Loopt's Sam Altman was named to Inc. Magazine's list of "30 Under 30: America's Coolest Young Entrepreneurs."
Not vesting their stock is a common legal mistake new startup founders make.
Early on in our funding cycles, I help the founders set up all the initial legal and incorporation paperwork. (I’m not a lawyer, but I’ve gone through it about 60 times by now.) Y Combinator’s philosophy on legal paperwork is that it should be as simple and straightforward as possible. We hate it as much as founders do. When we first started out, we didn’t include vesting in the paperwork because we didn’t want to be overbearing investors.
Boy, am I singing a different tune more than 2 years and 5 funding cycles later. It’s like I’ve taken a “Scared Straight” course in corporate law. I’m exaggerating a bit, but the point is that there are so many disasters looming out there for startup founders, why not arrange to avoid one?
What is vesting? It’s when the founders voluntarily agree that instead of getting all their stock up front, they’ll earn it over time. There's no set rule for vesting schedules, but the most common are 25% per year (vesting monthly or quarterly) over 4 years, or 20% per year over 5. Usually there's a 1-year "cliff," meaning people who leave after less than a year get nothing.
Once you’ve issued your stock, you then need to file a form called an 83(b) election with the IRS. You have 30 days to do this or you can face hideous tax repercussions. Many paperwork oversights can be fixed later, but this one can’t.
Yawn. You must now realize why founders don’t want to deal with all this: it’s boring! Why attend to legal paperwork when you can be working on your software and planning to take over the world? Because if you don’t have vesting and one of the founders leaves with a large chunk of your startup’s stock, you will waste a lot of time and money to fix this situation. One YC-funded startup that didn’t have vesting had one of its founders leave within the first year. Here’s what one of the remaining founders told me about the aftermath:
“The biggest thing by far was the legal and accounting fees we had to incur (+$20k) and the time and stress associated with dealing with something like this. Hours and hours on the phone, reading over documents that weren't explained well by lawyers, trying to understand from an accounting and tax perspective what we were getting ourselves into, etc. If we had the vesting agreement, it would have ALL been unnecessary.
Everything is roses when the company is first starting-- you're excited, you're even thinking about the people you're working with differently, i.e. any misgivings you may have you're lessening in a ‘let's see how it goes’ attitude, or ‘things will be fine once we get started’ attitude, so obviously you don't worry about it as much.”
Several of our startups have had founders leave early on. For those groups without vesting, some founders gave back the stock voluntarily and some didn’t. But you don’t want to have to rely on your cofounder’s opinion about how much stock he/she deserves to keep. You want to be clear from the start about what someone will walk away with if they leave.
I couldn’t blame someone for leaving. It usually means things aren’t going well for the startup-- you can’t get users, you can’t get funding, your bank account is dwindling, you are demoralized-- and you need to pay your bills after all. But what about the founder who sticks around, making huge sacrifices to keep the startup alive a la Evan Williams? How would that founder like to be broke and working around-the-clock on the startup while the founder who left is sharing equally in the upside? Kind of embittered I think.
Also, think of your future investors. It will be a major red flag if you have to inform them that someone who owns 25% of the company now works elsewhere and doesn’t have anything to do with the startup. They don’t like it when someone owns a large portion of stock and isn’t “adding value.” They’d want (as you should too) that stock to be motivating a new employee who would be busting his hump on the startup.
Professional investors expect vesting and will likely impose it upon the founders anyway as part of their investment.
If you are lucky enough to afford lawyers to set up your corporation, they will obviously help you with all this. But many founders can’t afford their fees so early on. If you are using online services to incorporate (which I wouldn’t recommend), make sure you set up vesting. If you have already issued stock to the founders without vesting, look into setting it up retroactively. I think it’s pretty easy to do.
Most founders don’t think they are going to need vesting, but roughly 20% of the startups we’ve funded had a founder leave within the first year. So if you are thinking, “We don’t need vesting,” you are in the company of a lot of people who were wrong.
Robert Morris with Loopt founder and CEO Sam Altman (summer '05) that summer.
Sprint will soon offer Loopt’s social mapping service on its phones. Loopt's mobile application uses the GPS capabilities on phones to let users keep in touch with their friends. A user's private network of friends is displayed as dots (yes, they move) on a map on the phone.
Loopt had till now been available only through Boost, so even though Loopt has been very successful, the average Web 2.0 fan may not have known about them. I think that’s about to change.
Congratulations!
Working with the founders is probably my favorite part of Y Combinator. So when “alumni” come to visit, I get especially excited. I’m spoiled when we’re in Silicon Valley, since so many YCers live in the Bay area. Many will crash dinners or else I’ll stop by the Y Scraper when I’m in the city to say hello.
Besides the 19 new startups participating in this summer’s funding cycle, I think there’s only one active alumni startup in Boston (more on this in a future post). So I was delighted when a few of our alumni visited Cambridge last week.
Zenter: Victory lap
Wayne and Robby of Zenter flew out to meet the new founders and talk about what they wished they’d known in the first month of YC. This was the first time we’d seen them since the Google acquisition and it was nice to see for myself how happy they seemed. Their main advice for the founders: channel all your hacking ability into making something users want. Especially in the months leading up to Demo Day.
Wufoo: Getting it right
Kevin Hale of Wufoo also visited and spent hours giving the founders design feedback. (He’s extremely talented in this area.) Kevin founded Wufoo with brothers Chris and Ryan Campbell. They moved from Tampa to Mountain View in January ’06 and, like the Zenters a year later, took advantage of the next 3 months to work nonstop on their product. They rewarded themselves occasionally by watching LOST, but other than that, they were programming animals.
They raised some angel funding before returning to Tampa in April ’06. We worried the Wufoos would be hosing themselves with this move (do you know any software startups from Tampa?) but it seems to have worked out OK. In the 15 months since, the founders have accomplished a lot. They launched a year ago and have consistently added new features. They also care a lot about customer service. Apparently their average response time to emails from users is six and a half minutes-- and it’s only three guys!
They have all sorts of clever tricks to help them stay productive. I can’t say too much about the most amusing one, since I think Kevin plans to write about it on Particle Tree, but the payoff is a trip to the winner’s destination of choice with the loser assuming the role of “trip bitch.”
Kevin’s most exciting news was that Wufoo is now profitable. He showed me a graph with a nice smooth upward curve. Assuming they don’t make some huge mistake, the Wufoos are in a place most “Web 2.0” companies would envy: they’ll never have to ask investors for permission to keep working on their product.
Congrats David, Dan and Chris! Weebly was named one of the 50 Best Websites of 2007 by Time Magazine. Foundersatwork.com is (proud to be) powered by Weebly.
Joe Damato (l) and Matt Humphrey (r) of SlapVid at a YC dinner.
Matt Humphrey, Joe Damato, Bob DiMaggio and Wei An Wang founded SlapVid last winter while students at Carnegie Mellon. They moved to Cambridge last month and were the first startup to launch during YC’s summer funding cycle (a few others were launched at the time we accepted them).
SlapVid is doing some cool new things in the streaming media space—hoping to change the traditional content delivery network (CDN) model. It’s the next-generation Akamai, using peer-to-peer networking to have users share the bandwidth load.
The founders were a bit surprised that the article focused more on SlapVid as an example of young people’s career options than on their actual product, but I told them they should be pleased: this is only the third YC-funded company the Globe has ever covered, despite 39 new startups springing up in their backyard since summer '05!
Applications for Y Combinator's winter funding cycle are due Thursday, October 11. You can start editing your application now.
Good luck!