Foundations of a Startup

  • “Thiel’s law”: A startup messed up at its foundation cannot be fixed.
    • Every great company is unique, but there are a few things that every business must get right at the beginning.

      • Companies are like countries in this way. Bad decisions made early on—if you choose the wrong partners or hire the wrong people, for example—are very hard to correct after they are made. It may take a crisis on the order of bankruptcy before anybody will even try to correct them. As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.

  • Choosing the right co-founder is the most important thing
    • Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce. Optimism abounds at the start of every relationship. It’s unromantic to think soberly about what could go wrong, so people don’t. But if the founders develop irreconcilable differences, the company becomes the victim.

    • Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they start a company together—otherwise they’re just rolling dice.

    • Everyone in your company needs to work well together
  • To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts:
      1. Ownership: who legally owns a company’s equity?
      1. Possession: who actually runs the company on a day-to-day basis?
      1. Control: who formally governs the company’s affairs?
    • A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control. In theory, this division works smoothly. Financial upside from part ownership attracts and rewards investors and workers. Effective possession motivates and empowers founders and employees—it means they can get stuff done. Oversight from the board places managers’ plans in a broader perspective. In practice, distributing these functions among different people makes sense, but it also multiplies opportunities for misalignment.

    • Early-stage startups are small enough that founders usually have both ownership and possession
      • Most conflicts in a startup erupt between ownership and control—that is, between founders and investors on the board.
        • The potential for conflict increases over time as interests diverge: a board member might want to take a company public as soon as possible to score a win for his venture firm, while the founders would prefer to stay private and grow the business.

      • An effective board should be small, ideally 3 people (it should never exceed 5 unless the company is public)
        • The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight. However, that very effectiveness means that a small board can forcefully oppose management in any conflict.

        • This is why it’s crucial to choose wisely: every single member of your board matters. Even one problem director will cause you pain, and may even jeopardize your company’s future.

  • As a general rule, everyone you involve with your company should be involved full-time.
    • Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example. However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day. If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus.

  • Distributing money
    • [E]ven so-called incentive pay encourages short-term thinking and value grabbing. Any kind of cash is more about the present than the future.

      • A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups.

    • Startups don’t have to offer high salaries, because they can offer part ownership of the company itself
      • Equity is the one form of compensation that can effectively orient people toward creating value in the future. However, for equity to create commitment rather than conflict, you must allocate it very carefully. Giving everyone equal shares is usually a mistake: every individual has different talents and responsibilities as well as different opportunity costs, so equal amounts will seem arbitrary and unfair from the start. On the other hand, granting different amounts up front is just as sure to seem unfair. Resentment at this stage can kill a company, but there’s no ownership formula to perfectly avoid it.

      • Why work with a group of people who don’t even like each other? Many seem to think it’s a sacrifice necessary for making money. But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational. Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together. If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms.

  • Recruiting should never be outsourced
    • You need people who are not just skilled on paper but who will work together cohesively after they’re hired.
    • The first four or five might be attracted by large equity stakes or high-profile responsibilities.
    • More important than those obvious offerings is your answer to this question: Why should the 20th employee join your company?
      • Talented people don’t need to work for you; they have plenty of options.
        • You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?

          • Here are some bad answers: “Your stock options will be worth more here than elsewhere.” “You’ll get to work with the smartest people in the world.” “You can help solve the world’s most challenging problems.” What’s wrong with valuable stock, smart people, or pressing problems? Nothing—but every company makes these same claims, so they won’t help you stand out. General and undifferentiated pitches don’t say anything about why a recruit should join your company instead of many others.

          • The only good answers are specific to your company, so you won’t find them in this book. But there are two general kinds of good answers: answers about your mission and answers about your team. You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done.

  • From the outside, everyone in your company should be different in the same way.
    • Every employee should be devoted to the company’s mission
  • On the inside, every individual should be sharply distinguished by her work.
    • Making each employee responsible for one thing increases efficiency and reduces conflict conflict