The High Cost of a Third Co-Founder

Continuing with yesterday’s post on Co-Founder Equity Ideas, there’s another point that needs to be made: adding a third co-founder can be one of the most “expensive” things a founder does, assuming equally split equity. Think about the standard scenario where there are two co-founders, each with 50% of the company. Now, introduce a third, equal co-founder where each has 33% of the company. The original two founders would have 33% less — that’s a huge amount of dilution.

Here are a few thoughts on a third co-founder:

  • Two co-founders is almost always better than three, especially when there isn’t a clear division of responsibilities, as it’s easier to make decisions and get everyone on the same page
  • Adding a third co-founder with equal equity results in substantial dilution for the first two co-founders
  • Consider adding the third co-founder down the road once the startup has made more progress and the co-founder can be brought on at a different equity level (they could be an advisor in the interim)
  • If the startup raises money, there’s often the ability to pay more salary and less co-founder-level equity, such that the dilution from the investment is better overall for the original founders

Think about the great tech success stories like Apple, Amazon, and Google — there’s rarely more than two co-founders. Know that having a third co-founder is rare and brings with it a high cost.

What else? What are some more thoughts on the high cost of a third co-founder?

Co-Founder Equity Ideas

Recently an entrepreneur was asking me for ideas on setting up an equity arrangement with his co-founder for their new startup. Over the years I’ve seen a variety of arrangements, both good and bad. Here are some of the key ideas:

  • Require Vesting – Yes, everyone is in this and fully committed. Only, things can, and do, change. Have a vesting period (typically four years) with a one year cliff and full acceleration on change of control. And, when raising money, expect investors to ask for founder vesting (some amount recognized for time served and some amount remaining).
  • Don’t Delay the Ownership Conversation – Co-founders are so excited, and focused, on their idea that they wait too long to have the ownership and equity splits conversation. Have the conversation right away and make sure everyone is bought in.
  • Do Equal Ownership Splits or Value-Based Splits – Equal equity ownership is the most common approach I see (e.g. two founders each with 50% of the company). Another approach I see is one based on some form of value the founders bring to the table (e.g. if one is more senior or has been working on the idea before bringing on the other, then there’s an unequal split).
  • Have a Buy/Sell – One more critical item is having a buy/sell agreement that outlines to potentially buy out a co-founder if he or she leaves. A simple buy/sell formula or plan is recommended.
  • Document the Commitment – Write down what each person will be doing, how much time they’ll be spending, and any other expectations to earn their equity. I’ve seen several examples where a co-founder ended up not being a co-founder and instead was more of an advisor or consultant.

Choosing a co-founder is often one of the most important decisions an entrepreneur makes. Document the relationship and follow these best practices.

What else? What are some more co-founder equity ideas?

New Year’s Resolutions and SMART Goals

New Year. New goals. Welcome 2017! I’ve mentioned it before but it’s worth repeating: set SMART goals. Too often, I hear goals that are vague and ill-defined. At a minimum, make them measurable with a defined due date.

From our friends at Wikipedia, here’s the original definition of SMART goals:

  • Specific – target a specific area for improvement.
  • Measurable – quantify or at least suggest an indicator of progress.
  • Assignable – specify who will do it (alternatively, use achievable to denote goals that can be accomplished).
  • Realistic – state what results can realistically be achieved, given available resources.
  • Time-related – specify when the result(s) can be achieved.

Take each New Year’s resolution you have and make sure they follow the SMART goals format — it’s worth it. Here’s to a great new year.

What else? What are some more thoughts on New Year’s resolutions and SMART goals?

Values Reflection at the End of Year

With the end of 2016 near, it’s time to reflect on the very core: values. Values are how we act when no one is looking. For the Atlanta Tech Village:

  • Be nice
  • Dream big
  • Pay it forward
  • Work hard/play hard

Check. Check. Check and check. Those core values feel right.

At a personal level, my company core values:

  • Positive
  • Self-starting
  • Supportive

Definitely. I want to spend time with people who are positive, self-starting, and supportive. A quick review of the values and everything feels right.

Here’s to closing out a great 2016. Happy New Year!

The TechRise Addition to Atlanta’s Startup Community

Urvaksh broke the news earlier today with his article 100,000-square-foot startup hub ‘TechRise’ planned for Buckhead. Atlanta entrepreneur Greg Benoit sold part of his SaaS physician scheduling company QGenda earlier this year and founded TechRise Ventures to invest in startups. Now, he’s purchased the building next door to the Atlanta Tech Village, 3405 Piedmont Rd., and added another 100,000 feet of space to Atlanta’s startup community: TechRise.

TechRise is geared towards startups that have raised a Series A or have at least a million in recurring revenue (often 15+ employees) and want a shorter term lease (typically one year) in turn-key space. This is perfect for companies that graduate from the Atlanta Tech Village as well as other co-working spaces in town.

More startup space in town is great for all the right reasons:

  • Density – Clusters of like-minded people that help each other and share ideas increases everyone’s chance of success. Now, this one section of Buckhead in Atlanta has more startup space in a city block than almost anywhere else in the United States.
  • Community – Educational events, networking, and programs are all important elements of building community. Now, there’s even more scale to the community.
  • Giving Back – Greg’s continuing to set the tone as a community that gives back and helps pay it forward for the next generation of entrepreneurs.

Congratulations to Greg on the purchase of TechRise and here’s to the continued success and growth of the Atlanta startup community.

Notes from the AppDynamics S-1 IPO Filing

AppDynamics, a fast-growing application performance management software company, just filed their S-1 IPO filing to go public. AppDynamics has raised a huge amount of money ($300+ million) and is growing super fast (>50%), making it one of the higher profile B2B software companies to file recently.

Here are a few notes from the S-1:

  • The integrated suite of applications monitors the performance of software applications and IT infrastructures, down to the underlying code, and automatically correlates them into logical “business transactions,” such as booking a flight in a web browser, transferring money on a mobile device, getting directions through a car’s navigation system or locating physical goods in an inventory system. (pg. 1)
  • 1,975 customers (pg. 2)
  • Revenues (pg. 2):
    • 2014 – $23.6 million
    • 2015 – $81.9 million
    • 2016 – $150.6 million
  • Net losses (pg. 2):
    • 2014 – $68.3 million
    • 2015 – $94.2 million
    • 2016 – $134.1 million
  • Industry Background (pg. 2):
    • Enterprises are Undergoing Digital Transformations
    • IT Investments are Moving to Customer-Facing Software Applications
    • Velocity is Critical
    • Accelerating IT Complexity
  • Internally estimate that the total addressable market for the solution is approximately $12 billion (pg. 4)
  • Revenues nine months ended October 31, 2016 (pg. 12):
    • Subscription $110 million
    • License $32.6 million
    • Professional services $15.7 million
    • Total: $158.4 million
  • Accumulated deficit of $476.8 million as of October 31, 2016 (pg. 16)
  • Mix of time-based licenses, SaaS subscriptions and perpetual licenses and the mix of applications sold (pg. 23)
  • Competition for people in our industry, especially in the San Francisco Bay Area is intense and often leads to increased compensation and other personnel costs. (pg. 29)
  • Federal, state and foreign net operating loss carryforwards (NOLs) of $182.1 million, $199.8 million and $94.7 million (pg. 42)
  • Cash, cash equivalents and marketable securities of $142 million (pg. 57)
  • SaaS subscriptions and time-based licenses are typically one or three years in duration, and are bundled with software updates and customer support services (pg. 67)
  • As of October 31, 2016, we had more than 165 customers with a life-to-date total contract value greater than $1 million, an increase from just over 20 such customers as of January 31, 2014 (pg. 70)
  • We have increased our sales and marketing headcount from 157, as of January 31, 2014, to 485, as of October 31, 2016 (pg. 70)
  • 2016 dollar-based net retention rate of 123% (pg. 71)
  • In the fiscal year ended January 31, 2015, we recognized the settlement costs of $10.0 million related to our litigation with CA, Inc. (pg. 75)
  • Founder/Chairman equity: 14.2% (pg. 153)

I think AppDynamics has the scale and growth to have a well received IPO but I think the heavy losses and high percentage of license and services revenue relative to subscription revenue will make it less desirable compared to equivalent SaaS companies.

Congratulations to the entire team at AppDynamics for building a large, fast-growing company.

What else? What are some more thoughts on the AppDynamics S-1 IPO filing?

Seven Spectrum of Outcomes for AI

Ray Wang has an interesting post up titled Understand The Spectrum Of Seven Artificial Intelligence Outcomes. From the post, here are the seven:

  1. Perception – What’s happening now?
  2. Notification – What do I need to know?
  3. Suggestion – What do you recommend?
  4. Automation – What should I always do?
  5. Prediction – What can I expect to happen?
  6. Prevention – What can I avoid?
  7. Situational Awareness – What do I need to do right now?

rwang0-spectrum-of-outcomes-for-ai-1440x800

Just think of how artificial intelligence is applied to every B2B SaaS application using these seven questions as a thought exercise — there are so many amazing possibilities.

It’s a great time to be an entrepreneur.