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Founder questions

Hi there,

Anyone have ideas on key questions/issues to probe with the founder of an
early stage startup (Series A funded) if considering to join an early
employee? Compensation is mainly equity stake.

Thanks!

S

From: [removed to protect privacy] [mailto:[removed to protect privacy]]
On Behalf Of Jason Crawford
Sent: Tuesday, October 02, 2012 11:36 AM
To: Shawn D. McDonald
Cc: Dimitri Gnidash; Istvan Jonyer; shahttp://jasoncrawford.org  |  Twitter: @jasoncrawford

On Tue, Oct 2, 2012 at 10:07 AM, Shawn D. McDonald <s.d.mcdon...@fdbke.com>
wrote:

Is it considered "Typical" for firms to defer fees until a round is
complete?

Thanks

-S

5 Replies

Rod Fitzsimmons Frey
0
0
Rod Fitzsimmons Frey Entrepreneur
Founder at Duet.io

I'd evaluate the company as if you were an investor, which you are if
compensation is mainly sweat equity.

I'd ask for financials, cap table, revenue projections, marketing plan,
hiring plan.  I'd ask to see the C.V.s of the founders and key employees.
 I'd assess the chances of success for the company.

If I thought the chances were good, it's worth checking if your equity
compensation is in line with your sweat equity.  To do that you'd need to
assign a per-hour valuation to your time - consulting rates are a good
proxy.

By way of example: My rates are $140, so if I had a deal where my equity
was 2% of outstanding shares vesting over 4 years, and they were paying me
$20/hour on top of equity it'd work out something like:

($140/hr-$20/hr salary) * 2000 hrs = $240000 invested first year in
opportunity cost.
Ignoring pre/post valuation corrections, which is naive but easy, $240,000
for 0.5% of the company (first year's vest) means about a $48 million value
for the company.  Is the company a good investment at that price?

Maybe you don't consult, but you're working as a programmer at $120,000/yr.
 They're offering $80,000 plus the same equity.  Then it's $40,000
opportunity cost for 0.5% of the company (first year), or an $8 million
valuation that you're investing in.

Lots more that goes into the decision, of course, like lifestyle, whether
you like what you're doing now, opportunity to change the world, etc.  But
the above is one easily-calculated piece that you might add to your
decision matrix.

Rod

Soham Mehta
0
0
Soham Mehta Entrepreneur
Founder at Interview Kickstart, the best preparation you can do to crush coding interviews

Above all, realize that you can only do so much. You have to do all the
due-diligence that Rod mentions and other things you read at other places,
but the world is complex enough that it's simply not possible to predict
the success/failure of a company at any early stage. (If it were, the world
would have been a very different place).

Best you can do, is to try and ascertain that you share the same values
with the founders. Those could be as mundane as detail-orientation, aiming
high, risk-taking, hard work, preference for certain markets etc., but
that's how you will not regret the time spent.

On Tue, Oct 2, 2012 at 11:59 AM, Rod Fitzsimmons Frey <rodf...@gmail.com>wrote:

Suchi Sharma
0
0
Suchi Sharma Entrepreneur
Technology Entrepreneur and Consultant

Thanks to all. Appreciate the perspectives!

-Suchi

From: [removed to protect privacy] [mailto:[removed to protect privacy]]
On Behalf Of Soham Mehta
Sent: Tuesday, October 02, 2012 11:14 PM
To: Rod Fitzsimmons Frey
Cc: su...@wattsatwork.com; [removed to protect privacy]
Subject: Re: [FD Members] Founder questions

Above all, realize that you can only do so much. You have to do all the
due-diligence that Rod mentions and other things you read at other places,
but the world is complex enough that it's simply not possible to predict the
success/failure of a company at any early stage. (If it were, the world
would have been a very different place).

Best you can do, is to try and ascertain that you share the same values with
the founders. Those could be as mundane as detail-orientation, aiming high,
risk-taking, hard work, preference for certain markets etc., but that's how
you will not regret the time spent.

On Tue, Oct 2, 2012 at 11:59 AM, Rod Fitzsimmons Frey <rodf...@gmail.com>
wrote:

I'd evaluate the company as if you were an investor, which you are if
compensation is mainly sweat equity.

I'd ask for financials, cap table, revenue projections, marketing plan,
hiring plan.  I'd ask to see the C.V.s of the founders and key employees.
I'd assess the chances of success for the company.

If I thought the chances were good, it's worth checking if your equity
compensation is in line with your sweat equity.  To do that you'd need to
assign a per-hour valuation to your time - consulting rates are a good
proxy.  

By way of example: My rates are $140, so if I had a deal where my equity was
2% of outstanding shares vesting over 4 years, and they were paying me
$20/hour on top of equity it'd work out something like:

($140/hr-$20/hr salary) * 2000 hrs = $240000 invested first year in
opportunity cost.

Ignoring pre/post valuation corrections, which is naive but easy, $240,000
for 0.5% of the company (first year's vest) means about a $48 million value
for the company.  Is the company a good investment at that price?

Maybe you don't consult, but you're working as a programmer at $120,000/yr.
They're offering $80,000 plus the same equity.  Then it's $40,000
opportunity cost for 0.5% of the company (first year), or an $8 million
valuation that you're investing in.

Lots more that goes into the decision, of course, like lifestyle, whether
you like what you're doing now, opportunity to change the world, etc.  But
the above is one easily-calculated piece that you might add to your decision
matrix.

Rod

On Tue, Oct 2, 2012 at 2:39 PM, Suchi Sharma <su...@wattsatwork.com> wrote:

Jerry B P
0
0
Jerry B P Entrepreneur
NewCo

I think those are pretty insightful comments. I wanted to follow up on the
same topic with a slightly different question. Let's say you asses the
company and everything Rod mentions checks. You like the technology, the
business model, the hiring plan, the investors, the building the dog, etc.
AND they love you back, so you think about leaving your job and join the
startup.

How do you assess the intangible things that matter as much if not more
during this decision process? Or at the very least, how can you
defend/protect yourself from uhmm. "undesirable situations".

Examples of bad behavior I have seen firsthand or heard before:

A.      Person joins, then contributes with a ton of sweat
equity/intellectual property etc. and then the person is replaced before any
shares are vested.

B.      Same as A, but the person is forced out after vesting X amount of
shares, then diluted to oblivion

C.      Similar to A, but instead of being forced out, capital structure is
shuffled behind closed doors, and your 1% becomes 0.01%

D.      Others?

The same thing can be applied to the search for executives and cofounders.

From: [removed to protect privacy] [mailto:[removed to protect privacy]]
On Behalf Of Soham Mehta
Sent: Tuesday, October 02, 2012 11:13 PM
To: Rod Fitzsimmons Frey
Cc: su...@wattsatwork.com; [removed to protect privacy]
Subject: Re: [FD Members] Founder questions

Above all, realize that you can only do so much. You have to do all the
due-diligence that Rod mentions and other things you read at other places,
but the world is complex enough that it's simply not possible to predict the
success/failure of a company at any early stage. (If it were, the world
would have been a very different place).

Best you can do, is to try and ascertain that you share the same values with
the founders. Those could be as mundane as detail-orientation, aiming high,
risk-taking, hard work, preference for certain markets etc., but that's how
you will not regret the time spent.

On Tue, Oct 2, 2012 at 11:59 AM, Rod Fitzsimmons Frey <rodf...@gmail.com>
wrote:

I'd evaluate the company as if you were an investor, which you are if
compensation is mainly sweat equity.

I'd ask for financials, cap table, revenue projections, marketing plan,
hiring plan.  I'd ask to see the C.V.s of the founders and key employees.
I'd assess the chances of success for the company.

If I thought the chances were good, it's worth checking if your equity
compensation is in line with your sweat equity.  To do that you'd need to
assign a per-hour valuation to your time - consulting rates are a good
proxy.  

By way of example: My rates are $140, so if I had a deal where my equity was
2% of outstanding shares vesting over 4 years, and they were paying me
$20/hour on top of equity it'd work out something like:

($140/hr-$20/hr salary) * 2000 hrs = $240000 invested first year in
opportunity cost.

Ignoring pre/post valuation corrections, which is naive but easy, $240,000
for 0.5% of the company (first year's vest) means about a $48 million value
for the company.  Is the company a good investment at that price?

Maybe you don't consult, but you're working as a programmer at $120,000/yr.
They're offering $80,000 plus the same equity.  Then it's $40,000
opportunity cost for 0.5% of the company (first year), or an $8 million
valuation that you're investing in.

Lots more that goes into the decision, of course, like lifestyle, whether
you like what you're doing now, opportunity to change the world, etc.  But
the above is one easily-calculated piece that you might add to your decision
matrix.

Rod

On Tue, Oct 2, 2012 at 2:39 PM, Suchi Sharma <su...@wattsatwork.com> wrote:

Andres Buritica
0
0
Andres Buritica Entrepreneur
Entrepreneur in Residence at MuckerLab

The Founder's Dilemma
http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Entrepreneur... has
some great insight into these issues and more. I've found it extremely
helpful.

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