Bootstrapper.com - Confessions of Serial Entrepreneurs

theres a psychological aspect to my compensation strategy. i used to be really cheap, super bootstrapper type and then i noticed that when i was cheap with comp, everything took longer so it ended up costing me more and taking longer since the time costed more than i saved by being cheap. so i thought about it and talked to a bunch of people and tested it out in some cases and realized the most effective way to do it, is ask what people need first (cover thier living) then ask what they think is fair and as long as they are being reasonable, offer a bit more than they said because then they feel grateful and feel they have something to prove to deserve the extra bonus and you actually save money in the long run because of increased productivity. of course i dont believe in ever aggressively overcompensating, that causes people to sit on thier earnings and get lazy because their making so much. in general ive found you always want to pay slghtly above expectation with slightly more kicker than expected but the kicker (equity/bonus) should either be subjective (up to employer) or stricter to get than standard (make peopel work for the bonus instead of get a bonus)

This is why you’re friend whose company just sold for $50MM to Cisco is asking you for a loan.

The average company takes 5 years concept to exit.

The average company has 3 founders.
By the time a company gets past its Series C round, the average founders group has a total of 15% of the stock or 5% per founder.

The company sells for $50MM.

The founder has never taken a penny out besides his $100,000 salary. Meanwhile he gave up a $250,000 a year cushy job to start the company.

The founders take is only $2.5MM.

After Capital Gains Tax say he has $1.9MM left.

Now let’s take out $700,000 for paying off the mortgage he couldn’t afford. He’s left with $1.2MM. Still not bad.

Now let’s pay off the Ferrari and the Wifes S500. Down to a cool million.

Now let’s put $200k in the kids college fund: $800,000

Now he probably owes a lot of favors - so lets write off $250,000 in bad investments (I’m being generous) $550,000.

Now there’s vacations and spending: Down to $450,000

Now he’s bored and has ADD. None of his initial ideas will be successful because their done for the wrong reasons. Now we’re down to $200,000

Now he pays off his student loans (finally - the Ferrari of course was more important before), down to $100,000

$100,000 = that is all your friend the dot com millionaire has in the bank for 5 years of work.

You make $250,000. Sock away $100,000. You know tech and have the time to invest, you earn 25% a year, You sock away $125,000 - in 5 years you’ve put away $600,000, paid off your house and cars, worked half as many hours and had 1/1000 the stress of your friend the founder.

Whose worth more? You are and you’re at the same cushy job he walked away from 5 years ago.

This is why serial entrepreneurs never have enough cash. They’ve been nickeled and dime’d to death.

The only people that cash in are people that have taken companies public or people that have been smart enough to sell shit for gold (Mark Cuban, Geocities guys, linkexchange guy etc….)

But i leave with one final question: Whose happier? The nearly broke founder or you, who has 5X as much cash in the bank as the founder?

The Founder because he loves it and is living the dream.

So i get asked all the time to be partners in businesses. It’s funny but people I’ve never met and people I just meet offer me half of their companies all the time. I wouldn’t offer myself half of my company but go figure. Of course, I turn everyone down unless I know them or they come from a personal referral. In addition, when I accept equity, I never take a full share even if its offered. Now, you’re probably saying “why would this idiot leave money on the table?”

It’s pretty simple, my role is to play architect. Once the startup is up and running my role is just occasional strategy and biz dev intros. It’s not heavy lifting and i’m not deeply involved. If i accepted a full stake, the entrepreneur would thank me for the first 3 months and then hate my guts and think i’m a greedy bastard for taking half and not doing work anymore. It is irrelevant if they were the ones that offered that to me in the first place and it does not matter if i carefully explained what I do. I would much rather collect smaller stakes in happy companies than largest stakes in unhappy ones. Considering most of the work I’m getting equity for, I would probably do for free just if they asked, I consider it a blessing so I try to be nice.

This can be extrapolated to investors. A lot of times investors try to get as much as possible. This isn’t always the best thing to do. Even if your founder is an arrogant prick, you still want him involved, maybe not as CEO but it really is never smart to get rid of the energy that started the company 100%….okay maybe sometimes but in general you want the guy or gal around. Usually the founder is a horrible CEO but could be a great innovator. The innovator is more important long term so I caution investors out there to be fair with your terms and equity because even if an entrepreneur says thank you, they may still hate your guts.

You’re a greedy bastard!

That’s right, you heard me. You want to invest because you are in the quest for Alpha, you greedy dog you. (I apologize for using a finance term, I do have a degree in finance though a little used one)

For those who don’t know Alpha = above average return = greed.

Now, a question that is often asked and i answered this a different way before, “why don’t you put your own money in?” well there’s another answer i left out - because I don’t fucking have to. If the idea is goo enough and the people are solid - there will always be an investor out there if you look hard enough. You are a greedy bastard. You seek alpha, I seek to mitigate my risk. After all you are investing someone else’s money as a VC and I have put in my own. Mr. VC would you rather put your own money in the deal or someone else’s? Of course you will choose OPM (other people’s money) unless its loss cost, low risk, high return (usually means you lose everything you put in) but regardless Good Ideas + Good People = Money will find you if you know how to put yourself out there - eventually at least.