Protecting yourself as a founder - Ryan Howard
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Vator Splash Spring May 2016 presentation
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Protecting yourself as a founder - Ryan Howard
- 1. Protecting Yourself As A Startup Founder Ryan Howard | Founder & Former CEO of Practice Fusion
- 2. The Price of Being an Entrepreneur Sequoia's founder says 45% of founding CEOs of their investments are fired within 18 months. Founders of Twitter, PayPal, Cisco, and Tesla, were all exited.
- 3. When Incorporating Your Company… 1. Allocate 3-4 common seats to maintain control of your board. 1. Have clear vesting for founders and rules for termination. 1. Issue FF class shares to yourself for early partial liquidity.
- 4. Employment Agreement Musts • Always be thinking about potential and possible downsides. • If this ends today… o How much money do I have in my bank account? o Can I liquidate my equity? • The state of California is at-will, even for founders.
- 5. Employment Agreement Musts • Get a great employment attorney unassociated with the company. • Make a cure provision: Timetable for making things right • Think about severance. o Cash: 6-12 months if you have closed Series A o Accelerated vesting o Extended exercising Today is brought to you by the letter U for Unemployed
- 6. Employment Agreement Musts • Get a great employment attorney unassociated with the company • Make a cure provision: Timetable for making things right • Think about severance. o Cash: 6-12 months if you have closed Series A o Accelerated vesting o Extended exercising Today is brought to you by the letter U for Unemployed
- 7. Your Teams Three teams you want to be constantly focused on: 1. Your management team 2. Your board team 3. Your personal support team
- 8. 1. Your Management Team Exceptional management team members will be force multipliers. • Free up your time to be more strategic • Have a network to recruit from in order to rapidly build a team • Deliver much better results for their function than you can
- 9. The Wrong Leader • Set functions back by a year (sales) • Put the company behind company plan • Be the reason you get fired • Ruin culture by causing dysfunction, fighting, and people to quit Enough wrong leaders will cause the company to fail. The wrong leader can greatly harm your organization. He or she can:
- 10. Interviewing Tips • Group interviews result in more data and overall consensus. • Candidates should explain how every part of a problem was solved. • Test everyone! o Have them do “A day in the life.” • Check references that the candidate didn't give you. • Must be a culture fit - Tolerating assholes will ruin your culture. Your ability to assess a potential employee during an interview is critical.
- 11. 2. Your Board Team The biggest single mistake founders make is assembling their board. • Allocate 3-4 common board seats. • Spend more time on vetting these candidates versus all others. • Avoid bloated boards so you can run your company. • Do not add board members unless you absolutely have to.
- 12. Board Member Investors Interview Them • Ask them when was the last time they fired a CEO and why • Explain your expectations of them • Explain how your run the board meetings Check References • Call CEOs in their portfolio companies • Check their reputation on ‘The Funded’ Watch for Dysfunctional Behavior • Fast-talking • Anxious / Jittery • Germophobes Many times, the majority of your board members will be investors.
- 13. Board Member Pitfalls • Operators > MBAs • Partners > Associates • Never rush filling a board seat. • Common seats: Find someone you trust implicitly (advisor first) • Board observers can have undue influence in meetings.
- 14. 3. Your Personal Support Team • Great Coaches, Advisors, and Success Models o People who have been in your shoes • Therapists o Someone to vent to that is always on your side o Hire a professional, not your spouse • Personal Assistant o To keep your life together, while you work • Build strategies to your routine to relax o Meditation, message, social time
- 15. 3. Your Personal Support Team • Great Coaches, Advisors, and Success Models o People who have been in your shoes • Therapists o Someone to vent to that is always on your side o Hire a professional, not your spouse • Personal Assistant o To keep your life together, while you work • Build strategies to your routine to relax o Meditation, message, social time
- 16. Don’t Give Up Your Life For Your Company Wealth Love Health
- 17. Don’t Give Up Your Life For Your Company Wealth Love Health
- 18. Thank You Ryan Howard Ryan@ibeat.com For more Dysfunctional Startup tips, visit www.dysfunctionalstartup.com
Notas del editor
- Thank Bambi and Vator for having me here today. How many founders / how many people are thinking about starting a company (raise) Started working on PF in 2002 What I learned is that you will make most of your hard decisions by yourself with little to no data You will make mistakes and you will be accountable for all of them Nearly everything I am going to share are mistakes I made at PF, which I am mitigating these in my new company, iBeat, that we will be announcing in a few weeks Other Founders have been through your struggle Much of this knowledge isn’t shared or centralized because when these mistakes are made, people usually get fired. Sign settlement and releases or uncomfortable I am here today to help you avoid some of the fatal mistakes As a side note, I am not selling anything, I don't want to be a paid coach, advisor or board member-I am simply here to share with you, be in service to you all
- Being a founder is an incredibly challenging job -macro concerns are building a great product, team, and fundraising to make payroll The last thing you want to do during this time is worry about getting fired from a company you created *C* Sequoia's founder says 45% of founding CEOs of their investments fired in 18 months -This isn't a binary statistic, meaning, once you make it past 18 months your likelihood gets better at maintaining the position; it doesn't. The pressure will be on to perform your entire tenure. *C* Most people don’t know that founders of Twitter, Paypal, Cisco, Telsa, were all exited Pragmatic steps to protect yourself as you run your new company.
- To dig right in, there are ways to insulate yourself Incorporating your company Allocate 3-4 common seats upfront -This is critical – maintain control of your company as long as you possibly can -Many founders lose control of their company after their first round of funding to their investors *C* Have clear vesting for founders and rules for termination -This happens often - Founder’s leave after 6 months and they own half of the company– the remaining founder is stuck running the company alone -have something in writing about if someone’s not performing, how they will be exited, and vesting mechanics *C* Issue FF class shares to yourself for early partial liquidity -This is effectively a preferred security -During a financing, you can sell some equity to investors - Won’t have to wait for an IPO to get some liquidity Downside protection
- Start-ups and founders are constantly in a temporary state – never know what’s going to happen the next day When you start, you have nothing - if you lose it all it’s not a big deal – it’s inconsequential But that changes as time goes on After a few rounds of financing: Great – you’re worth $5 or 10M in equity on paper. But if this ends today, what do you tangibly have? Can you even pay your rent? *C* Always be thinking about your downside *C* -If this ends today, what do I have left? -What do I have in my bank account? -Can I get any liquidity from my equity? *C* Keep on mind that California is at will -once you incorporate, you’re an employee of your company -if a board or co-founders wants you gone, they don't need a reason to exit (again, maintain control)
- That’s leads us into your employment agreement -Keep in mind, your tenure will be longer than most personal relationships -Therefore, think of your employment agreement like a prenup – its what happens if you and the company break up *C* Key items you want are: - Get a great employment attorney unassociated with the company (Don’t use company counsel) - A cure provision - this means if the board wants to fire you, they must inform you of the issue, and then you have a period of time to remedy it (clean transition) *C* Severance -Cash - If you've closed a series A financing somewhere ~6 months ---company may not have an abundancy of cash – if you just got fired, that’s not your problem. ---you need to look out for what's best for you and feed yourself -Equity - meaningful vesting accelerating; no exact formula; attorney should have idea (6-12 months) -Extended exercising – fired; exercise them within 90 days of leaving the company. ---Paying for the options + taxes - owing the IRS millions in taxes ---Autonomy to see how the company performs, then buy
- -Consistently see that founders don't look out for their best interests -I believe this is because they are simply naïve, unaware and overloaded Everyone else you’re engaging in is looking out for their best interest -Investors will have preferences and rights in their agreements -Executives will have CIC and severances Negotiate for yourself, because no one else will Lastly, you might get along with your board and co-founders now and trust that they will do the right thing, but when things go sideways people tend to show their ugly sides; always amplified when there is money involved. Be sure to protect yourself and your interests -A great time to tackle your employment agreement is between incorporation and series A
- There are three key teams that you consistently want to build and develop Your management team (CFO, Head of Marketing, Operations) Your board team (Board members you recruit for common seats, as well, as the ones that come with investors) Your personal support team (coaches, assistants, behavioral therapists) People spend a ton of time on the first, a little on the second, and the least on the third
- Management Team -Many founders are intimidated by older, tenured people, which ultimately slows them down – I was in the early years at PF When I got past this block in myself, when I hired these leaders, I would see a tectonic shift in the organization. Great leaders will be force multipliers for the following reasons: *C* -Your time will be greatly freed up, especially if you were managing that function (and its team) – allowed me to be more strategic *C* -The new leader should have a network that will make that team stronger *C* -The new leader should will likely be better at the function than you were, and therefore deliver much better results Which is always invigorating (you and your company will be more valuable because of this hire)
- In contrast, choosing the wrong senior leader can set your company back *easily* by a year *C* -Take sales for example -3-6 months to hire a VP of sales, a few months to get up to speed *C* when they are off track, the entire team is generally off track, which means the company is behind goal (missed goal rolls into next year) If you need Sales to hit to make payroll – life or death (fund raise sooner) *C* --Be the reason you to get fired *C* - The wrong leader will also ruin culture, cause dysfunction, fighting, people to quit Always have a low tolerance for underperformers and culture misfits; - mantra: hire slow, fire fast (courage) *C* Enough wrong leaders will cause the company to fail in its entirety Side note – wrong leader is really expensive -between salary and severance - $500k to exit when you are at scale -Execs usually get a point or two of the company – leave with that equity -plus the company being behind on the function that the leader owned
- Interviewing Your ability to assess a candidate with the limited time during an interview is critical; eliminate risks I mentioned *C* Group interviews 1:1 -start, stop, formalities, no depth More efficient, more depth in a group setting. Plus the team will have the same data and get to consensus faster *C* A great candidate should be able to explain every part of how a particular problem was solved in their last role (Elon Musk's litmus test for hiring) *C* Test everyone - we would have senior leaders in for a full day (a day in the life) ---You will know if they are smart, Will work well with the team, can execute at the level you need them to --If someone won’t do it, don’t hire them, move on (Position: It derisks them) *C* Check references that the candidate didn't give you -any reference a candidate gives you will be good; why check it; do you dd *C*Must be a culture fit You’re gonna spend more time with this person than your spouse – you should like them Tolerating assholes will ruin your culture - people quit Culture fits will keep people there longer and make the company more attractive to candidates
- Your board team The biggest single mistake founder's make is assembling their board *C* 3-4 common (placeholder) board seats to protect your interests (balance out bad board members) -I lost control of my company after the first round of funding – stupid mistake The board's primary function is hiring and firing the CEO *C* Therefore, spend more time on vetting these candidates versus all others -once a board member is on board, it’s nearly impossible to get them off (vegas) *C* Avoid bloated boards, so you can run your company ---I see this all the time; seed stage startups with 5 board members? ---Why hire more people to control your company and be your boss? ---Make these people your advisors if they really want to participate *C* Do not add board members, unless you have to ---Again, the board’s role is hiring and firing the CEO, so why create additional risk for yourself ---They can create a lot of overhead and work for you and the team, as well ---Again, maintain control of your board
- Investor board members The majority of your board members will come with an investment when you close a round of funding Ask who the person is going to be during investor meetings *C* Interview them –until you’re comfortable -- at least three meetings ---Ask them the last time they fired a CEO and why? ---Explain what your expectations of a board member are ---Explain how you run your board meetings (don't wait for them to tell you this; it's the CEO's role) ---Ask what works well for them – this is a partnership *C* Dial in your EQ - watch for subtle, dysfunctional behaviors (fast talkers, anxieties, twitches, germophobes**) ---handshaking ---don’t get so excited that you’re getting money and throw out the baby with the bath water ---Take a lower valuation to maintain more control or get a better investor *C* References ---call CEOs in their portfolio companies (not references they gave you) ---Check The Funded for their reputation
- Board member pitfalls Operators > MBAs ---you want people who have been in a high growth startups and understand the stresses and challenges, not an analyst at P&G *C* Partners > Associates --Junior associates will be under a ton of pressure to perform, and will not have significant experience if you hit a roadblock) --partner more stature experience --if you hit a major issue (ex. money) a partner will have more clout to get the fund to cut you a check --partner who was an operator is the best combination *C* Don't be rushed into bringing on a board member, ever (especially outside a financing) ---never, ever bringing on someone you just met or haven't worked with (my biggest mistake) *C* ---Have the person serve on your advisory board for a year; attend board meetings (build trust) ---once you trust them, offer them a board (biggest mistake – didn’t know them well enough, weren’t aligned) *C* Board observers are generally pains in the asses --Distractions and undue influence in meetings – they may not have a vote, but they can talk --No one ever said build a bigger board - Campbell / smaller boards are more efficient, effective in serving you
- ---Exceptional Coaches ---Trainers ---Advisors ---Therapists
- Your personal team -You will break down – the pace of a startup is simply not sustainable long term without maintenance -One thing I constantly see being overlooked are founder’s personal teams. -Think about yourself just like an athlete. A great athlete has a circle of people around them to help them get to extreme levels of success -Great coaches - Advisors and success models around you ---bounce issues off people that are thoughtful and wise ---this is what Great leaders do – build great counsels to support them *C* -Therapists – emotional Someone to simply vent to -- that’s always on your side. -Not friends, not your spouse; if you come home every night and complain and they’ll divorce you -Hire a professional – who gets paid to listen *C* -Personal assistant to help keep your life on track when you are managing chaos Food, dry cleaning - lead to the ability to better manage stress *C* Personal wellness plan - Build strategies into your routine to relax Plan time for Meditation, message, time with friends
- When I was running PF (2013) I had massive adrenal fatigue Couldn’t sleep, anxious all the time from the stress of running company, hyper growth Took time to fix this / could have prevented it -you only have one body – be sure to take care of yourself – its not worth dying for your startup
- Lastly, someone once told me that life is a balance of health, wealth and love *C*---Health from food and exercise ---Love from friends, family and intimate relationships ---And wealth, obviously from your work
- These three are always competing, because we all have limited time *C* If you spend too much time on any one of them, the others will suffer When I started PF, I was so focused on the company, the I inadvertently neglected my friends, family and personal relationships I can tell you from experience that it wasn’t worth it (cant make up) For most starting a company, you will spend the best years of your life on your project Be sure it’s truly something you’re passionate about / something you can see yourself doing in 10 years / that’s how long it takes to build real value Be sure to enjoy your life during this process ---because life is short ---and I can assure you that no matter how successful you are, ---you’ll wish you always spent more time on your health, friends and family With that - Thank you.
- Thank you all for being here today.