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Firing up your dream team

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Being able to fire up a dream team first implies to have good team foundations: the right co-founders, the proper shareholder agreement, a well accepted equity split. Then comes the recruitment of A+ people, and the key triggers of team motivation.

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Firing up your dream team

  1. 1. Firing up your dream team
  2. 2. Investor dilemma?A team A ideaB idea B team
  3. 3. "What matters is not ideas, but the peoplewho have them. Good people can fix badideas, but good ideas cant save bad people.” Paul Graham, Y Combinator
  4. 4. Agenda• 3 main co-founding models• How to split equity The Foundation• Shareholder Agreement• Who do you want on your team Recruiting• How do you get them• How to reward them• Key motivation triggers Managing• Firing people on your team
  5. 5. CO-FOUNDING MODELS
  6. 6. 1 2 3+
  7. 7. 1 2 3+• 80%+ of total equity• Self starter / charismatic / strong ego• Much more senior than other guys on the team• Can pay for the initial team salaries
  8. 8. 1 2 3+ 50 / 50 Majority / Minority• Trust! Trust! Trust!• Almost perfect complementarity / No overlap• Not a stable situation• Good Shareholder Agreement is critical
  9. 9. 1 2 3+ 50 / 50 Majority / Minority• Decision-making rules• Deadlock management• Transfer shares to remaining founder• How to manage transition to CEO
  10. 10. 1 2 3+ 50 / 50 Majority / Minority• “Majority” has anteriority / seniority / expertise• Decision-making simpler• Need some protection clauses for “Minority”
  11. 11. 1 2 3+• Getting tricky on splitting equity• Decision-making may rely on moving “alliances”• Sometimes unstable and manipulable• A CEO needs to emerge soon from the team
  12. 12. Chances of success? 1 < 2 > 3+No statistical evidence that it is true, but…
  13. 13. A bit of (old) academic research• Heterogeneity of team members drive higher long term performance – Murray (1989)• Long term performance driven by size of co- founding team – Teal & Hoffer (2003)• But both creates more conflicts, lack of trust, decreasing creativity – Mosakowski (1998), Clarysse & Moray (2001)
  14. 14. Do you need co-founder(s)• In general, you achieve more and faster with co-founders, so look and keep looking for the best entrepreneurial talents around you• Seek perfect competency coverage with no or very little overlap• If enough money in your pockets: give less equity by paying a salary (some co-founders prefer cash)
  15. 15. References• Disappointed by what I found on this.• Key sentence everywhere: “you need to LOVE your co-founder”…
  16. 16. HOW TO SPLITEQUITY AMONGCO-FOUNDERS?
  17. 17. Potential variables• Experience and credibility• Core expertise• Level of commitment• Ability to bring in key people• Relevant capabilities * importance to project• Time already spent * market value• Future role and responsibility• Early money invested• Who got the idea• Who got started first
  18. 18. Example: The founders’ pie calculator INPUT OUTPUTSource: Frank Demmler
  19. 19. Founder A Founder B
  20. 20. What does is come down to?• Maximizing the size of the pie• Fairness on a set of criteria and “what ifs”• Creating trust mechanisms• …
  21. 21. It is all about making a dealX% (1-X)%
  22. 22. References• http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27 %20Pie%20Calculator.htm• http://thinkspace.com/how-to-divide-equity-to-startup- founders-advisors-and-employees/• http://foundrs.com/calculator/index.php• http://www.ownyourventure.com/
  23. 23. SHAREHOLDER AGREEMENT
  24. 24. You need solid paperwork
  25. 25. Key shareholder agreement clausesVestingTag alongDrag alongRight of first refusalDecision-makingDeadlockNDAIP ProtectionNon-compete
  26. 26. Shareholder Agreement ClausesVesting The process by whichTag along founders / co- founders / employeesDrag along accrue non-forfeitableRight of first refusal shares.Decision-makingDeadlock Industry standardNDA • 6-12 month cliffIP Protection • 36-48 monthsNon-compete
  27. 27. Shareholder Agreement ClausesVesting “Protect minority”Tag along If a majorityDrag along shareholder sells hisRight of first refusal stake, then theDecision-making minority shareholderDeadlock has the right to joinNDA the transaction andIP Protection sell his minority stake in the company.Non-compete
  28. 28. Shareholder Agreement ClausesVesting “Protect Majority”Tag along A right that enablesDrag along a majority (industryRight of first refusal standard 70-75%) toDecision-making force a minority toDeadlock join in the sale of a company on theNDA sameIP Protection price, terms, andNon-compete conditions.
  29. 29. Shareholder Agreement ClausesVesting The (founders) haveTag along the right to purchaseDrag along shares before theRight of first refusal offering is madeDecision-making available to otherDeadlock potential buyers.NDAIP ProtectionNon-compete
  30. 30. Shareholder Agreement ClausesVesting Important decisionsTag along need to have aDrag along special approvalRight of first refusal process. Eg: financing, sale, keyDecision-making recruitments, …DeadlockNDA Board role andIP Protection composition.Non-compete
  31. 31. Shareholder Agreement ClausesVesting How to escape aTag along deadlock in case noDrag along agreement is reached among 50/50Right of first refusal founders? How toDecision-making divorce?DeadlockNDA • Put off meetingIP Protection • ArbitrationNon-compete • Mexican shoot-out
  32. 32. References• JFDI Shareholder Agreement: http://mengwong.com/sg/capital/thin.pdf• NVCA investor term sheet:http://www.nvca.org/index.php?option=com_content& view=article&id=108&Itemid=136• Paul Graham (Y Combinator):http://www.paulgraham.com/startupmistakes.ht ml
  33. 33. IS IT TOO LATE?
  34. 34. Maybe it is possible to change• Discuss based on rational arguments• Offer to buy shares to pay for the past and keep the future for yourself• Some key favorable moments for a REWIND – When all goes well and everyone agrees – Financing round (investor pushes for a new configuration)• The longer you wait, the harder it is
  35. 35. Some ideas to increase your stake• Buy back non vested shares instead of Company• Increase your ownership if IRR > X% p.a.• Take from Key People Pool or issue new stock if your role increases (say you become CEO)• Call option on investors’ shares at predefined price• Right of first refusal in case of share transferHave rights and the money to exercise them
  36. 36. WHO DO YOU WANT ON YOUR TEAM?
  37. 37. Not this guy, do you?
  38. 38. The bestrecruiter in the world
  39. 39. ”You look for three qualities: integrity,intelligence and energy. But the mostimportant is integrity, because if theydont have that, the other twoqualities are going to kill you.”
  40. 40. So who?
  41. 41. Hire only A+ people
  42. 42. Why?1. If you have A+ people, you may fail. If you don’t have A+ people, you will fail.2. A+ people won’t joint you if your team is not A+. So start being A+ yourself.3. If you are afraid to lose control because of A+ people on your team, then you are back to point 1.4. It is a bit like in sports: if you train with athletes, you have more chances to become and remain one: it motivates you, you acquire the techniques faster by watching others, you train harder.5. You want to make sure that each new person on your team will make a critical difference to your business.
  43. 43. My definition of A+• High level of personal integrity• Doers, Achievers, Solution-oriented• The best experts with humble attitude (*)• Accountable• Speak up when there is a problem• Love the product / vision (“infected people”)• High level of resilience*an expert who is not humble and has no listening attitude is useless
  44. 44. What are your criteria?
  45. 45. HOW DO YOU GET THE A+ PEOPLE?
  46. 46. Create a competitionThe best people are not afraid of it. In fact, they seek it.
  47. 47. You want to see…
  48. 48. …how they compare…
  49. 49. …to get only the best (*)*most probably, not these guys
  50. 50. Define the Prize• Job description• Include the job challenge• What is your Unique Value Proposition• Best (required?) to include the compensation
  51. 51. Create visibility for the job • Your Network • Your employees networksPUSH • Job boards are more than ok • University placement offices • … • Informal meetups (ongoing)PULL • Be a visible expert • Inbound marketing
  52. 52. Example of recruitment process• Screen CVs• Quick interview over the phone• Test competences (hard*)• 3 interviews minimum (**) Sell, Sell, Sell• Check references throughout the process• Discuss compensation• Make a priced offer*get to muscle rupture, A+ people prefer hard challenges** use trusted external people if needed
  53. 53. Recruitment is a lot of work (*) # candidates Time spent (hrs) Communicate the job offer 5 Screen CVs 180 6 Quick phone interview 20 5 Test competences 10 15/3=5 3 interviews (45 minute each) 5 11 Check references 3 3 Sell and discuss compensation 1 2 Total hours 37*not even talking about ongoing networking, inbound marketing…
  54. 54. Example of interview guide (*)*quick and dirty, the point is you need one to rate candidates consistently
  55. 55. Examples of questions to references• Context of collaboration• Why should I recruit her/him?• What drives her/his motivation?• Can I trust this person?• How can I help this person feel good?• What are the 2-3 things she/he needs to work on?
  56. 56. If there was only one question to ask“If you were to launch a new company, would Mr.Candidate be the first person you would take onyour team (and pay from your savings account)?” “Why?”
  57. 57. Don’t make the offer till the very end • You want your offer to be accepted, not discussed nor refused • So discuss before, it feels more comfortable for you and the candidate • An offer letter is just a formalization of a pre- existing agreement
  58. 58. Some personal advice• Take a well connected headhunter as a Business Angel investor.• Between 2 candidates, choose the one with the best attitude, as competences turn out to be less relevant over time.• Recruiting is one of the key skills you want to develop on your team.
  59. 59. HOW TO REWARD EMPLOYEES?
  60. 60. Just to give it a try -0 to -50% vs market rate at the beginning Depends on development stage, resources, cash / equity candidate profile, and your Base value proposition. Aim to reach market rate fast (in the end, + you don’t want to take the risk of losing them)Bonus Forget it at the beginning except if super well defined and quantifiable goals. +Equity
  61. 61. Equity distribution for “employees”• Employees ≠ Co-founders• Count more in value, less in percentage terms• Take from Key People Pool (12-20% post money)Title % equity post Series A Value @ 10m USD post money in 000sCEO 5-10% 500 – 1000COO 2-5% 200 – 500VP 1-2% 100 - 200Director 0.4 – 1.25% 40 - 125Lead Engineer 0.5 – 1.0% 50 - 100 Source for % equity: VentureHacks
  62. 62. From art to science (Fred Wilson) • Cut employees in 4 brackets (except CEO) – Officers: CMO, CRO, CTO, CPO, CFO… 0.50 – Key People 0.25 – Employees in key functions 0.10 – Employees in no key functions 0.05 • Multiply by salary to get equity value – For a CMO earning 150k: 150 * 0.5 = 75k • Calculate corresponding # shares – 75 000 / company value (10m) * total # shares outstanding (1m) = 7500, ie 0.75% of total equitySource: Fred Wilson
  63. 63. Cont.• Apply vesting scheme over 4 years• Potential gains for employee – 75k * Value multiplier over period (5-10?) – exercise price (say 75k) = 300 – 600k
  64. 64. Some references• VentureHacks: http://venturehacks.com/articles/option-pool- shuffle• Fred Wilson: http://www.avc.com/a_vc/2010/11/employee- equity-how-much.html
  65. 65. TEAM MOTIVATION
  66. 66. Posters don’t work.
  67. 67. HR not so well either.
  68. 68. SHARED VISION
  69. 69. “If you want to build a ship, don’tdrum up the people to gather wood,divide the work and give orders.Instead, teach them to yearn for thevast and endless sea.” Antoine de Saint Exupéry
  70. 70. CULTURE
  71. 71. “The Culture is defined by who you recruit, promote, and let go” - Netflix presentation
  72. 72. ACHIEVEMENTS
  73. 73. What worked for me• Setting challenging and agreed upon goals• Progressively give more control to people• Share the data, even the hard one• Listen to the young guy and the silent person• Recognize and reward the achievers• 4-8 people sub-teams• Have the tough discussions• Have the team spend time on what it doesn’t know yet
  74. 74. Call for half times toreview and celebrate.
  75. 75. References• Motivation models: http://www.slideshare.net/rmullenger/motivation-models• Lance Laking, common sense on people management:http://www.slideshare.net/webgoddesscathy/h uman-capital-building-high-performance-teams-for-your- startups-success• Netflix HR: www.slideshare.net/reed2001/culture-1798664
  76. 76. Tanguy Lesselint.lesselin@cartouche.sg+65 91 000 667

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