The course of lectures "Startup". Peter Thiel. Stanford 2012. Lesson 6

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This spring, Peter Thiel ( by Peter Thiel ), one of the founders of PayPal and the first investor FaceBook, held a course at Stanford - "Start-up". Before starting, Thiel said: “If I do my job correctly, this will be the last subject that you will have to study.”

One of the students of the lecture recorded and posted the transcript . In this habratopika ntonio translates the sixth lesson. Formatting 9e9names . Astropilot Editor

Lesson 1: Challenging the Future
Lesson 2: Again as in 1999?
Session 3: Value Systems
Session 4: The Last Step Advantage
Session 5: The Mafia Mechanics
Session 6: The Law of Thiel
Session 7: Follow the Money
Lesson 8: Presenting an Idea (Pitch)
Lesson 9: Everything Is Ready, But Will They Come?
Session 10: After Web 2.0
Session 11: Secrets
Session 12: War and Peace
Session 13: You Are Not a Lottery Ticket
Session 14: Ecology as a Worldview
Session 15: Back to the Future
Session 16: Understanding Yourself
Session 17: Deep Thoughts
Session 18: Founder - Victim or God.
Occupation 19: Stagnation or Singularity?

Lesson 6. Thiel's Law

I Grounds, rules, culture

All companies are different. But there are certain rules that you simply must follow when starting your business. The consequence of this is what some friends (somewhat pompously) call the law of Thiel: if something is messed up in a startup from the very beginning, then this can no longer be fixed.

The starting point for any activity is very important. In each case, these points are qualitatively different. Consider, for example, the question of the origin of the universe. At that moment, various things happened that we do not experience in everyday life. Or, for example, we turn to the process of formation of the state, which necessarily includes many elements that you will never encounter in the ordinary course of business. Here in the USA, the founding fathers did a lot of the right thing. With some things, they coped quite poorly. However, in most cases, they are truly impossible to fix. For example, in Alaska there are two senators. And in California too. And so Alaska, despite the fact that its population is 1/50 of the population of California, has with it an equal number of votes in the Senate. Someone might say that it was intended, and this is no mistake. Whatever it is, it is unlikely that the state of affairs will change while the country exists.

The notion that the foundations are very important for any type of activity is at the forefront of the Founders Fund (an investment company whose partner Peter Thiel is a translator ). Founders and starting points determine the further development of the business. If you focus all your attention on building the foundation of the activity and do not make major mistakes at this stage, then you will have a chance at development. If you do not - at best, you may be lucky, but not likely.

The importance of fundamental decisions made during the founding of the company is already embedded in many of them. When disputes or contradictions arise on Google, the final argument is the following: “The founders have a scientific justification that the statement x is true,” and the one who makes such an argument insists on x. If you think that the office should have special coffee pots with a strainer, because when people are happy, they work most productively, then say that Larry and Sergey have already solved this problem. The bottom line is that all the scientific justification was already made at the very beginning when the company was established, and no new introductory notes should change the fundamental foundations.

However, all foundations have their own lifespan. But how long this period is is a difficult question. A typical story involves: setting up a company, hiring first employees, primary financing. However, there is an opinion that the foundation of the company is delayed for a much longer period. Making the transition from 0 to 1 - creating technology- occurs parallel to the foundation of the company. In contrast to this process, the transition from 1 to n within the framework of globalization, in turn, completely occurs after the foundation of the company. It happens that the process of founding a company lasts as long as the development of technical innovation. It is unlikely that the founders of the company should be responsible for making decisions while the company is at the stage of transition from 0 to 1. After the paradigm changes to “from 1 to n”, the founding process is completed. At this point, managers must fulfill their responsibilities.

There is, of course, a limit to what you can do by the rules. Failures cannot be avoided even with ideal “game rules”. There is no way to initially configure everything so that then events unfold unhindered. But you should still lay the foundation of the company as correctly as possible.

Imagine a 2 x 2 matrix. On one axis, you have good people worthy of trust, and behind them people who should be trusted less. On the other axis, you first have an unregulated structure with a small number of rules, and then a perfectly regulated structure, where the rules are set in sufficient quantities.
The work of good, trustworthy people in a poorly regulated structure leads mainly to anarchy. The closest company to such an organization, which nevertheless succeeded, is Google from about 2000 to 2007. Talented people could work on all kinds of projects and, in general, worked without a lot of restrictions.

Sometimes the opposite combination - unreliable people and a large number of rules - also works well. Basically, this system can be called totalitarian. Foxconn is a typical example. A lot of people work there. People are kind of slaves. The company even installs special nets on buildings for employees who jump from the roof in an attempt to commit suicide. But this is a very productive company, and this approach seems to work.

A model with a low level of trust and few rules represents a merciless world. People you wouldn’t trust can do whatever they please. A good example of this is an investment bank. This combination is best avoided.

Ideal is a combination of people you can trust and a well-regulated structure. People trust each other and together create a good culture. And besides, it's all structured. People row in one direction, and this does not happen by chance.

Equity is one of the key ways to think about regulating a startup. Different groups own shares in the capital of the company. Part, of course, is received by the founders. First they need to figure out how to distribute shares among themselves. Business angels get their share. The first employees and advisers of the company also receive a certain amount of shares. Later, round A investors will also buy shares. Then you will have your option in the form of stocks. So, you get some set of features. With the development of this structure and the separation of share capital, the key point is the organization of all shareholders in such a way that the company achieves success.

In this calculation, one of the factors prevails over the others. It is a question of whether the founders of the company are compatible with each other. This issue is key both in terms of structure and in terms of corporate culture. If the founders work together, you can move on to the second part of the equation. But if this is not so, then the company will explode from the inside. Nothing will work. That is why investors should and do pay so much attention to the teams of company founders. Everything matters. It matters how well the founders know each other. It matters how they interact and work with each other. It matters whether they have complementary sets of competencies and personal qualities. All of these issues are very important. Any cracks in the founding team will only increase in the future.

One of Peter Thill's first investments was an investment in a company that Luc Nosek founded in 1998. The investment did not bring such a good result. Luke met someone at some event, and they decided to start a joint business. The problem was that they had very different perspectives. Luke's thoughts were chaotic, but brilliant. The other guy was a "bookworm" - of those guys who have everything on the shelves. The case was doomed to failure. In a way, choosing a co-founder is like getting married. Marriage sometimes makes sense, but you really should not start a family with the first person you meet, whom you met at a slot machine in Vegas. You can hit the jackpot, but most often it doesn’t. Good relationships between the co-founders of the company, as a rule, lead to success. Thus, coherence of the founding team is the single most important issue when evaluating a startup at an early stage. It can be asked in different forms. How do co-founders divide shares in the company’s capital? How well do they work together?

II. You must be a C-corporation in Delaware (a corporation that is taxed separately from its founders - approx. Translator ).

A very important issue at the initial stage is the question of how to register your company. This question is simple. You must register your company as a C-Corporation in Delaware. Here is the correct answer. You come together to separate your own activities from the activities of the company. You need to create a structure in which you can include new people, sell shares, etc. And registration will give you much more legal options to do this. The Larry Page and Comrades business group is likely to work today. But that would not work in 1997. Provide yourself with the basic structure you need.

There are various types of corporations. There is nothing better for startups than C corporations. S-corporations are good for companies with few shareholders. In such a corporation there can be only one class of shareholders; there are no preferred shares along with ordinary ones. There are also no stock options (the right of employees to buy shares at a fixed price - approx. Translator ). There are restrictions on the number of shareholders. And you cannot go public IPO. Thus, S-corporations are only good for companies that will not scale beyond a certain limit. Limited Liability Company ( LLC, Limited Liability Company, an analogue of our LLC - approx. Translator) are more like C corporations. But there can be problems with them if you want to issue preferred shares, give out options or go public. Theoretically, you can draw up specially designed agreements to do all these things. In practice, this does not work as well as in theory.

A big disadvantage for a C corporation is double taxation. You pay taxes on company income, and then also pay your own income tax. Suppose your C corporation makes $ 100. In the United States, the corporate tax rate is 39.2%. Thus, $ 39.20 goes to the government right away. You now have $ 60.80 in net profit. But the maximum individual income tax rate is 35%. That amounts to 21.28 dollars. Thus, you end up with 39.52 dollars if you are the sole owner of the company. Limited liability companies and some other legal entities that are not C-corporations are taxed once. That is why consulting firms and law firms are usually not C-corporations.

The great advantage of C-corporations is that they are easier to get out of. You can bring them to IPO. They are also easier to sell. Most likely, any company that acquires you will also be a C-corporation. This means that they are already accustomed to double taxation, and, regardless of the legal form, they evaluate your business as already functioning in the context of double taxation. That is, the legal form of an LLC does not make you a more attractive acquisition target. You can also be a regular C-corporation.

More than 50% of C-corporations are registered in the state of Delaware. There are many reasons for this. Delaware business laws are clear and transparent. Clerical work in state courts is quick and predictable. The judges are pretty good. And of course, this is in a sense fame; they all seem to do it, and most think it’s right. Just believe me, you should register your company as a C-corporation in Delaware.

III. Ownership, ownership, control

As a company founder, you should always think about how and why processes can get out of hand. Your task is to prevent such deviations from the desired course and correct them where they occur. One approach that will help discuss such deviations draws the line between ownership, ownership and control / management. These are related things, but the difference between them is important. The ownership right belongs to the one who actually owns the company: who has shares and in what quantities. Ownership is held by those who manage the company. These are those who make decisions on a daily basis and work in company offices. You can think of ownership in relation to job titles. Finally, the control function is performed by those who formally control the company. The control function is performed by those people

Consider the political counterpart to using this approach. Say you have to go to the DMV ( Department of Motor Vehicles, Department of Transportation - approx. Translator ) to get a driver’s license. In a sense, you, as a voter, control the government, and the DMV is part of the government. Voters elect civil servants. Those, in turn, appoint other people to various posts. You probably somehow indirectly influenced who became the head of the bureaucratic structure of your DMV.

But you will not speak with him after you have waited your turn. You will talk with people who perform the ownership function described above: window clerks or managers who actually set the DMV in motion. They are people who have the ability to help you or not to help you. You can tell them that they are freaks. You can remind them that, according to the theory of an elected government, you are their boss. But most likely it will not work. There is a skew between control and ownership. This skew is not a disaster, but it is very indicative. Misalignment often happens when dealing with government officials, or, say, with top managers in the business world.

In many countries, it is difficult to distinguish between ownership, ownership and control. This makes creating a viable business truly challenging. If the owner of a controlling stake also exercises exclusive control, being a minority shareholder is unprofitable, so there are no minority shareholders. As a result, we have companies that could be much more effective if people were able to share the above concepts.
That is, it cannot be said that everything is simple when you can separate ownership from ownership or control. As the example of obtaining rights showed, between these groups or even within them, serious disagreement of actions may arise. Everything can get confused quickly.

Suppose you are setting up a company. You are the sole founder. You have 100% ownership, ownership and control. Given the absence of other co-founders, everything is perfectly adjusted. But even adding another co-founder is a possible source of imbalance. Serious disagreement may arise on how to properly perform these three functions. Since now there are only two of you, you are still quite compatible. But the more people being added, the harder it becomes. Employees will be more loaded with daily ownership, have small shares of ownership with minimal control. Problems begin to appear if they are unhappy with the volume of their ownership or control. The intrigue becomes more interesting when you add investors to this bunch.

IV. Founders and employees

A. Capital allocation

Your initial task will be to achieve consistency between the founders of the company, employees and first investors. In technology startups, equity is a classic tool for achieving consistency. It is very important, since this is exactly the general thing that everyone in the company has. Since all participants in the events benefit from the increase in the value of shares, everyone is trying to increase this value. It is difficult to overestimate the importance of equity in creating the most important long-term prospects for a company.

The flip side of the coin in this case is that bonuses and salaries can cause various distortions. The “ceiling” of salaries is very important. Based on its practice, the Founders Fund has created a categorical rule: no CEO should have a salary exceeding $ 150,000 per year. Experience has shown that CEO salaries financed by venture capital have tremendous predictive power: the lower the salary, the better the company usually works. If you could reduce all your activity to one question, you should ask what salary the CEO of the company you are potentially planning to invest gets. If the answer is “more than 150 thousand dollars”, investing in a company is not worth it.

The salary issue is important, because when CEOs get low salaries, they believe that the company's shares will be expensive and try to make this happen. This effect applies to the entire company, as CEO salary limits mean salary limits for all employees. In this way, you create a culture focused on stock prices and equity. This is not the case when the CEO receives 300 thousand a year. When something goes wrong in such a company with high salaries, it is impossible to correct the course. The CEO is trying to keep his high paying job, not to fix mistakes. If the CEO received a much lower salary, problems would come to light very quickly. Therefore, a small salary is a great way to manage motivation in the company.

B. Or to the ship, or to the shore.

Another important thought is that people should either fully work in the company, or not work in it at all. As Ken Kesey said in the 60s during his bus tour to support the use of LSD: “Now you either get on the bus or not.” Combining work in the company with other projects, attracting consultants and external advisers to important parts of the work is all very big risks, as this very often leads to a loss of coordination in actions. It is hard to imagine that all these people will take care of the growth of share capital in the way they should do it.

As always, there are exceptions. Peter did not invest in YouTube in the summer of 2005, because all the guys worked on this project part-time. Then everything changed very quickly, and Sequoia got a big profit by earning (or making, depending on the point of view) investments ( in detail ). But the basic rule remains. You need to think carefully, and then either get on the bus or not. And if you still get on the bus, you should get on the right bus.

C. Share Allocation and Time

Also, the key point is the redistribution over time of the share capital that you give people. You probably won’t want to give it all at once, as they can just take it and leave. The standard format is the distribution of equity for 4 years, with the first 25% distributed after 1 year, and then every month for the remaining 3 years, 1/48 part is distributed. This means that if employees do not work a full year before the distribution of capital, they will not receive shares. More often than not, you still give them part of what they earned if they did not cause you any trouble. But as soon as they have worked for you for a year, they get their 25%, and the rest is gradually supplemented.

The founders of the company should also have a schedule for the distribution of equity. It is not very good to immediately give all the share capital to the founders. One of the co-founders of the company may decide to leave the business. If he fully owns a stake in the business from the very beginning, then the second co-founder may, as a result, come to a standstill, working for two. In practice, everything is organized so that part of the company's share capital passes to the founders instantly. They can go 20-25% for the work that they will do before the first round of investment. But all the rest of the capital should be transferred to them over time.

Consultants also receive money or part of the shares, which go to them immediately. But you should never hire consultants. From the point of view of capital, this is not correct, since immediate payment does not stimulate work well. And the reason, not related to capital, is that consultants violate the “bus principle”. Everyone should be in the same boat and row very stubbornly in one direction.

V. Capital

There are several different types of company equity. There are, for example, common stocks, which are just a way to split ownership of a company. This is usually expressed in the number of shares. But this quantity is meaningless in itself, it is just a numerator. You will also need to know the number of shares in circulation, which in our case is the denominator. Only the share of equity owned by the company matters. The ratio of 200 thousand to 100 million is the same as the ratio of 20 million to 1 billion. 2% is 2%.

A stock option is the right to buy a share in a company’s share capital at a fixed price at some point in the future. The strike price is the purchase price set at the moment the option was issued. Typically, the strike price is set equal to or greater than the real market value of the share at the time this option was created so as not to create a taxable event. If the real market value of the stock is $ 20, and you value the option at $ 10, then the remaining $ 10 in this case is subject to tax. Valuation of the option at real market value ensures that they will not cost anything on the first day.

Options also have an expiration date, after which they become invalid. The basic mechanics of the work are as follows: the value of the option increases if the value of the company has grown between the date the option was issued and its end. If this happens, the option holder buys the shares at the strike price, which brings him income in the amount of the real market value of the shares at the time the option is closed, minus the above strike price. Theoretically, this contributes very well to the coherence of actions, since the option can be quite valuable if the company succeeded in a given period of time.

There are two different types of options. Bonus stock options, also called ISO or qualified options, expire 10 years after the acquisition or 3 months after the employee left the company. This keeps employees in the company. If they leave, they must decide whether to exercise the option in the near future. ISOs are also good for individuals, as they have favorable tax conditions. Any other option that is not an ISO is NSO. With this type of option, any increase in its value before exercise is ordinary income.

Finally, there are shares of an employee of an enterprise ( they are also sometimes called “family shares” - a comment of a translator), which are, in fact, a share in a company sold to an employee at a very large discount. The company has the right to buy back these shares at a reduced price. This is a kind of mirror image of the option granted, in the sense that a buyback of shares in the company's employees is possible. Over time, a company can buy back less and less shares.

The main conclusion of this story is that most equity metrics are inappropriate. The number of shares does not show a realistic picture, nor does the price of a share or the size of an option. Your share in relation to the share of other employees also, in theory, does not matter. What matters is your stake in the company.This is 3rd class arithmetic. You will need to solve a few division examples. Many seemingly smart people from the technology sector for some reason can not cope with this. Moreover, it is curious why people do not want or cannot apply basic arithmetic when they join technology companies. Maybe the psychological effect of inertia of thinking just makes people make mistakes thinking that 1 million / 1 billion is better than 1 thousand / 1 million.

In practice, shareholdings are seriously reduced as you invite new people to the company. The most reliable way to destroy a company is to send everyone a list indicating who owns what share in the company. In this case, the ability to be secretive can be very useful, since the coordination of actions on time really matters. Some of your employees will have very rare skills. Others will be less unique employees with interchangeable skills. But incentives are tied to when you joined the company, not just what you can do. Key employees who came to the company later will receive a share different from the share of employees who perform less important functions, but who got into the company earlier. On eBay, secretaries could earn 100 times more than their bosses who graduated from the Stanford MBA, and all this only because the secretaries came 3 years earlier. You can say that this is honest, since early employees experience greater risks. But later hired employees, who are often more valuable to the company, see this picture in a completely different light. Thus, in practice, it turns out that even if you have adjusted everything perfectly, something may go wrong. You cannot make everyone happy. that even if you adjusted everything perfectly, something might go wrong. You cannot make everyone happy. that even if you adjusted everything perfectly, something might go wrong. You cannot make everyone happy.

VI. Fundraising process

Business angels are the first significant external investors in a startup. Ideally, they add experience, communication and credibility. They must be accredited, which means a net worth of assets of more than $ 1 million, or an annual income of more than $ 200,000. The market of business angels is quite saturated, and the recent adoption of the JOBS (Jumpstart Our Business Strength Act) law should cause an even greater surge in the activity of business angels.

As a rule, there are two types of shares: ordinary, which are distributed between the founders and employees, and preferred, which are received by investors. Preferred shares are endowed with a number of properties and rights that allow investors to protect their money. The standard rule states that the price of an ordinary share is about 10% of the price of a series A preferred share investment. If the real market value of one preferred share is $ 1, then the price of one ordinary share will be 10 cents.

A. Simple math business angels

Suppose you have 2 founders, each with 1 million shares repurchased at a price of $ 0.001 per share (each founder invested $ 1,000). The company has 2 million shares and is valued at $ 2,000.

A business angel can come and invest $ 200,000 at $ 1 per share. Thus, you issue 200,000 new shares for a business angel. You now have 2.2 million shares outstanding.

Then, let's say you hire a few people. You hire 6 people, and, as you have not read above, 2 consultants. Each of these 8 people receives 100 thousand shares. Thus, you provide 800 thousand shares at a price of 10 cents per share.

You now have 3 million shares. The valuation of the company is $ 3 million, as the transaction price was $ 1 per share. Angel owns 200 thousand shares, which is 6.7%. Consultants and employees own 3.33% each, or 26.7% together. Each of the founders has 1 million shares, or 1/3 of the company.

B. Why Debt May Be Better

As an alternative to this model, a convertible debt transaction can be made. There are two standard ways to structure such a debt. Firstly, you can fix the value of the company and give a discount on the next round of investments. This means that the company's valuation will be limited to, say, $ 4 million. The drawer receives a discount of, say, 20% on the next round of investment. Secondly, you can not limit the rating of the company and not make discounts, but simply accumulate bonds or options for each round.

Convertible bonds are often better than rounds of capital. One of the main advantages is that they avoid company valuation. Business angels may not have a clue how to make this assessment. Convertible bonds make it possible to postpone the issue of valuation for investors to solve series A.

There are other advantages. For example, the possibility of diluting capital is mathematically excluded ( Down and Dirty Round - a substantially “diluting” capital additional issue of shares, which is usually carried out in connection with the inefficient work of the company, approx. Translator) This can become a problem when the angels systematically re-evaluate the company, how they can do this, say, with the “hot” companies from Y Combinator. In addition, debt is much cheaper and faster than rounds of capital, which usually cost between $ 30k and $ 40k in Silicon Valley.

C. Series A

After your meeting with an investor who wants to invest in your company, you have compiled a list of investment conditions. After about a month of comprehensive examination, in which the venture capitalist carefully considers the team, as well as the financial and technical prospects of the company, the deal closes and you get the money.

You must establish an options pool for future employees. 5% - a small pool. 15% is large. Larger option pools weaken shareholders, but in a sense, this approach may be more honest. You may need to give up a tangible share in the share capital in order to attract good employees later in the process of working for the company. The size of the options pool is a classic compromise between fear and greed. If you are too greedy, you will leave more to yourself, but it may result in nothing to cost. If you are too afraid, you can give too much. You need to find the right balance. Investors prefer that an option pool be created before the round of financing, so as not to suffer from instant dilution of shares. You would like to form an options pool after a round of financing. This is a matter of your negotiations with the investor.

VII. Investor Protection

There are many conditions and techniques that help investors protect the money that they invest in you. As a rule, investors care about privileges in the order of payments upon liquidation of the company. 1x privileges mean that investors get their money back first. You may also have a situation with privileges of the Nx class, when investors receive an amount N times greater than the money they invested before you even get something.

You need conditions for the benefits of liquidation benefits, as they help coordinate the motivation of participants. Without writing down the benefits when paying out, you can just take an investment, cover the shop and distribute the money among the team members. This is obviously not the best result for investors. They need guarantees that you will not take the money and do not run away. Using such an investment mechanism, when a company is closed, they get back all the money invested before you get anything, and you are interested in growing a business so that everyone earns.

Venture capitalists often try to get even higher privileges. 2x privileges will mean that if an investor invests $ 5 million, he will receive $ 10 million before the founders and employees get anything. But the big problem with participating in simple or complex privileged arrangements is that they increase the likelihood of an intermediate exit from the business. If the company's turnover is one billion dollars, it does not matter that much and everything works. But during an intermediate exit, investors may want to sell their share, as they will double their money, while the founders of the company do not want this, because they will not receive anything. Therefore, the best privileged conditions are 1x privileges without participating in the distribution of profits.

Conditions that prevent the erosion of capital are also an important form of investor protection. In fact, they retroactively overestimate previously made investments when and if additional shares are issued. The basic math is simple: the new number of shares is equal to the initial investment amount divided by the new conversion price.

There are several different types of conditions that prevent the erosion of capital. The most aggressive condition is a full retrace (retouch is a mechanism for the transfer of investor's shares to management provided for by the agreement of shareholders when the business reaches certain indicators, contained in the agreement concluded by the shareholders). It sounds like a form of medieval torture, because, in a sense, it is. This methodology reevaluates past investments, as if the investor had just made the financing subject to an additional issue of shares. This is great for investors, and very bad for everyone else. A more common practice is what is called a universal weighted average. In this case, the volume of additionally issued shares is considered in relation to the total share capital of the company. As a result, investors get more shares. Sometimes a similar condition is used, called a special weighted average.

If there is one definitive rule, you should never, ever allow an additional share issue. With rare exceptions, this is a disaster. If there are strict conditions that prevent the erosion of capital, then the additional issue will ruin the founders and employees. They also make the company less attractive to other investors. The fact is that additional emission makes everyone just go crazy. Owners can blame supervisors, who in turn can blame employees. Everyone blames everyone. Essentially, on the day the company issues an additional share issue, the company is destroyed.

If you have to go through the stage of additional emission, it is probably better to let it be truly catastrophic. Thus, many inadequacies will leave the company and will not cause even more problems when you begin the hard work of restoring the company. But again, you should NEVER allow an additional issue of shares.

If you have created a company and in every round of investments you play for promotion, at least you will earn money. But if you have to conduct an additional issue of shares at least once, you probably will not earn anything.

Viii. Even greater investor protection.

There are many more important conditions in the organization of financing. The main and common goal for all is to achieve coherence in the motives of all participants. Therefore, you should always think about how various combinations of conditions help achieve your goal or prevent it.

Proportional rights are fairly standard conditions under which existing privileged investors are guaranteed the right to invest in subsequent rounds under the same conditions as new investors. This is good for venture capitalists, as it gives them the opportunity to participate in the next round for free. The problem arises when previous investors do not participate in further rounds, this can give negative signals to new potential investors.

Often used restrictions on the sale of shares. Some of their forms provide that ordinary shareholders could not sell their shares at all. In other cases, a sale is permitted only when 100% of the ordinary shares planned for sale are offered to the company and existing investors. These rules severely limit the ability of first employees to turn their shares into money. The positive side is that it sets up the founders of the company and investors to achieve growth in the value of the company. But a mismatch of actions can also occur due to the difference in the level of well-being of both parties. As a rule, investors are well-off and can wait for dividends to be paid, while the first employees can strive to cash out part of their shares when the opportunity arises to insure themselves.

There are also joint sale agreements, dividends on preferred shares, agreements on canceling the search for co-investors, repayment terms and conditions for the exchange of shares. All of this can be important. All this is worth studying, understanding and, if possible, discussion. But they, as a rule, are not the most important conditions of a financial agreement.

IX. Tip

Your board of directors is responsible for corporate governance. Another way to say that it is the board of directors that is responsible. Holders of preferred shares usually have the right to vote, which allows them to approve certain actions, refuse to use protective mechanisms, etc. But the importance of the board of directors cannot be overestimated.

Everyone on your board of directors matters. Each of them must be a really good person. A typical board of directors is two investors, one “independent” director, and two founders of the company. Five people is already a fairly large board of directors. More than five people on the board of directors - this is no longer the optimal solution. Advice should be convened only when absolutely necessary. On board matters, less often means more. Ideal advice probably consists of three people: one investor and two founders. It is much easier to reach agreement between board members if they are all wonderful people, and if they are few.

X. Future Planning

Creating a company with value is a long way to go. The key issue that you, as the founder, will need to follow is blur. Google’s founders owned 15.6% of the IPO. Steve Jobs owned 13.5% of Apple when it became public in the early 80s. Mark Pincus owned 16% of Zynga at IPO. If you have more than 10% left after many rounds of financing, this is generally a very good result. Blurring a stake is a ruthless process.

There is an alternative option when you are not attracting investors. Let us briefly dwell on this approach. It is worth remembering that many successful companies were created that way. Craigslist would cost about $ 5 billion if it evolved more like a company than a commune. GoDaddy never accepted third-party funding. Trilogy had no outside investors in the late 1990s. Microsoft almost joined this club, the corporation took one small venture investment, right before the IPO. When Microsoft went public, Bill Gates still owned an impressive 49.2% of the company.

So the question of whether to think about attracting investors is not so different from the question of attracting co-founders of the company or its employees. Which people are the best? Who do you want to see next to you, who do you need on board your ship?

From the translator:
I ask for translation errors and spelling in PM. I also remind you that this text is a translation, its content is copyright, and the author's opinion may not coincide with mine.

I repeat once again that I translated ntonio . Formatting 9e9names . Editor of Astropilot . All thanks to them.

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