Part 1: Team is everything
Updated: Feb 16, 2020
You need the very best people you can find. It’s difficult to overstate how important this is. I’ll go even further and state that in essence, the team is the product.
Team is everything.
I used to think that a good company needed four things: (1) the right product, (2) at the right time, (3) with the right funding, (4) and the right team. Then, one day it occurred to me that the first 3 really come from the 4th point.
There’s more to a great team than just “great people.” You need a group of people that get along, work well together, and are comfortable in their roles. Often, it is dysfunction between team members that kills a startup or stalls a company, perhaps more than any other reason. I’ve been in companies that had great teams and other companies that didn’t, and the great teams always had better outcomes, every time. Nine Systems, a Content Distribution Network (CDN) that was based in San Diego, had a great team. This is why we were able to drive such a high multiple exit. When excellence is the norm, it creates its own internal peer pressure that pushes people to perform. Additionally, it creates a strong trust component; you know your teammates are going to produce and you can count on them, and vice versa.
Some CEO’s are micromanagers. While good results can still be derived from this management style, I don’t think it is the best way to manage a rapidly growing company. Your work environment should be built around trust and high expectations. Each person, more so in a small company, essentially “owns” a piece of the business. It is critical to explain and gain agreement about what you expect from each person, and yet you want to stay away from explaining in too much detail, how someone should do their job.
When it is a startup, a small team, and a rapidly growing company, you need people that can and want to think for themselves. If you have to explain everything about how they should go about doing their job, then they are probably not a great fit for an early stage company. The classic One Minute Manager is a good reference.
Lastly, yes, everyone will be wearing multiple hats. Are all your employees, and you OK washing the coffee cups? Those are the people you want and who you want to be.
Understand the job roles and requirements. You need a GREAT Product Manager (PM). I promise, your chief engineer can't drive engineering and be a PM, they are separate functions. What happens if you don't do this? Things don't ship on time and what does ship won't be that good. Moreover, you risk having your chief engineer dragged into what amounts to customer support meetings, usually a fire drill and fire drills are a dangerous and costly consumer of time. It may be that this is a role that someone fills part-time and that’s OK. What’s critical is that this person doesn’t report into the head of engineering. It is a separate function, and critical that it remains so.
Building a great product is about being clear about roles, timelines, functions and perhaps most important, expectations for product releases. There’s a reason for terminology like Beta, RC1, MVP, V1, they define product stages, and a PM sets these. You need a hardcore, super solid PM to drive product functionality, testing, and to manage the release schedule.
If you’re a business person who is founding a company, it can be tough to evaluate the skills you need in an engineering partner. Often the business person tends to base the requirements strictly on the engineer’s technical abilities but this person is also an executive. They will need more than technical skills.
The person running engineering needs discipline and management skills. Engineering gets barraged with product requests, and while the PM is there to protect engineering and maintain the schedule, the PM has to have the support of the person responsible for engineering to make that work. These two people, need to be very familiar with the word “no!”
Additionally, even if the team is very small, you still need someone with the skills to drive a schedule, allocate resources, manage subordinates, build and manage the roadmap and a host of other things. If it is sloppy when there are just a few people, it will be much worse as you grow.
There’s a cliché that goes “In a startup, everyone sells!” It’s not really true, but what it gets at is that most or even all of the employees at startups tend, at some time or another, to be in front of potential customers and partners. And while each person may be present in a meeting will have to contribute in some fashion, and needs to be competent in doing so, that’s not the same as selling.
Selling means, you prospected the potential customer/partner, set up and guided the meetings, and then followed up and attempted to close the deal. Only one person needs to drive that process. Often in very early stage companies, that’s the CEO but not always. Each person critically needs to understand his or her role in the meeting prior to stepping foot in it. If there isn’t a solid, clear reason why someone needs to be included, then that person should never be in a meeting.
Finally, just as someone is in charge of development, only one person should be responsible for managing the sales process.
When you have the right people, executing against their role, these challenges are easier to identify and rectify, usually sooner and with less friction.
Business Development is not Sales. “We didn’t want to call the people doing the selling, salespeople, so we called them all business development.” This is a common mistake, often made when a founder doesn’t understand the critical difference between the two roles.
Business development is responsible for opening new markets that the salespeople don’t currently sell into.
Much of their work may be partnership or, beta-product type adoption oriented and may not have an immediate revenue impact. You need the people that can do this work for a simple, yet important reason. Good salespeople, who typically generate a significant portion of their income from commissions, aren’t going to want to spend their time and energy helping the company open up a new market, dealing with the trials and tribulations of beta products, and spending time establishing a beachhead because their numbers and thus income will suffer during this process. Sales people want to sell an established product into an existing and supported market.
Leave the new market development to the biz dev people who have lots of new market experience, and leave the selling to the sales pros who want to crush numbers every month.
Don’t over-title people. As you build your team, there’s the temptation to over title people as a carrot to attract them. This is a big mistake. I looked at a startup recently that had at least 7 “C” level people.
This isn’t reality. You want to be careful about giving away titles unless that person is really qualified to have that title because it can frequently create a problem later as the company grows.
Let’s say, for example, that someone was a director of marketing at a much larger company and in order to recruit them you bring them in as Chief Marketing Officer. There are two potential problems.
First, what happens if your company takes off and the person you brought in is really still working at a director level when you really need a qualified CMO? The person you initially recruited then has to be demoted, or they have to be let go. Not only does that hurt the person you brought in initially as CMO but it is a negative to the team’s morale
Secondly, if you have the majority of your people with executive titles, it means the management/worker ratio is upside down. Great, you’ve attracted some terrific people. But don’t over title them though just because they’re willing to work for you.
Your team is more than just your employees, advisors and board members. It’s people you know from your network with specific expertise. Don’t be afraid to ask for a favor or to offer one in return. The “I can do everything myself” is a path towards failure. True networking comes from providing bidirectional value in your interactions with others. Grabbing a cup of coffee once or twice a year with people you value, and vice versa is a great way to update your network and get a valuable sounding board.
Be smart about how you pay people. Pay is an area where many mistakes are made. Here’s my simple rule: pay market rates for the size of the company at its given stage. Yes, in a startup and cash is going to be tight, but in startup companies, what are you investing in if not the team? If you need to completely bootstrap the company, then cap the timeline, so your employees have some expectation when you expect to be at or near market pay rates.
One company I was involved in kept employees pay rate at 50% of the market for 8 years. The board thought this was OK because it was a small company but they didn’t see that this was putting tremendous stress on employees and this, in turn, caused turnover which carried its own cost. Additionally, with pay rates so far below market, the company wasn’t able to attract the best people, and this, in part, kept the company small and plateaued. I raised money and immediately raised pay, so we could keep and ultimately incent people, and grow the company.
Along the same lines, work with your attorneys and come up with a viable equity comp plan. Keep in mind that equity is the most expensive form of compensation, but frequently it is treated as if it is the cheapest!
Why is equity so expensive? Because once you give a portion of your company away, you can never get it back. Cash is worth whatever it is worth the day it is distributed. Equity, assuming you do a good job, gains value over time. I stepped into a company once that had given the first CEO 20% of the company with no vesting schedule and then he was fired 9 months later. Without a vesting schedule, this person immediately had 100% of their equity grant, and this caused the fundraising I was engaged in to be put on pause until we could rationalize his stake.
No matter what, you need a vesting schedule with a one-year cliff. Always! There’s another equally important reason to employ a vesting schedule. It is an incentive to motivate employees to stick with the job, particularly when in an early stage company, it can be tough going.
Good lawyers really do make a big difference. I cannot begin to overstate how important having the right counsel is. The person who did your Mom’s will should not be constructing your cap table or filing patents. This is a common and huge mistake and one that you will pay for later. In the same way that a podiatrist isn’t a neurosurgeon, business lawyers aren't IP lawyers, and IP lawyers aren't corporate lawyers.
You’ll need the following 3 types of lawyers:
1. Commercial Lawyer. This person does your bread-and-butter contracts, NDAs, partnership agreements, commercial agreements and other business agreements. You’ll have lots and lots of these agreements.
2. Corporate Counsel. Corporate counsel sets up and helps manage your capitalization table, bylaws, articles of incorporation and can help manage corporate governance. This is a critical role that is often given short shrift. Think of your company as a piece of land. If you didn’t know the dimensions and couldn’t accurately explain who the owners of the property are, it would be impossible to accurately value it and sell a portion or all of it. This is a nightmare problem, and yet I see it all the time.
3. Intellectual Property Lawyer. Filing patents isn’t an automatic thing anymore. It is important to remember that patents are intended to be defensive, and it costs a tremendous amount of money, at least $1 million, to defend them. While a patent can add value to a company and may be important to defend your product, this isn’t automatically the case. Often a patent is written too broadly or too narrowly and thus have little value. Good patent counsel can help determine what’s worth filing a patent for and what isn’t.
A law firm can be big or small; it is more a matter of who you’re comfortable with. For example, corporate firms like Wilson Sonsini or Fenwick are considered marque law firms with cache for a reason, and there’s value in being associated with them in addition to the great work they do.
There are also boutique firms such as the Seattle firm Tango Law that also do great work. The key in whatever firm you choose is that it has deep experience in corporate law and M&A around technology companies. That’s a narrow niche but important to pay credence too.
If you’re going to file patents, then it is really, really important that you engage with a strong IP firm such as Seed IP, who I’ve had great results with. Seed’s only business is intellectual property so all of my dealings with them are very focused and I like that.
Side note on the legal aspects of capitalization table- once you get over 10 share/debt holders (including employee option holders), sign up with a cap-table manager like Gust, Capshare, or Carta. This is a no-brainer that will make your job massively easier, especially if and when you get to an exit. Moreover, it will cut your legal costs.
Importantly, you don’t have to do everything with a single firm. In fact, I’ve rarely done so myself.