StartUp / Startup Ecosystem
Startup ecosystem signals, funding, and strategy insights. Topic: Startup-Ecosystem. Updated briefs and structured summaries from curated sources.
Equity, incentives, and early-stage tradeoffs with Yuri Sagalov, GeneralCatalyst
Full timeline
0.0–300.0
Founders are advised to be generous with their first hires, as these individuals will significantly influence the company's culture and success. Additionally, there are three types of investors, with the most desirable being those who actively support the company beyond just providing capital.
- Founders should be generous with their first two to three hires as they set the culture of the company
- It is important to be slow in hiring initial team members since they will set the tone for the business
- Founders should aim for their first hires to stay with the company until IPO and beyond
- Incentivizing early hires is crucial for their sense of fairness and shared success
- There are three buckets of investors: those who are supportive, those who are passive, and those who meddle
- The first bucket of investors can act as extended employees, helping with recruiting and go-to-market strategies
- Founders should seek feedback from other founders about potential investors to gauge their supportiveness
300.0–600.0
Co-founders should engage in early discussions about equity splits, aiming for a distribution that is as close to equal as possible to ensure long-term alignment. Early hires should receive more equity than initially feels appropriate to foster commitment and shape the company's culture.
- Co-founders should have early conversations about equity splits
- Equity splits do not need to be equal but should be as close to equal as possible
- Founders often overvalue their contributions based on the initial idea
- Its important for co-founders to feel aligned for the long-term journey of the company
- Previous collaboration between co-founders is beneficial for understanding how to handle disagreements
- Early hires should be given more equity than instinctively feels right to incentivize them
- The first few hires will set the culture of the company
- Founders should seek to hire individuals who are aligned with the mission of the business
600.0–900.0
Founders are encouraged to offer equity to early hires, as it may significantly increase in value if the business succeeds. The discussion also highlights the importance of standard legal structures and the challenges of navigating global investments.
- Equity may not be worth much initially but can increase significantly if the business succeeds
- Founders should be compensated similarly to their employees to show alignment in risk and reward
- Leaving a stable job before funding can be risky, but passion for the idea can be a green flag for investors
- Non-standard formation documents can be a red flag for investors
- Standard legal structures are preferred to allow founders to focus on building their business
- Investing globally requires navigating different legalities and market rates for valuations and salaries
- Having a global team with local expertise helps in managing cross-border investments effectively
900.0–1200.0
International founders face challenges in raising funds in the US, often requiring significant commitment to enter the market. The qualities sought in founders remain consistent globally, emphasizing high velocity, intelligence, and resourcefulness.
- International founders may struggle to raise funds in the US
- Qualities of founders sought are the same globally: high velocity, smart, hungry, and scrappy
- Valuations and legal structures vary by region
- Talent is globally distributed, not limited to Silicon Valley
- Resources and knowledge for startups are now available online
- Local teams can help founders sell to their specific markets
- Geography does not dictate the outcome for a business
- Most advisors are busy and may not provide ongoing value
- Equity for advisors is often a mistake for most businesses
- Paying advisors hourly or based on success is recommended
1200.0–1500.0
Founders should retain a significant ownership stake in their business, ideally owning at least a third by the seed round. High dilution, particularly beyond 20 to 25%, raises concerns for investors about the long-term viability of the company.
- Founders should maintain a significant ownership stake in their business
- A red flag is if founders own less than a third of the business by the seed round
- Dilution of more than 20 to 25% by the seed round is concerning
- Investors may pass on companies with high dilution due to the difficulty of addressing ownership issues
- Its important for founders to manage their cap table early to avoid excessive dilution
- VCs should primarily be advisors and not control the business unless they are founders
- Advisory boards can include experts but VCs typically prefer a seat on the board of directors
- The structure of advisory boards should align with the business needs, such as industry-specific expertise
1500.0–1800.0
The discussion centers on the evolving landscape of equity distribution and compensation structures in startups, particularly the trend towards longer-lived options for employees. It also addresses the challenges and cultural expectations faced by founders and employees in early-stage startups, including the demanding work hours associated with startup culture.
- Board meetings about quarterly goals are infrequent and may not add much value
- Office hours with founders every four to six weeks are more valuable for discussing challenges
- Longer lived options for employees are a positive trend in equity distribution
- Employees often face a 90-day window to exercise options after leaving a company
- Startups are moving towards allowing 10 years to exercise options instead of 90 days
- The tax treatment of employee options versus non-employee options is complex
- Young founders are often in it for the long game, while older individuals may seek a last hurrah in startups
- The 996 culture and hustle culture are prevalent in early-stage startups
1800.0–2100.0
Startups can provide greater job stability compared to large public companies due to less pressure from shareholders. Founders are advised to hire only when they experience a genuine need for additional resources, emphasizing the importance of achieving product market fit before scaling operations.
- Startups can offer more job stability than large public companies due to less pressure from shareholders
- Private companies and startups are not bound by the same rules as public companies, allowing for more visibility on job stability
- Founders should hire when they feel the pain of not having enough resources, rather than hiring ahead of need
- Letting go of a single employee in a small startup can be very damaging
- Its important to find product market fit before aggressively scaling a sales team
- Product market fit is indicated by ease of selling, customer satisfaction, and low churn rates
- Founders often make the mistake of hiring a sales team before achieving product market fit
2100.0–2400.0
The discussion focuses on the importance of hiring and investor relationships in the startup ecosystem. Founders are advised to carefully consider their hiring strategies and the value that investors provide post-investment.
- Season one of build mode was all about finding product market fit
- Season two is all about hiring
- Founders should not get ahead of themselves due to distractions
- Ask other portfolio founders how their investors helped them post-investment
- Investors make promises, but its important to find out what they do after investing
- The check size and investor rights are decoupled from the value the investor provides
- Co-founder breakups are a leading reason startups fail in early days
2400.0–2700.0
The discussion addresses the common conflicts that arise in co-founder relationships, particularly when there are differing business directions. It emphasizes the importance of having a designated CEO and frameworks for resolving disagreements to maintain healthy partnerships.
- Co-founder relationships often face conflict, especially when there are differing directions for the business
- Its important to have a designated CEO in close to equal co-founder relationships to avoid deadlock
- Customer dissatisfaction, bugs, and churn can strain co-founder relationships
- The moment something breaks in the business is crucial for maintaining healthy co-founder relationships
- Having frameworks for handling disagreements and stress is vital for co-founders
- Some co-founders seek marriage counseling to prevent future problems
- The discussion includes co-founders who are married, siblings, and those who have broken up