of the startup world.

For example, let’s suppose you are a two years out of college and have a job at a startup.  You like your job but decide you want to go to graduate school.   The big company legalistic types will tell you to secretly send in your applications, and, if you get accepted and decide to attend, give your boss two weeks notice.

What you should instead do is talk to your boss as soon as you are seriously considering graduate school.  Give them twelve months notice.  Any good startup manager won’t fire you, and in fact will go out of her way to help you get into school and get a good job afterwards.  They will appreciate your honesty and the fact that you gave them plenty of time to find a replacement.

(Now don’t get me wrong:  if you work for bosses who have a legalistic, transactional mindset, by all means give two weeks notice.  I gave 4 months notice once to a boss with that mindset and was duly punished for it.  But hopefully if you are at a startup you work with people who have the startup, relationship-centric mindset.)

This way of relating to other people is one of the main things people are talking about when they talk about “startup culture.”  It is why so many people coming from other industries have difficulty fitting into startups (especially people coming from Wall Street where the transactional mindset is at its most extreme).  I personally find the community approach a much nicer way to operate, and try to only professionally associate myself with people who prefer that approach as well.

A while back, I posted about how I recommend thinking about non-founder option grants.  In the comments, Aaron Cohen made the point that given today’s “good” exit sizes and standard equity grants, most non-founders will not gain independence even in the (non-extreme) good cases:

Most startup employees need to realize they are on a journey and that in addition to making a few hundred thousand dollars on a good outcome they are learning how to become more senior at the next company. Real wealth creation will take founding, seniority, or staggeringly large exits.

As Aaron said, you shouldn’t think of joining a startup as just joining a company. You should think of it as joining the startup career path. This career path could mean starting a company as your first job.  It could also mean working at a few startups and then starting a company.   (In my view, if your goal is to start a company, it is mostly a waste of time to work anywhere but a startup – with the possible exception of a short stint in venture capital).

Maybe you will make some money working at a startup, but more importantly you will hopefully work for founders and managers who are smart and willing to mentor you and eventually fund or help you fund your startup.

The startup world is extremely small.  If you’re smart, work really hard, and act with integrity, people will notice.  Contrary to popular wisdom, you will actually have more job stability than working at a big company.  And hopefully you’ll go on to start your own company, gain independence, and then help others do the same.

About 6 years ago, when I was working at Bessemer as junior investor, I was at a dinner with a group of friends and acquaintances.  The guy sitting next to me was a business school student who spent most of the dinner talking about how he was trying to get a job in venture capital.  He never bothered to ask me what I did for a living and I never mentioned it.

Now, I wasn’t a particularly important venture capitalist, but getting a job in the industry is all about meeting as many people who work in it as you can.  The fact that he happened to be sitting next to one was potentially serendipitous – had he only bothered to ask questions.

Over the years, I’ve run into many prospective employees in similar situations. When I ask them a very obvious question: “What do you want to be doing in 10 years?”   The answer is invariably “working at or founding a tech startup” – yet most of them decide to remain on their present path and not join a startup. Then, a few years later, they finally quit their job, but only after having spent years in an industry they didn’t enjoy, and that didn’t really advance them toward their long term ambitions.

How can smart, ambitious people stay working in an area where they have no long term ambitions?  I think a good analogy for the mistake they are making can be found in computer science.

A classic problem in computer science is hill climbing.  Imagine you are dropped at a random spot on a hilly terrain, where you can only see a few feet in each direction (assume it’s foggy or something).  The goal is to get to the highest hill.

Consider the simplest algorithm.  At any given moment, take a step in the direction that takes you higher.  The risk with this method is if you happen to start near the lower hill, you’ll end up at the top of that lower hill, not the top of the tallest hill.

A more sophisticated version of this algorithm adds some randomness into your walk.  You start out with lots of randomness and reduce the amount of randomness over time.  This gives you a better chance of meandering near the bigger hill before you start your focused, non-random climb.

Another and generally better algorithm has you repeatedly drop yourself in random parts of the terrain, do simple hill climbing, and then after many such attempts step back and decide which of the hills were highest.

Going back to the job candidate, he has the benefit of having a less foggy view of his terrain.   He knows (or at least believes) he wants to end up at the top of a different hill than he is presently climbing.  He can see that higher hill from where he stands.

But the lure of the current hill is strong.  There is a natural human tendency to make the next step an upward one.  He ends up falling for a common trap highlighted by behavioral economists:  people tend to systematically overvalue near term over long term rewards.  This effect seems to be even stronger in more ambitious people.  Their ambition seems to make it hard for them to forgo the nearby upward step.

People early in their career should learn from computer science:  meander some in your walk (especially early on), randomly drop yourself into new parts of the terrain, and when you find the highest hill, don’t waste any more time on the current hill no matter how much better the next step up might appear.

If you look at the backgrounds of partners in VC firms, they generally either came in as a partner after being a successful entrepreneur or worked their way up in VC.  There are books written on how to become a successful entrepreneur, so here I’ll just focus on the other common path – career VCs.

First, you should understand how VC firms are structured.  Every firm is different, some have no junior people, some have just a few, and some have a lot.

The key distinction between junior and senior people is whether they can write checks – meaning they can independently lead a deal.  If you can’t write checks, you have to get a check writer to sponsor an investment you like.  Check writers get almost all the credit and blame for an investment.

The hierarchy within VC firms is basically as follows:  (There has been a wave of title inflation in VC lately, so I’ll put the inflated titles in parentheses).

Partners – Owners of the firm.  Get the most of the management and carry fees.  Can write checks.

Principals – Usually get small piece of carry.  Can write checks.  (Inflated title:  Partner;  in which case it’s hard to tell the “real” partners from the principals).

Associates – Usually post-MBA or 4-6 years work experience.   Usually get little to no carry and can’t write checks.  (Inflated title:  Sr. Associates or Vice President).

Analyst – Usually right out of college.   They do research or cold call companies.   No carry and obviously can’t write checks.   (Inflated title:  they just don’t list a title or say something vague like “investment professional”).

As you can see with the title inflation this is all pretty confusing.  It’s meant to be.  VCs want entrepreneurs to take their junior people seriously.  (Which, by the way, entrepreneurs always should:  even though they can’t directly write checks, they can be extremely influential)

You can break down working your way up in VC into 3 challenges:

1) Getting a job in the first place.  The two most common places to break into VC as a junior person are after undergrad or business school.  VCs are heavily biased toward certain top schools.  On the MBA side, the industry is dominated by Harvard and Stanford.  Undergrad, the VCs I know only recruit from Wharton, Harvard, Stanford and maybe a few other elite schools.  (Please don’t accuse me of elitism-I’m just reporting on elitism, not promoting it). Even if you go to one of these fancy schools it’s still not easy to get a job.  You need to network like crazy.  I did a whole bunch of volunteer research projects for VCs when I was in business school.  I came up with lists of investment ideas so when I got a few minutes with a VC, I could show them I was obsessed with this stuff.  Other things that help you:  computer science or other relevant technology background.  Single best thing is to have started a company (even if it didn’t succeed).

2) Going from non-check writer to check writer.  This might even be harder than breaking into VC.   There is kind of a Catch-22 here:  you can only gain credibility by having led deals, yet you can’t lead deals until you’ve gotten credibility.  Some partners are nice and let high level junior people “virtually” lead deals, join boards etc so they can get credit.  My advice here is to try to get your hands on a checkbook, even if it means leaving a top tier VC and going to a second tier one. Too many junior people hang around top tier firms waiting to get promoted.

3) Once you get your hands on a checkbook, then you just need to find the next Google/Facebook and invest before anyone else figures it out.

If you really want to break into VC and aren’t just now graduating from a top school, my top suggestion would be to go start a company.  If you don’t have the stomach for that, the next best thing is to work in a VC-backed portfolio company, hopefully in a role where you get some VC exposure.

And, finally, if you just want to work in finance, try to get a job at a hedge fund or a big bank.   Breaking into VC so hard that it’s only worth it if you really love startups.

I’m not saying you need a computer science degree, but I am saying it’s incredibly helpful to know computer science.  Lots of great computer scientists are self taught. But almost all of them started coding in their teens.  If you are a coder already and want to spend your college years majoring in something else for the heck of it, great.  I spent my whole childhood coding, and worked during college as a programmer, so decided to major in Philosophy because I thought it was interesting.

Why is it so much better to learn computer science in college (or before)?  Because after college it’s very hard to find the time and discipline to teach yourself coding.  On the other hand, it’s pretty easy to pick up business skills, economics and all sorts of other skills on the job or in grad school.

Why is a computer science degree so important to VC and startups?  I would estimate in about half the conversations I have at my own startup, with tech founders, and with venture capitalists, there is a moment in the conversation when we start getting technical.  Sometimes someone will even ask “Are you technical?” before starting down a topic.  The non-technical people in the room just sit there like we are speaking Greek.

It’s a shame that student enrollment in computer science is in decline.  The thinking apparently is that computer programming is increasingly moving overseas.  What these students fail to realize is you don’t need to be a professional coder all your life to find computer science an incredibly valuable major.

* There is a whole separate world of VC and startups in energy and healthcare.  In those areas I’d recommend analogous technical undergraduate majors.

Here’s one I got recently:

So you’re joining a startup as one of the first, or the first, non-founding members.  At the moment, the company generates little or even no revenue, but they do have a working first version of their product and a few early users.  To this point the company has been surviving on a modest amount of “friends and family” capital, which has largely been used to support the founders as they built the company and their product.  The founders, however, are convinced that a significant investment is imminent and you will be receiving a reasonable salary in short order.  They are equally certain that their product and their plan is ready to take off.

Determining a fair equity grant at this time is tricky enough; there seem to be far fewer established norms and guidelines for determining compensation in a pre-investment startup than there are following such a milestone.  To further complicate this situation, fast forward 6, 9, even 12 months into the future.  That “imminent” investment has not yet materialized and you have yet to receive any salary (though perhaps the founders have continued to subsidize themselves from the earlier friends and family investment).  The original product has been slow to build traction.  The product has undergone significant upgrades, and one or more new products have been developed, all with your input and assistance.

At this time, both sides decide to sit down and more formally address the issue of your equity grant, but by now the boundaries of your role have become even more blurred than when you first joined the startup.  To be sure, you are not one of the founders, but it seems the founders were not as far along as they believed when they brought you in.  Of course both sides are still likely to overvalue their contributions, so what guidelines and norms can you and the founders possibly look to in order to reach a fair and reasonable agreement on your equity grant?

Honestly, I’m not sure my top worry would be my equity grant at this point.  If I understand correctly, you’ve been working for a year with no written equity grant, no salary, for a company that has gotten little traction, and for founders who were way overly optimistic about their chances of raising money…? (perhaps even misleadingly so?)  I guess if you really love the vision or have no other options then you stay, but otherwise I’d recommend looking for a new job.  At an absolute minimum you should be given an option grant in writing ASAP, and I think that given your sacrifice and the uncertainty of raising any money beyond friends and family that grant should be significant.  If your skills are as important to the company’s as the founders, I’d say it should be at or around founder level.

I worked for a startup once where my equity grant wasn’t in writing.  Needless to say, when the company was sold, I got nothing.  Always, always get your equity grant in writing. Quality entrepreneurs will simply give you your grant in writing without you even needing to ask.

*/

function my_exit_payout(  company_sale_price, your_percent_ownership, your_aggregate_options_strike_price, investor_preferences, investors_ownership_percent)
{

if (investors_ownership_percent * company_sale_price < investor_preferences) investor_converts=FALSE;
else investor_converts=TRUE;

if (investor_converts) return your_percent_ownership * company_sale_price – your_aggregate_options_strike_price;
else {
common_stock_proceeds = company_sale_price – investors_preferences.
your_percent_common = your_percent_ownership / ( 1 – investor_ownership_percent );
return common_stock_proceeds * your_percent_common – your_aggregate_options_strike_price;
}

}

Number of shares:  meaningless.

Price of shares:  meaningless.

Percent of the outstanding option pool:  meaningless.

Your equity in relation to other employees:  meaningless.

Strike price of options: meaningless.

The only thing that matters in terms of your equity when you join a startup is what percent of the company they are giving you.  If management tells you the number of shares and not the total shares outstanding so you can’t compute the percent you own – don’t join the company! They are dishonest and are tricking you and will trick you again many times.

I find it really depressing how often employees, especially engineers who are so smart about other mathematical issues, don’t get this.  I felt forced to post this after talking to a friend today who told me about how a prominent NYC startup has been telling hires the number of shares they are granted but won’t tell them the percent those shares represented (“it is company policy”), or the number you need to compute the percent – the total outstanding shares.  It’s really amazing people are getting away with this simple and incredibly cynical trick.

I’ve seen many companies “split the stock” 10-1 so that instead of, say, 10M shares there are 100M shares outstanding so the absolute number of shares granted sounds really big to naive hires who don’t understand that all that matters is the percent they own.

I think every engineering school in the country should have a week-long course on the basics of the capitalization of startups.  There are other things that matter too, but far less (like the number of preferences outstanding).   I’ll try to write about these other things in later posts.

Engineers – here’s how equity is paid out in a normal company sale/IPO (assuming a “good” outcome – in the downside cases it’s more complicated as investors have preferences which act like a max() function).  You get the percent you own multiplied times the price the company was sold for (or the market cap after IPO).  That is why percent ownership is the only equity number that matters.  Don’t work for someone who tells you otherwise or won’t tell you what percent you own.

Here’s how equity is often granted from the very beginning of a company’s formation:

1. Founders decide on mostly equal split over beers.  It’s all just scribbles on a napkin at this point so equity flows freely.

2. In the cold light of day, founders renegotiate, with some founders possibly getting (significantly) more than others.

3. Employees who join pre-funding get reasonably big equity grants.

4. Series A financing occurs.

5. Suddenly equity grants to new employees are sliced an order of magnitude or more from what they were prior to Series A.

(Also, toss in there along the way one founder gets disgruntled and leaves – see founder vesting).

The problem is a Series A financing usually de-risks the company far less than the equity grants drop.  If I had to graph this in a totally unscientific way it would be like this (for successful companies – as represented by the green line going straight up):

Why do the equity grants drop so much after initial VC financings?

1) There are well established norms for post VC equity grants.  Going against them generates a lot of resistence from VCs.  By way of example, here are directionally accurate although probably 2x what I have typically seen post Series A.

2) Compounding this, after a financing the founders probably just got finished arguing for a smaller option pool to reduce their dilution, and it’s seems very hypocritical after that to argue for greater-than-standard equity grants.

3) The company now has an arms length valuation, probably in the multi-millions of dollars.  Suddenly 1% is worth “real money.”

The best time to join a company is at the very beginning – to found or co-found the company.  The second best time is to join before venture financing.  The third best time is when the company has started to ramp sales/traction – at that point your equity grant will be small but at least the company will have a much higher likelihood for success.  The worst time, from my experience, is right after initial (Series A) VC funding.

The flip side of this argument is after the company raises venture financing, an employee is more likely to get a “market” cash salary.  Personally I’d rather see people get bigger option grants post Series A and sub-market (or better yet subsistence) cash salaries – until the company is cash flow positive.  This is pretty much the opposite of Wall Street’s compensation schemes.  To me, as a principle, that means it’s probably a good idea..

The truth is I don’t know of any great guidelines – this is seems to me a very case-by-case decison.

Obviously the main consideration should be the relative importance of each founder to the future prospects of the venture.  And, as in any negotiation, the alternatives each person has will also factor in.

Probably way too many founders divide things evenly just to avoid a difficult conversation.  Most likely, this will lead to a difficult conversation down the road (or worse).

(As an aside – you should also figure out titles early on.  When founders say “we are co-CEOs” or “we don’t have titles” that more often than not means there is a big fight looming.  Startups are little dictatorships for good reason.)

One thing I’ve also noticed is people tend to overvalue past contributions (coming up with the idea, spending time developing it, building a prototype, etc) and undervalue future contributions.  Remember that an equity grant is typically for the next 4 years of work (hence 4 years of vesting).  Imagine yourself 2 years from now after working day and night, and ask yourself in that situation if the split still seems fair.

Another consideration is if one founder has had greater career success and will therefore significantly improve the odds of getting financed at an attractive valuation.  One way to figure out how much this is worth is to estimate how much having that founder increases your valuation at the next financing and then, say, split the difference.  So if having her means you can raise $2M by giving away 30% of your company instead of 40% of your company, let that founder have an extra 5%.

If one founder had the idea for the company, it is sometimes reasonable to give that person additional equity.  If that idea involves a bona fide technology breakthrough, they could be entitled to considerably more equity, say 10-20% (or you may have to give some of that to a university or other IP owner). But if the idea is more abstract and doesn’t have real IP behind it (“User generated X” “A marketplace for Y”) that should only earn a few extra points of equity, if any.

If one founder is providing seed capital, assuming there are no other investors involved, the best way to do this is a simple interest bearing (say 5% annual rate), non-convertible loan to the company. I did this once and just had my partner write an IOU on a single sheet of paper, without using lawyers.  When you raise further money the best thing is to have that loan convert into equity at the same terms as the rest of the investors (it looks a somewhat bad to investors to take their fresh capital and pay it right out to a founder – unless the founder is in dire financial straights).

The reason you want to avoid granting equity for a founder’s seed capital is 1) it would cost a lot more in legal fees and 2) you would have to come up with a valuation without a 3rd party, arms length offer.

If there are multiple seed investors, including non-founders, things get more complicated and you might have to resort to a convertible note or full blown equity round.

There are lots of benefits to talking to people.  You’ll get suggestions for improvements.  You’ll discover flaws and hopefully correct them.   You’ll learn a lot more about the sector/industry.  You’ll learn about competitive products that exist or are being built.  You’ll gauge people’s excitement level for the product and for various features.  You’ll refine your sales and investor pitch.  You might even discover your idea is a bad idea and save yourself years of hitting your head against the wall.

In terms of the risk of someone stealing your idea, there are at best a handful of people in the world who might actually drop everything and copy your idea.

First of all, most people will probably think your idea is stupid.  This does not mean your idea is stupid.  In fact, if everyone loves your idea, I might be worried that it’s not forward thinking enough.

People at large related companies almost always think they have already built or are in the process of building all the good ideas – so your idea is either something they are already building (which is a good thing to discover early) or else they will dismiss it as a bad idea.  (I have a personal diligence rule that when speaking to people at large companies, the facts that they tell you are very useful but their opinions about startup ideas no more valuable than any other smart person’s opinions).

In terms of speaking to other entrepreneurs, the vast majority are already working on something and are highly unlikely to drop everything and copy you.  Even if they are in the idea generation phase, high integrity entrepreneurs wouldn’t copy your idea anyways.

VC’s will either not like your idea, or else like it and possibly want to fund you.  They vastly prefer funding an existing team than taking an idea and building a team.  The one risk is if they have entrepreneurs they are working with in a similar area (see next paragraph).  Most VCs have enough integrity to disclose this and let you decide how much detail to go into.

The handful of people in the world who might copy your idea are entrepreneurs just starting up with a very similar idea.  You can probably just explicitly avoid these people, although by talking to lots of people your ideas will likely seep through to them.

Even if your idea gets in the wrong hands, they will probably just get the high level “elevator pitch” which isn’t worth much anyways. Hopefully by that time you’ve developed the idea much further and in much greater detail – by talking to as many people as possible.

A note about NDAs:  1) almost no experienced entrepreneurs/VCs will sign them (in fact, you asking them too is widely considered a sign of inexperience), 2) It’s not clear they have any real value – are you really going to spend years suing someone who signed an NDA?  I’ve personally never heard of it happening.

Here’s why:

- Big companies aren’t as stable as you think:  I graduated business school 6 years ago.  Very few people in my class created or joined startups, instead opting for “safe” companies like… Bear Stearns, Lehman Brothers, Ford, hedge funds that no longer exist, etc.  Meanwhile, everyone I know who went the startup route has had job security and been successful – in some cases spectacularly so.

- Big companies aren’t loyal to employees:  When there are cuts at big companies, they tend to just use a hacksaw and not consider how loyal you’ve been or how hard you worked.  The people who survive are often the ones who happen to be in certain favored divisions or are good at playing politics.

On the flip side:

- Startups that have financing pay pretty well:  If the startup you found or join is VC backed, you usually make market or near-market wages (in addition to the potential upside you get with equity).   Even if things go south you will probably have broken even financially and learned valuable skills.

- Startups tend to be much more loyal to employees:  For example, in the recent downturn I know of a number of startups where management took pay cuts (in some cases took their pay to zero) before laying anyone off.  Experienced startup managers know how devastating layoffs can be to morale and to their own reputation and tend to avoid them at all costs.  Moreover, even when there are layoffs they tend to be based on merit and loyalty.

- When you join a startup, you are also joining a network –  You aren’t just joining a company – you are joining a network of employees and investors who – regardless of the fate of the startup you join – will inevitably go on to do interesting and successful ventures.  If you impress them, they will bring you along.  I know of many cases where startups failed but employees went on to flourish at the founders’ next startup or another company their VCs invested in.

In short, just because startups tend to fail more than big companies doesn’t mean joining a startup is riskier than joining a big company.

1) All startup employees – including founders! – should vest over 4 years from their start date (with a one year “cliff”).  When I used to work in VC I can’t tell you how many companies I saw where some random former founder who was long gone from the company and was only there for some short period of time owned some big chunk of the company.  Not only is this just plain unfair, it also means there is a lot less room for giving equity to employees and for raising new capital.  Even if you are founding a company with your best friend – actually, especially if you are founding a company with your best friend – everyone should have vesting.   If you have a lawyer who tells you otherwise, get a new lawyer.

2) Founders should always have acceleration on change of control!  In particular, you should have full acceleration on “double trigger” (company is acquired and you are fired).  In addition you should have partial acceleration on “single trigger” (company is acquired and you remain at company).  I prefer a structure where you accelerate such that you have N months remaining (N=12 is a good number).  This gives the acquirer comfort that the key people will be around for a reasonable period of time but also lets the founders get the equity they deserve without spending years and years at the acquirer.  Consider the scenario where your company gets acquired 1 year after founding and you have 3 years of vesting remaining.   Suppose further that you just aren’t a big company type and leave after 1 year.  In that case you would forgo half your equity.  It’s always surprising to me how much time founders spending focusing on valuation that might change their ownership by a few points when vesting acceleration (albeit under certain circumstances – but I have seen this happen) can have a far larger impact on their ultimate equity ownership.

Note that we think of the VP Engineering role (as opposed to the CTO) as the person who makes software that gets built on schedule, on budget, in a reliable, scalable way etc. You might also want a CTO at your company to think of big, creative ideas but often those people aren’t good VP Engineers.

Technical Skills

1) They are comfortable with web-speed development — release every week, ok to have minor bugs on the site vs never getting a release out etc. You don’t have any users right now so you can afford a few bugs. In six months you will have users and then you can start worrying more about having more process.

2) They are not overly process oriented — you’re not building the space shuttle so don’t need to spend three months designing the next release. You do need to know how the big pieces of the problem will interact with each other and what the overall system architecture will be. No Gantt chart experts, non-techy people managers, or high level big company guys who haven’t been hands on in years.

3) They are someone who can architect the system, understands how to test/QA a site, what IT needs to do to keep the site running fast and reliably. They need enough technical expertise in all areas to see how each person’s work affects other people’s work, what it’s inputs and outputs are, see how each piece fits into the rest of the system, judge trade-offs being made, estimate complexity, timelines etc.

Make sure they can talk in intimate detail and have opinions about all of this. How should the DB clustering work? What exactly were the test scripts checking and how did they get written so that as the software changed all the scripts didn’t have to get thrown out? That sort of thing.

4) They have experience using open source technologies such as MySQL, Apache, Java/Python, Linux etc. I’d avoid people who want to use MS
technologies since you have to pay a lot for it and most of the kids these days want to work on the open source stuff.

5) They are someone who can code and wants to code on day one and could even build the first version of the system, but understands that by day 365 they won’t be coding any more. You’re not so big that you can afford anyone who just manages in the early days.

6) They can architect the system in a way that developers can build your project with maximal parallelism and so that computers can run it with maximum parallelism so that you can scale to the millions of users, terabytes of data, or whatever it is you need to do.

7) They should prefer the simple to the Baroque. Most simple, reliable and quick-to-build systems can also be built as a complicated, slow, bug-laden piece of software too. Every line of software that doesn’t exist because of your simple design is a line that has no bugs, can’t slow the system down, and won’t take time for new developers to understand. Can they talk about how they design things to be simple, what they gave up to make the system simple, etc?

Personal Skills

1) Watch out for people that seem dogmatic about unreasonable things (”Anyone who uses Postgres instead of MySQL is an idiot” etc etc) (Note, see my comment above about anyone that uses Windows technologies being an idiot).

2) Watch out for empire builders or people who need lots of resources. Do they believe they can build anything with a couple of great guys or have they never worked with a few great people before? Do they want to hire a large over-seas staff because everyone else is doing it and it will look good on their resume? Do they know so little about things that they need lots of expensive tools or consultants?

3) They should be outgoing, fun, intense people. No one likes to work for a low energy introvert. Ask them why they want to manage instead of coding. See if they are an engineer who got promoted into management because they wanted the higher pay but really would be happier just coding all day and not interacting with people. A lot of people aren’t into managing but end up doing it for the money. Or maybe they are an ego maniac that needs to be in control since otherwise no one pays attention to them?

4) Are they really excited about technology, do they do techy things in their spare time, etc? Do they talk about how they programmed for fun in high school or wax poetic about the cool game they wrote back in the day?

5) Most technical hiring is about convincing engineers that your problems are the best to work on and that the rest of the team are super smart people, so your VP Eng will have to be able to pitch this.

6) The ideal VP Eng could build most parts of the system themselves, but they’re self-confident enough to work with people better then themselves too.

7) They should be hungry to step up and prove themselves. Ideally they have been a tech lead or had some managerial exposure already, but are
eager to step up and build something even bigger then they’ve been responsible for so far.

Where do you find someone that has these qualities?

Unfortunately, there’s not one good answer. I’ve seen people have good luck by having a recruiter target specific companies. Your personal network is obviously the ideal way so that you can get trusted references. If you have outside investors, their network might be useful too. We’ve had basically no luck using job boards like Monster and Hotjobs.

I think it’s hard for people with no technical background to interview a VP Engineering candidate. If you don’t have a technical background, have someone technical (if not someone full time at your company, perhaps an advisor or board member) interview with the candidate as well.