Upping Your Game in the Board Room: A Review of Startup Boards

Four years ago, at a panel discussion for my Founders’ Dilemmas course that featured a handful of experienced serial entrepreneurs, one of the questions raised by a student was, “What’s the most important piece of advice you’ve ever gotten from a mentor?” After thinking for a few seconds, one of the panelists said, “That the goal of every board meeting … is to end it.” My heart fell when I heard that answer. A board of directors can be an extremely valuable part of a startup’s foundation, filling in the team’s biggest remaining holes and helping the founders overcome big-picture challenges. Yet, this experienced entrepreneur had gotten burned by his prior boards so often that he chose to give up a board’s potential value by avoiding building or convening a board. Fixing such problems is a core mission of the book Startup Boards, by Brad Feld and Mahendra Ramsinghani. If you are pushing off creating your board because of fears like the ones expressed by the panelist in my course, or you have an existing board that you would like to manage more effectively, you should read this book, underline the key elements of its diagnoses, and put asterisks next to their prescriptions. Its content is most relevant to those who have investors on their boards, but much is also relevant to other types of boards, as I discuss below. Frank Diagnoses of Misalignment and Conflicts At its core, board relations problems are caused (1.) by a lack of knowledge of pitfalls and best practices, and (2.) by inherent misalignment between founders and the members of their board. Unfortunately, investors often paper over the fact that board dynamics can be extremely challenging for founders and CEOs, reinforcing both the knowledge and misalignment problems. They paint a simplistic picture of adding […]

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Read Startup Life!

A review of Brad Feld and Amy Batchelor’s Startup Life                 Halfway through Startup Life, married couple Brad Feld and Amy Batchelor suggest that, “Being in a relationship with an entrepreneur is hard, possibly harder than being an entrepreneur” (p. 78). This hard-learned gem of wisdom is richly conveyed throughout their excellent read. Through their own real-life examples, and those of others, Brad and Amy drive home the message that a founder’s spouse or life partner is the true cofounder, the one without whose support and contributions the startup could be dead or might have never been born to begin with. Startup Life is an invaluable resource not only for showing life partners their likely path ahead, but also for opening the eyes of the founders themselves to the stresses their partners are likely to experience. I appreciate how the book tackles the full range of the entrepreneurial journey, beginning with the initial decision to leap (e.g., when motivated by “not wanting to risk a life in a cubicle”), and culminating with a successful exit. However, their clear-eyed presentation of these events highlights the unexpected challenges that can accompany even the biggest success. For instance, the authors poignantly describe the aftermath of Brad’s successful exit from one of his startups as “the entrepreneur’s equivalent of post-partum depression.” Far from the jubilation we would expect to see, Amy and Brad’s raw reflection offers a sobering, honest view of the dark underbelly of what many expect to be the glorious Promised Land. Along the way, Brad and Amy impart a wide variety of practical lessons and suggestions, such as keeping a weekly digital “Shabbat” in which they are offline each Saturday. To ensure they have cast a wide net of experience, Brad and Amy pepper […]

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Is Dead Equity Crippling Your Company?

By: Noam Wasserman for Inc.com Dead equity — equity held by employees and founders no longer working at the company — is a large and growing problem. Facebook’s IPO minted many millionaires and even billionaires.  One who attracted much attention is David Choe, the graffiti artist hired to paint the company’s first headquarters.  Choe opted to forgo a cash payment “in the thousands” for the equity equivalent at the time. Thanks to that one decision, he owns nearly four million shares of stock, worth in excess of $100 million. Choe’s equity is a headline-grabbing example of “dead equity”: equity owned by people who are no longer actively working for the startup. Every share of dead equity could have been redeployed as incentive for a current or future contributor to grow the value of the startup.  Instead, the dead equity languishes on the cap table, weighing down the startup and making it harder to attract and motivate the people who could impact its growth. Facebook’s situation is far from unique, even among recent tech IPOs. Mark Pincus of social gaming company Zynga recently confronted a similar problem when he tried to reclaim equity that he felt he had over-allocated to some early hires. Imagine how much tougher a dead-equity dilemma becomes when co-founders, who tend to hold large equity stakes, are involved. Facebook co-founder Eduardo Saverin was able to hold onto a significant chunk of equity after his forced exit from the company; that equity is now worth billions. Other prominent examples of drop-out co-founders who held significant amounts of dead equity include those at car-sharing company Zipcar and at tech startup govWorks.com (made famous in the movie “Startup.com”). A Significant – and Growing – Problem Dead equity has always been a significant issue for startups. Founders and hires have always […]

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Access Free Compensation Data for Participating in the 13th Annual CompStudy Survey – Deadline: June 30, 2012

Our annual “CompStudy” Entrepreneurship and Compensation surveys are under way right now. If you participate, you’ll get free access to detailed compensation data. The CompStudy surveys focus on private companies in the Technology and Life Sciences industries. We have conducted these surveys annually since 2000. (I collaborate on the surveys with Ernst & Young, law firm WilmerHale, and executive-search firm Park Square.) Last year, more than 800 private startups participated, giving us an extremely detailed dataset to help you understand the market for executive talent. The first decade of CompStudy surveys – which included almost 10,000 founders from 3,600 startups – served as the data backbone of my book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. As in past years, survey participants will receive free access to our sophisticated reporting/analysis website, including salaries, bonuses, and equity holdings for C-level and VP-level executives. To qualify for the free access, please complete the questionnaire by June 30th, 2012. Click here to go to the survey site. Investors (VC, angel, etc.) who get their portfolio companies to participate, earn free site access for themselves and their participating companies. Investors who get multiple portfolio companies to participate also receive access to additional tools, such as a portfolio-level compensation dashboard. If you participated last year, we should be able to pre-fill some of the data that would not have changed, making it quicker for you to participate now. (If you did not participate in the past, participating now will make it quicker for you to do so next year!) All survey submissions are kept completely confidential. Submitted information is seen only by me and the core research team. The analysis site will only show slices for which we have multiple data points, and we do not even list the […]

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Fear vs. Greed at Facebook

By: Noam Wasserman for Inc.com Mark Zuckerberg and his executive team have been extremely successful at retaining equity in their company. But how well do most other founders do? Even as Facebook prepares to go public, Mark Zuckerberg, the founder and CEO, still owns 28% of his company. As a whole, Zuckerberg, his co-founders, and his former and present employees, own about 55% of Facebook. How did they do this? Fear vs. Greed Each time founders seek capital they face what my colleague Bill Sahlman refers to as the fear versus greed tradeoff. On the one hand, founders fear that they will be forced to shut down their startup if they run out of money, which leads them to rush to raise new capital. On the other hand, they are also understandably greedy about maintaining a high equity stake, by minimizing their dilution. (Dilution is the progressive shrinking of each executive’s equity percentage as the startup raises each round of financing.) When founders delay raising each round, they are typically hoping to achieve certain milestones that will raise the startup’s valuation. That will reduce the percentage of stock they will have to cede to their financiers, and thus reduce their dilution. In every round of financing, Zuckerberg and his Facebook team have impressively minimized their dilution. Our CompStudy data, which allows us to compare Facebook’s equity dilution against that of some 2,500 technology startups, shows how successful the team has been. To estimate how much the founders and other insiders owned after each of the startup’s first three rounds of financing, we used the two major factors that affect dilution: the capital raised by the startup and the pre-money valuation it received. As shown in Figure 9.5 of my book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can […]

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Kauffman Sketchbook

Noam narrates a lesson from Founder’s Dilemmas (Chapter 2) in this entertaining Kauffman Sketchbook titled “Take the Leap”

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Avoiding The BlackBerry Blues: Know When To Fire Yourself

by: Noam Wasserman for Forbes.com Many founders ride their companies up the value ladder, and then down it. Last week saw the latest example of this phenomenon, as the next dramatic chapter was written in the evolution of Research-in-Motion (RIM), the once world-beating maker of the Blackberry smartphone. Once again, a founder overstayed his welcome and paid a price. A founder’s early passion, confidence, and attachment to a vision are often the magical ingredients that fuel the launch of a startup rocket ship. Visionary founders are usually the most central, irreplaceable players in a startup. Seen as the guardians of the corporate culture and the ones with deep ties to early employees and customers, such founders enjoy being the generals leading the troops. However, these early strengths can become Achilles’ heels if a founder is not aware of the downsides of passion and attachment. The downsides include things that the founder can’t do and things that the founder won’t do. On the “can’t” side, founders fail to realize that success breeds a new class of challenges; challenges that require skills they do not have, such as scaling a larger organization or managing functions in which they haven’t worked. On the “won’t” side, they stick with their initial ideas for too long, ignoring clear signals that it is time to pivot. They stick with their early employees and executives, even when those people are not up to the new challenges and demands. To Read More

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4 Top Myths About Start-up Pay

I’ve been collecting data about startups and compensation since 2001. Here’s what entrepreneurs think they know about startup pay–and what actually happens. Entrepreneurial decision-making is often guided by anecdotes, rules of thumb, and intuition. Sometimes that’s because entrepreneurs don’t have time to look at reams of data, sometimes it’s because they’ve learned to trust their gut, and often it’s because the data just isn’t there. But when it comes to pay, you need data. Since 2000, I’ve been collecting information about startups, including how much founders, their lieutenants, and their employees get paid. That research forms the basis for my annual CompStudy survey, as well as the quantitative backbone for my new book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. The research also highlighted four myths about startups and pay. Here’s how they contrast with reality. Myth number 1. Startup CEOs make a lot more than the rest of the executive team. It’s easy to see where this myth comes from: The average Fortune 500 CEO makes several times as much as execs just one or two levels down. The Truth: Compared to the lowest-paid member of the executive team, non-founding startup CEOs only make 1.7 times more in cash compensation. The big difference is in equity: Startup CEOs who are not founders get 6.2 times as much equity as the lowest-paid member of their team. Myth number 2. Founders make more than everyone else. Founders often believe that their own compensation is a ceiling beyond which they will not have to pay new hires. They try to anchor compensation packages at or below their own pay. The Truth: Across all senior-executive positions, founders make significantly less than other similarly-qualified execs. I call this the “founder discount.” This holds true even when we adjust […]

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Can Entrepreneurship Be Taught?

Eighty years ago, Ralph Heilman, the dean of Northwestern University’s School of Commerce, wrote an article entitled, “Can Business Be Taught?” His answer: yes. Take the lessons about what works and what doesn’t, analyze and organize them, and then teach them—just as we do with engineers, doctors and lawyers. Clearly, the process works for training M.B.A.s. So, why not entrepreneurs? After all, entrepreneurs are the ultimate general managers. They can benefit from much of the same knowledge that business students gain about marketing, finance and other topics, complemented by lessons that are specifically tailored to start-ups. And those lessons are getting better all the time. Early entrepreneurial education was largely based on case studies and anecdotes. Over the past decade, though, academics have brought a new level of sophistication to analyzing what leads to entrepreneurial success or failure. We’re now developing a “Moneyball for Founders”—rigorous data with which to scrutinize anecdotes and rules of thumb—that promises to revolutionize entrepreneurial education just as a similar movement revolutionized baseball a decade ago. To Read More

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The Quick Handshake: A Valuation Penalty?

When do co-founders split the equity equally, and does an equal split affect their venture’s later valuation? We are currently conducting our annual CompStudy survey. (I’ll soon be posting details about how to participate.) Over the last two years, I have enhanced the Founding Team section of the survey, so we can get a deeper view of various founding issues. The first issue I am revisiting is how founders split equity among themselves, an issue that I first surfaced in a series of posts over the last few years (e.g., Splitting the Pie: Founding Team Equity Splits, Equity-Split Results, Part 1: When Do Teams Split Equally?, Equity-Split Results, Part 2: Implications for Team Stability, The Idea Premium: How Much (Equity) is Your Idea Worth?, and New: “A Note on the Legal and Tax Implications of Founders’ Equity Splits”). For these new analyses, I have been collaborating with Prof. Thomas Hellman, and our initial paper has just been accepted for the annual summer-time conferences of both the Academy of Management and the National Bureau of Economic Research (NBER). In the paper, we take a detailed look at the drivers and the financing consequences of founder equity splits. Below I outline the core results in each of these two areas, and would love to get your input about them (especially about the financing consequences). Note: For these analyses, we combined the data from the 2008 and 2009 CompStudy surveys, including both Technology and Life Sciences ventures. Across the two years, we received complete survey submissions from a total of 576 multi-founder teams. Dropping 65 repeat respondents in 2009 gave us a full dataset of 511 ventures, which included 1,476 total founders. Part 1: Drivers of the Initial Split In the initial models, we examine whether the founders’ backgrounds affected whether they split […]

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