Entrepreneur Office Hours - Issue #63
Are your competitors actually your frenemies?
Entrepreneurs tend to be suspicious and competitive. As a result, you can often find them obsessing about some combination of what other companies are doing and whether or not those other companies are going to “steal” their ideas.
It may or may not be reasonable to worry about those kinds of things. What I’m more concerned with is that entrepreneurs tend to obsess about the wrong competitors trying to steal their ideas or customers. In this issue, I’m going to help you take a closer look at your competition to make sure you know what/who you’re actually competing with.
Plus, in the Q&A, I help answer a question about founder equity splits. If you’re struggling with the same thing, be sure to check that out. It’s probably one of the most straightforward answers you’ll ever get from me.
Less straightforward, as always, is my advice on pitching investors, which I share in this week’s LinkedIn article.
What if the companies you think are your enemies are actually more like your frenemies? That’s probably the case, and it could be causing you to miss out on an effective customer acquisition opportunity.
Every entrepreneur knows a good startup pitch presents a problem. But all problems aren't created equal. In addition to explaining the problem, you have to be able to explain why your problem is worth solving. Do you know how to do that?
Office Hours Q&A
I’m working with a friend to develop content we’ll be using to grow a social media audience. Neither of us are producers, though. So we’ve got a video guy who wants to work with us. But we’re not making any money yet.
He’s OK with being paid in equity. How do we figure out how much to give him? And what if he doesn’t work out? Are we forever stuck with him owning part of our project?
I love a question with a straightforward answer!
This is a solved problem using a vesting schedule and a what’s called a “cliff.” Simply put, a vesting schedule means people earn equity over time rather than all at once. A typical vesting schedule lasts four years. So, for example, for the sake of easy numbers, let’s say you give him 12% of the company. Each month he’d earn 0.25%. After four years, he’ll have earned all 12%. Simple math, right?
The addition of a cliff is also standard practice. Basically, a cliff means the person earns equity, but doesn’t actually get it until after a pre-set amount of time. If, for any reason, the person leaves the company before the cliff (i.e. you and your friend decide he’s not a good fit and ask him to leave), the equity returns to the company. A typical cliff is 12 months. If, after 12 months, you don’t know whether or not he’ll work out, you’re probably doing something wrong.
As for your question about how much equity to give him, that’s a decision only the three of you can decide. My only advice is to remember that 100% of a failed company is worth infinitely less than 5% of a billion dollar business. In other words, I tend to lean toward being generous with equity. Don’t go crazy, but don’t be stingy, either. If people are putting in work and taking significant risk, they deserve to be well-compensated. They also tend to work harder if they feel like they’re being treated fairly. Besides, the cliff and vesting schedule protect you and the company, meaning if things don’t work out as planned, you won’t be stuck with someone owning a significant chunk of your company who didn’t provide any value.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!