One of the things that draws startups to Andrew is the fact that like you, he has done the startup grind. Andrew put in thousands of hours building his first SaaS startup with partners as the company’s General Counsel.
From doing most of the legal work to sales and marketing to participating in the software development process Andrew has seen first hand just about every aspect of a startup company.
TIPS FOR STARTUPS
How Much Stock Should Be Issued To Founders After Incorporating?
Another issue that startups ask Andrew about is how to properly structure a Delaware C Corp in terms of how much stock should co-founders get and should any of this stock vest over time and for how long.
Andrew tells startups that the moves they make in the initial stages of the company with issuing stock to founders could very well determine the success of the company and their ability to attract investors.
Startups, before issuing stock to co-founders need to put themselves in the shoes of an investor who is thinking about making an investment in their company. For starters, the investment is risky. There is no product yet; just a concept. The team within the company is assembled but there is little to no money to get this thing going. Should the startup issue all of its outstanding stock to the co-founders? Do you think this will attract a serious investor? Absolutely not. The last thing a startup should do in desperate need of investors is dilute the company of all its stock so that if an investor comes in additional stock will have to be issued. The founders should own collectively 51% of the equity in the first round so that they control the company leaving enough stock in the company to be issued to key hires and investors.
Should the startup require that the founders’ stock vest over time, let’s say for three or four years? Absolutely, the founders stock should vest over time. Why would an investor put their hard earned money into a company if the founders owned all of their stock with no strings attached to it? Would you invest in a startup knowing that a key founder could quit tomorrow and take all of their stock with them? The answer is probably no. Investors want co-founders to have no incentive to leave the company. If a co-founder quits in month five but his stock doesn’t fully vest until the end of the fourth year the founder is leaving the company with just a small percentage of the stock that was issued to him.
With that said Andrew is always telling his early stage SaaS clients that they should leave their egos at the door and not issue all of the stock to themselves up front and that the stock should invest over time. Why is that? The reason being is that a startup will never attract serious investment money if the co-founders take all the stock up front leaving no stock to issue for key hires or investors. And, another turn off to investors is if the co-founders fail to have their stock vest over time. Look at it this way. If you are a serious investor who understands how to build and grow SaaS companies and a startup comes to you looking for money and you find out that the co-founders have issued all the stock up front to themselves and none of the stock vests over time for what possible reason would you invest in this company? The reason being is that the co-founders essentially own all of the company’s stock and they have no skin in the game in that they can leave whenever they want to and this is a huge risk for any investor. Please read Andrew’s article on how to attract smart money investors
Can You Get Use To A Startups Lack of Structure
You also need to be aware if you are joining a startup is the lack of structure. While most people who work for large companies don’t like to be bossed around or micro-managed there is some level of comfort with a hierarchy and levels of management and goals and performance evaluations. If you join a startup chances are it will have very little in the way of structure with the exception of job titles. Startups move so quickly sometimes that the goal for one week might be achieved in a day or a sales pitch to a prospective customer might switch gears quickly due to changing industry conditions. And, because startup employees typically work alone or are on their own island sometimes there is the feeling of isolation with not much praise or feedback.
Startups Come With Financial Uncertainty
Entrepreneurs going into startups should also be aware of the financial uncertainty that comes with joining early stage companies. There is a possibility at any time during the first year of employment that you can get fired for things such as the startup running out of funding or the big contract that the startup was supposed to get didn’t materialize. Or, it’s possible that you’re working really hard but your area of the startup is falling behind the others and the company decides to cut its losses and fire everyone in your area.
Can You Survive Financially in a Startup?
Another issue that individuals joining startups need to be aware of is that salaries and for that matter any kind of compensation can vary greatly from company to company. Sometimes, you might get a job offer that’s just all stock with no salary until the company can hopefully pay a salary if it gets funding. You might be leaving a job with good pay and benefits and while no job is guaranteed at least it is steady. The opposite rings true with a startup.
Can You Deal With A Startup’s Crazy Hours
Another thing that people have a hard time adjusting to in a startup is the need or the pressure to work all the time. If you have a high pressure job and work crazy hours chances are you are paid well, have great perks and can take frequent vacations. You need to be prepared with a startup lifestyle that there are not many days off, practically no vacations and very little in the way of perks. It’s a tough life being in a startup. You are expected to work long hours including weekends. If you are married with kids it will disrupt every part of your life with your family including dinners, social occasions and to having to postpone vacations. What’s the reward for this lifestyle? The chance that your company makes it big and your stock is actually worth something.
Once you have more than one person working for the company you should create a written list of your company’s common core values and practice them. Having written defined values will make your company more focused and aligned with your goals and might help you attract great talent.
Know who you want to help. Figure out your target audience and then build your product and business based on the problems your customers need to solve. If the problem goes away you still have these customers and you can pivot and hopefully solve another problem for them.
Your company’s mission matters.
Your company needs to have a defined mission. Everyone that works for the company should be able to articulate the mission of the company. Customers want to know that your company is disciplined and focus on solving certain problems.
Your value proposition is how your mission helps people. What does your company do that makes life better for people or makes their jobs easier in the workplace? Will it increase their customers’ bottom lines or help them get customers? Perhaps you have created a SaaS application that makes HR functions easier. You need to make sure that everyone in the company understands what your value proposition is.
Spend like a miser when it comes to your financial resources. The lesson here is to be thrifty with your money. Use shared work spaces until you absolutely have to move into your own office. Don’t pay attention to other entrepreneurs and how they are living the good life.
Know what your costs are for adding features to your SaaS product or application. If you are a SaaS entrepreneur human nature dictates that you would love to over develop your product and build every possible feature into it. The downside is that you might not have a handle on what the costs are going to be once customers use the feature. Hypothetically, what if the new feature requires a lot of bandwidth for data storage or usage. You need to get with your third party cloud managed services provider and understand what each of these costs are going to be so you can properly charge your customers.
This post is for informational purposes only and is not being offered as legal advice.