Entrepreneur Office Hours - Issue #30
Scaring customers, answering the right questions for investors, and co-founder equity splits
I’m old enough to remember not having Internet access. I know… it’s like I grew up in the stone age!
I also remember begging and pleading with my parents for an AOL account, but they thought it was too expensive and didn’t want to pay.
I finally got on the Internet thanks to a company called NetZero. NetZero gave free Internet access in exchange for having a little window above your browser that contained a rotating banner ad. Sure, it was annoying, but at least it got me online.
Maybe some of you reading this had a similar experience? If so, you’ll love my guest on this week’s episode of Web Masters… Ron Burr, founder of NetZero.
Also in this issue, I explore the second most important question you need to answer in a fundraising pitch, and I answer a question about co-founder equity splits.
As always, if you’ve got questions, just reply to this email and I’ll do my best to answer.
“What problem are you solving?” is the most important question that entrepreneurs have to answer during a fundraising pitch. But it’s not the only question.
The Coder Who Found a Way to Make the Internet Free
In the earliest days of the Internet, if you wanted personal, at-home access, you were going to have to pay… a lot. That led an entrepreneur named Ron Burr to wonder if he could give away Internet for free and subsidize the cost with advertising. The result was NetZero.
Hear Ron’s full story on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
The language entrepreneurs are trained to use to describe their companies for investors and others in the startup world can scare away potential customers. Are you saying the wrong things?
Office Hours Q&A
I’ve been working for a while as a solo entrepreneur. I’ve got a product built and I’m ready to start marketing it, but that’s not really my speciality, so I’ve been trying to find someone to partner with who’s good with sales and customer acquisition.
I think I’ve found someone, but I’m not sure how to offer a fair equity split. What would be a reasonable offer for a company at my stage? And would he be a co-founder or Employee #1?
For reference, I’ve already put in close to 18 months of work developing the software.
Lots to unpack here… let’s tackle them one by one…
In general, when entrepreneurs tell me they’ve been building a product for a long time and now they’re ready to start selling, I get very worried. Have you been building this product without talking to people? Because if you haven’t been selling, you haven’t been talking to people, and that means there’s a good chance you’re not building something people actually want.
If that’s the case, then the 18 months you’ve already put in might not mean much. As soon as you start talking with customers, you’re likely to find lots of what you’ve built needs to be rebuilt. Or the entire thing needs to be scrapped.
To be fair, you *might* have gotten the product perfect without any feedback from potential customers. But don’t count on it. Consider yourself warned.
Co-founder equity splits are tricky, and there’s no perfect option. You just need to talk with the other person and work through the details until you come to an agreement can both live with. It might be an uncomfortable conversation, but that’s OK. If you two are going to build a startup together, you need to get good at having uncomfortable conversations, so might as well start practicing now.
The key here is to make sure you set the terms at the very beginning. It’s a lot easier to divide the proverbial pie before it’s worth anything than to start arguing over ownership once it has real value.
When you do divide equity, don’t forget about the future of the company. It’s going to be easy to get bogged down worrying about small percentages of ownership, but, in the long run, they won’t really matter. This is especially true if you go the venture capital route. You’ll keep getting diluted along the way, and the difference in ownership stake will decrease over time.
Also, my general mantra is this: “100% of nothing is way worse than 5% of a billion dollar company.” In other words, as the original founder, you might be keen to control as much as possible. However, you’re going to need help. You have to invite other people to join you and you have to give them a fair stake in what you’re building. If you don’t, you’re going to fail.
Would you rather have a smaller portion of a successful company or a larger portion of a failed company?
Don’t worry about whether the person is your co-founder or Employee #1. You’ve got so many bigger problems to deal with.
Whatever deal you strike, make sure it has a vesting schedule with a cliff. You can Google the details of what that means, but the gist is that whatever equity the person gets, it takes X amount of years for all the equity to accrue, and the person doesn’t start getting any of that equity until after Y amount of time.
The standard structure is a four year accrual period with a one year cliff. This means if you give the other person 48% (for the sake of having a nice, round number), that person will get 1% additional ownership each month for four years until all 48% has been accrued. In addition, the first 12% doesn’t transfer to the other person until a full year has passed, meaning if, for any reason, you and the person split before the first year (not an impossibility) that person doesn’t get any stock.
This is an important protection for both you and the company. It gives you a year to figure out whether you’re a good match.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!