Vesting Schedules Protect Company Equity
I’ve written about how important finding a co-founder is for entrepreneurs. But equity (company ownership) is a big concern. Specifically, what happens if things don’t work out? If one founder isn’t pulling their weight, do they own as much of the company as they would if they were contributing mightily?
It’s a valid concern. But there’s a simple tool to mitigate it: a vesting schedule. A vesting schedule outlines when each person’s equity is theirs, free and clear. Keep in mind that equity should be earned, not granted, for early employees and founders. The vesting schedule is a great tool to set expectations about equity.
The most common vesting schedule is time-based. You typically see a four-year schedule with a one-year cliff. What does this mean? No equity vests until after a year of employment. If someone leaves in month eleven, they receive zero equity. On their one-year anniversary, 25% of their equity will vest (they stayed for one of four years, or 25% of the four-year schedule). After that, their equity vests in equal monthly increments until the forty-eighth month. Carta has a good article with details and examples.
At CCAW, we used a milestone-based vesting schedule with revenue as our milestone. As we reached certain revenue targets (while maintaining profitability), equity for leaders would vest. We had a minimum revenue threshold (i.e., cliff) the company had to hit before any equity vested. This schedule was very helpful because everyone was aligned. Our approach was specific to what we were trying to accomplish at the time and may not work for everyone.
Many investors will want to see that founders are on some sort of vesting schedule, which ensures that they’re committed to building the company. There are lots of details that I won’t get into, but the takeaway is that founders should have a vesting schedule (in some form or fashion) if they’re raising investor capital.
A vesting schedule is a great way to protect against someone who isn’t contributing having equity in a company. Finding a co-founder is hard, but vesting schedules overcome one hurdle.
Today I participated in an idea session with my Outlander Labs teammates. No agenda, just a topic and a conversation about ideas. It was a topic that I’m not knowledgeable about, so my goal was to listen and learn. And boy, did I! The team’s collective knowledge was vast and we ended up with great ideas. Today was an opportunity for me to fill a knowledge gap, and it highlighted something else for me too.
As I listened, I noticed a pattern. Idea compounding. Sounds weird, so let me explain. Our team is composed of highly intelligent people who, individually, have great ideas and unique perspectives. As one person shared a thought, you could see the wheels turning in everyone else’s head. Then someone else shared an idea inspired by the previous one. This went on for an hour and resulted in more great ideas than we can possibly execute. A high-class problem for sure.
Our idea-generating exercise was highly effective because we approached the topic as a team. Had we assigned it to one person, I have no doubt that their ideas would have been really good. But approaching it as a team resulted in ideas that are great (or so we think).
I wish I had had the benefit of idea compounding in my early days at CCAW. I chose the solo founder path, and it was difficult. I was forced to come up with all the ideas, which were far from great. Years later I hired high-level thinkers and our idea compounding led to some of CCAW’s greatest breakthroughs. We overcame enormous hurdles and made tons of traction in a relatively short time.
Idea compounding is one of the many benefits of working with a team. And great ideas can be the difference between success and failure for early-stage companies. For any founder wondering why you should consider recruiting a co-founder: idea compounding is one of the many reasons you shouldn’t go it alone!
Solo Founders Should Hang around the Hoop
One of the mistakes I made early was choosing to be a solo founder. Over the last year, I’ve been intentional about sharing with early founders the importance of having a founding team. Some still think the solo route is best, but most tell me they want a co-founder. But finding one is easier said than done—especially for nontechnical founders seeking a technical founder.
Nontechnical founders who want to build a technology company face a dilemma. They can’t build the product. They must find a technical co-founder (or a senior developer they don’t have to manage closely). Otherwise the company never progresses beyond the idea stage. Technical solo founders face a host of other challenges, but they can at least build the product. Putting the product in users’ hands can generate traction —a powerful recruiting tool. It’s easier to recruit a co-founder when you can show that you’ve already acquired customers or users.
So how does a nontechnical founder find a technical co-founder? There’s no silver bullet, but a good start is to hang around the hoop. The hoop is anywhere good technical talent might be found: meetups, conferences, pitch competitions, slack channels . . . you get the idea. Colleges are also great resources. Loitering around a school won’t help, but you can reach out to computer science professors and leaders of student clubs. If you’ve got a good idea, can tell a story, and talk to enough people, the odds are in your favor.
The difficulty of finding a co-founder is a problem I’ve heard about often enough that it warrants deeper thought. I’ll discuss it with others and, I hope, come up with a more comprehensive set of ideas for solving it. If I do, I’ll be sure to share it!
Build Rapport Before You Build a Better Mousetrap
Yesterday I had the privilege of being on a virtual panel that spoke to about 50 early entrepreneurs. The session was full of entrepreneurs with great ideas. I found it energizing and insightful. At the end there was a Q&A session. We were peppered with tons of great questions, but one stood out to me:
How do I find early customers?
I’m sorry to have to tell people that there’s no secret group that will unlock the door to early customers. Entrepreneurs have to hustle to find them. In my opinion, the right strategy can make it easier (though not easy). I’ve noticed that finding early customers is many times harder when founders do things in the wrong order, which is VERY common. Bob thinks the world needs product X because he experienced a problem or noticed it would be helpful to others. He decides to build it. What has he done? Created a solution without understanding the problem from the perspective of potential customers. He’s done a ton of work based on what he thinks about the problem, which is worthless. Why? Because Bob isn’t the customer. He won’t pay for the solution. Bob may be right—what he built is missing and pretty cool. That doesn’t mean customers will pay for it.
Ideally, entrepreneurs should build rapport with potential customers before the solution is ready. Sounds hard, but it’s not if approached correctly. The key is to do customer discovery before you start building. Find people who are experiencing the problem you see. Ask them about it. Why is it such a problem for them? How are they working around it now? Have they looked for a solution? There’s a great book that explains how to go about doing this.
People love talking about themselves and their problems. By listening to understand (not to inject your opinions), you’ll develop rapport with them. These conversations should help you build a better solution to the problem. When it’s ready, people you’ve nurtured a relationship with will probably be open to trying it. If it solves the problem (it may take time to get there), they’re likely to refer you to people they know who have the same problem.
In other words, making the effort to deeply understand the problem early on will benefit you in two ways: you’ll have a better idea of how to solve it and you’ll have potential customers already waiting for it when it’s ready.
Entrepreneurs see an opportunity where others see a problem and sometimes stubbornly cling to their vision of the opportunity. There’s nothing wrong with having conviction, but great entrepreneurs take the time to understand the “why” behind the opportunity they see.
Secret Weapons 101: Diverse Networks
When I worked at EY, I had a great group of friends. Over time, I found that my circle consisted mainly of people at public accounting or similar firms. When I talked about entrepreneurial ideas, the response was often a blank stare. Most people in my network viewed life through the same lens. There wasn’t much diversity in thinking or interests.
When I started CCAW I didn’t know many entrepreneurs in Atlanta and struggled to gain traction. Eventually, though, I connected with some amazing founders. These people had different backgrounds and were solving all sorts of interesting problems. They were knowledgeable about finance, technology, the arts, advertising . . . To this day I’m amazed at how diverse this group was.
As I look back, I see that the diversity of my network played a huge role in my growth. These people introduced me to things I didn’t know existed. For instance, in 2009, I had no idea what a software developer did. Exposure to that knowledge led to CCAW building technology that would help power its growth.
When I’ve needed help in an area in which I’m not strong, my network has been a valuable resource. I once renovated a property and was terrified the project would go awry. Someone I knew helped me by giving me information that was critical and led to the project being successful.
Having a diverse network has also helped in recruiting. When I needed a great creative, artists I knew introduced me to credible candidates.
The diversity of my network has helped shape me. It’s broadened my perspective, made me more empathetic, and given me confidence to do things outside my areas of expertise.
If you’re building a company, doing something else great, or simply want to continually grow, seek friends and acquaintances who are different from each other—and different from you. The exposure could change your life!
Sow the Seed Before You Need the Crop
As an early-stage entrepreneur, I didn’t fully appreciate the value of nurturing relationships. I thought that if I worked hard and presented a logical case, others would want to work with me. Eventually I realized that I was missing an important part of the equation.
I wanted CCAW to enter a new segment of the automotive parts industry. It was a massive market and where I saw our growth occurring. We invested in creating a better technological approach to selling these products, but I couldn’t get any vendors to listen. None of them wanted to give us a shot. The conversation would go something like this: “This is great, but we don’t know you” or “How do I know you can do what you say you can do?” I tried for months to get someone to give us a shot. No dice. Then I finally got a lucky break. Someone I had worked with moved to a new company that we’d been eyeing as one we’d like to work with. He vouched for us and described the fruitful relationship we had with his previous employer. An established relationship opened a door that had been closed for months. All of a sudden we got the green light to start doing business with them. We quickly grew the business to hundreds of thousands of dollars a month. The vendor was blown away.
There were tons of things I did wrong in this situation, and the biggest was not establishing relationships with these vendors ahead of time. I should have been telling them about my vision and how we were going to make it a reality through innovative technology. I should have been sharing the success we’d had in other product categories. As we built the technology, I should have been updating them. If I had done these things, I’ll bet the conversations would have been much smoother when we were ready to go live with the new category.
I learned that a great idea can be dismissed if it comes from a stranger. And that the same idea (or a worse one) from someone known and trusted can be welcomed on the basis of the strength of the relationship.
If you’re trying to do something that can’t be done without someone else’s buy-in, make a point of cultivating a relationship with them before you need them. They’ll be more likely to want to work with you.
How Do I Find More of You?
Today I was the (virtual) speaker at the Founders Journey Lesson Lab for the latest cohort of It Takes A Village. The program is a pre-accelerator focused on helping female founders and founders of color be successful. The program lasts four months and culminates in a graduation/demo day event.
I chose an informal approach that allowed for a candid conversation. I shared my background, my transition from corporate America, and the highs and lows of my CCAW journey. I also learned more about each founder, the problem they’re solving, and what they’re currently struggling with. It was a good conversation. At the end, I let the founders ask me anything.
One of them asked me a pointed question. He wanted to know why he’d never heard of me before today and how he could find more founders of color like me who have experience building sizable companies. He said that hearing from someone he could relate to who has built a big company was inspiring. He wants more inspiration and to learn from the experiences of other successful founders of color. He doesn’t know where to find us.
I absolutely loved his question because it hit on a very important area where I’ve fallen short. Here’s how I responded:
- Personality – I’m a private person by nature and don’t like the limelight. I shy away from attention because it makes me extremely uncomfortable. But, through conversations with others, I’ve realized how impactful my journey can be. This far outweighs my personal comfort. I’ve started telling my story more.
- Heads down – Founders trying to build something big don’t have a ton of free time. They’re busy building a business. In my opinion, founders who devote time to giving interviews and getting press do so at the expense of their company, which will make substantially less progress because the founder isn’t as focused. Because founders building something great aren’t out and about and you don’t read about them, you don’t know they exist.
- First gen – Tech founders of color who started a decade or so ago (I call them the “first gen”) didn’t have a blueprint. No coworking spaces (e.g. WeWork) and few accelerators were available in Atlanta. It was a different time and we figured it out as we went. We did the best we could with the information we had at that time and learned as we went along. We got some things right and some things wrong. Some (not all) tech founders of color are realizing, looking back, that we made a mistake. We were too heads-down trying to make sure we didn’t fail. We didn’t spend enough time sharing our experiences in our community.
I’m so glad that founder asked that question. He was spot-on. The question reinforced that I need to continue doing more chats like the one today. No excuses. I should have shared more over the years. I’ve pledged to do better. I’d like to inspire and motivate rising founders of color to do something great. And I hope that other founders of color do the same if they can.
From those to whom much is given, much is required!
Ask for What You Need from a Business Relationship
In CCAW’s early days I was constantly trying to convince vendors to work with us. They’d never heard of CCAW and I was asking them to do things they weren’t doing for other customers. I sounded like that annoying customer who would be a pain to work with. Many said no, but a few said yes. Often the terms and pricing were unfavorable because I wasn’t in a position to negotiate. The opportunity, though, was worth paying inflated prices.
Over time our spend and reputation with vendors grew. Our use of technology meant that our relationship required minimal interaction. Translation: our account was highly profitable. Vendors loved working with us. We eventually became the largest customer of some of them.
One day I realized that our relationships had evolved from customer–vendor to more of a partnership. We had a unique perspective (and data to support it) on their operations across many states. We also had customer insights nationally. None of their other customers provided these things.
We began to embrace our strengths. We started providing data to our vendors, but we also made an ask. We had been bearing the brunt of their operational mistakes and eating the costs. In our minds it was a cost of doing business. As we scaled, the error percentage stayed the same, but the dollars were material (e.g., an 1% error rate went from a loss of $1,000 to $100,000 annually). We asked them to assume this financial burden. We thought they would say no. After all, it wasn’t something they did for any other customer. To our surprise, they quickly agreed. No negotiation. Just a quick yes. Apparently, the value we brought to the relationship far exceeded the cost of our request.
Healthy relationships are bidirectional. This experience taught me a valuable lesson about managing healthy business relationships. Ask for what you need to receive from the relationship. Good partners will recognize your value and want to reciprocate by saying yes.
We All Win When We Pay It Forward
Over the last few weeks I’ve been working on a project that’s important to me. I realized in its later stages that I don’t have the skills required to complete certain tasks. I humbly reached out to others and asked for help.
Over the years I’ve had many opportunities. Most came through other people. Some of my luckiest opportunities weren’t the result of my hard work. I just knew the right person. I’ve always been mindful and appreciative of the help these people provided. They didn’t have to help me, but I’m grateful that they did. For this reason, I try my hardest to be there to support others in their time of need.
My requests for help this week were received openheartedly. My time frame was tight, and I made sure to communicate that (so people could opt out). Everyone said no problem; they’d be happy to help.
Healthy relationships truly are bidirectional. They require regular goodwill deposits by both parties. The responses I received to requests for help on short notice qualify, big-time! Entrepreneurs (and everyone else, for that matter) should be mindful of this.
Doing things for others out of the goodness of your heart with no expectation of getting anything in return is one of the cornerstones of healthy relationships and communities. I think it’s also the foundation of a healthy entrepreneurial ecosystem. Your good deed today will inspire someone else’s good deed tomorrow. If everyone operates in this manner, the ecosystem will be strong and everyone can go farther, faster!
Rookie Mistakes 101: Not Keeping People Updated
Update emails are a great tool for founders. They’re just what the name suggests: emails that highlight important recent information about the company or founder. They’re an electronic way of answering the “What’s new?” question from investors and advisors. When I meet with founders, I usually request that they add me to their update email list.
Here are some ways update emails add value:
- Efficiency – One email communicates your updates to many people . You can’t beat that ROI. Imagine having to bring each person up to speed individually.
- The luck factor – Opportunities tend to be offered to people who are top-of-mind. Sending updates regularly puts you on people’s minds.
- Accountability – Nobody wants to disappoint people they hold in high regard. Knowing that you have to send an update will push you to complete things you’ve committed to in the last one.
- Help – It’s hard for people to help if they don’t know what you need. Updates bring awareness of your needs to a broad audience. I’ve seen founders receive help from someone on their update email list who was the last person they anticipated would be helpful. You never know what or who someone knows.
- Reflection – Experiences—good or bad—are valuable, and reflecting on them will help you grow and gain wisdom. But it’s all too easy to succumb to the daily whirl and never stop moving long enough to think deeply. Writing an update email forces some degree of regular reflection.
- Team building – People like to know what’s going on outside their area of responsibility, and that can be difficult for founders to communicate. Especially while everyone works from home. And I’ve seen founders benefit from including their teams on their updates. Again, you never know what or who someone knows. Team members can be great resources.
So, what makes update emails successful? Here are a few of my thoughts:
- Consistent rhythm – Send them regularly to stay top of mind. Consistency also helps keep the length down. Cramming six months’ worth of updates into a single email will ensure that few people will read it.
- Consistent structure – Organize and format your update emails the same way every time. This will allow readers to quickly find the info that matters most to them. And they’ll be more likely to read them. A progress report, future plans, and requests for help are good things to include.
- Conciseness – Get straight to the point. The more concise the update, the better. People will stop reading if you ramble.
- Transparency – Don’t sugarcoat bad news. Include the highs and the lows. Nobody expects perfection from founders. Revealing problems opens the door for others to share the wisdom they gained from similar experiences.
I love it when a good update email lands in my inbox. If you’re thinking about starting a company (or you’ve started one), sending regular update emails is a good practice.