Startup Therapy Podcast

Episode #129

Ryan Rutan: Welcome back to another episode of the startup therapy podcast. This is Ryan written from startups dot com, joined as always by my friend partner and the founder and ceo of startups dot com wil schroder. Well as startup founders, we are building under great uncertainty, lots of pressure. Uh, you know, we're underpaying ourselves, we're overworking ourselves, we are doing all of this for a lot of reasons. I mean, we want to leave our stamp on the universe, right? We want to build a great product, we want to build a great team, but a lot of us, you know, I think we also do expect some financial reward and return from this at some point. And that typically comes in the form of some kind of liquid event based on our equity, right? And equity can and usually does get divided in a number of ways as we go along of all the stakeholders that we can have in that cap table, what's the worst kind of stakeholder to have in that cap table,

Wil Schroter: The ones that don't work there anymore. Boom, you're just saying it just kind of like Burns, you know, got like, you know, I was in a founder group last week and uh, we were talking about just exactly this topic, which is why it's so top of mind. And a couple of founders were saying, look, I've got a bunch of people in my cap table that were, you know, here three years ago, but they're not here now. And at that time, I didn't, I didn't think about it the way I think about it now, because I was like, you know, they they're they're here, they've got their equity, et cetera. And all of a sudden I'm looking at this cap table and I'm saying to myself, what the fuck right here, I'm slaving away every day and this person has got an equal percentage to me and they don't even have to work here anymore. Like how did I get myself in this situation? So I think today we can talk not only about why the absentee landlord problem, as I call it, the people that you know are earning but aren't present um is such a huge predicament and what to do about it. You know, I think let's let's blow it up and let's unpack it a little bit,

Ryan Rutan: let's do it. This feels like the perfect day to do this because this is one of those problems that always feels like it never comes in isolation. This is always like the second or third thing that's piled on at any good time as a founder, you're dealing with like two other house fires and then something around some ghost in the cap table comes up and I didn't sleep well last night. So I feel like this is the perfect day to tackle it. I feel like I'm in exactly the frame of mind and the state of energy that I would be in were this to happen. So this will be perfect, I'll be the the the prime example of of the state of mind that this would actually occur in.

Wil Schroter: Alright. So before we get into this next topic, I just want to let you know what we talk about here is like 1% of the conversation, you know, really, this conversation is going on all day long online at groups dot startups dot com. Where Ryan and I pretty much talk endlessly with founders about every one of these topics. So if by the end of this discussion, you like the topic and you want to dig into it a little bit more with Ryan and I just had two groups startups dot com and we'll pick it up from there.

Ryan Rutan: So yeah, you call it the absentee landlord, you know the other, the other funny way I've always thought about this is it's kind of like having that roommate that hasn't paid rent in four months, but still lives in the house, right? Um because they're still, they get all the benefits of the roof in the kitchen and you know, they they've got they've got all of it. Um Now it's a bit different because you know, again, the, and I think this is how from the other side of the table gets justified or like, well

Wil Schroter: you haven't sold

Ryan Rutan: it yet, right? It's not liquid yet. Like I haven't earned anything yet. That equity is worth zero until you do something with it. But that's the rub, right? It's until I do something with it. Right,

Wil Schroter: right, right. You know the term absentee landlord was actually spoken to me the first time I had heard that reference used in a cap table when I was sitting across from my first partner and I was telling him, hey, business is going amazingly well we're running this agency business has gotten huge. We had hundreds and hundreds and hundreds of employees. And I said, look, it kind of doesn't need me anymore, right? Like you know what, what we got done here is fantastic. I want to go do something else. And he looked at me and he said, sounds awesome for you. He said you're missing a part of this equation, which is me. What's so crazy? I gotta be honest, I didn't even think about it in in retrospect, I was being selfish. I was also probably 26. So you know, just hadn't done this before. And I remember when he said that as soon as he said that I was like shit, that's a yeah, that's a huge problem. But what was, I think the moment he said it, right, And so he says to me remember this, this conversation, he says, um if you go out and you go start something else and your equity is still sitting here, I'm gonna wake up tomorrow morning and I'm going to be working for your Equity. And I said, so I'll be working for the value, what will you be doing? And I'll be like, I was like, well, yeah, now that you put it that way, it

Ryan Rutan: doesn't sound particularly fair

Wil Schroter: right? And I said, I mean I didn't say this, but I was thinking I was like, well I know legally I can do this right? I know legally I have the equity. We're in a situation where there wasn't a breakup claws huge mistake. Um, so I can do it. But the emotional side of me was like, like that's a horrible thing to do, right? Like I should probably be giving this more thought. Today, we're gonna talk about the people who are not,

Ryan Rutan: I don't care about the people who are like, legally I'm okay, I'm okay. How do we

Wil Schroter: build that argument as the people that, that are stuck holding the ball?

Ryan Rutan: Yeah, yeah, yeah. I think building the argument and I think that, you know, obviously there are financial ramifications to this, right? And I think that's easy to see. I think the one that that goes overlooked is, and you said, you know, part of that conversation with him saying I'm gonna be waking up and I'm gonna be thinking about the fact that I'm working for your equity. That doesn't go away, that's not like a one time thought, gee whiz I'm working for Wells Equity. Um, okay back to it carry on, right? It's going to be something particularly as like you go on to raise subsequent rounds or the business continues to grow even more or you get closer and closer to that, that exit. Um, and particularly this has taken years and years to get to that can have a real drag on the founder emotion, right? And, and at some point it's like, why am I doing this? And of course it depends on how significant that dead stake of equity Is it. Alright? If you're talking about one or 2%, That that's, you know, that's, that's a little bit of an itch, right? But if it's 50% of the company, that's my arms off, right? Like that's fucking painful, right? I don't want to deal with that, right? Like that's, that's a huge, huge issue. Um, and so I think that I don't want to, you know, flog a dead horse here, but this is really an important piece of this, how it's going to change your mentality, how it's going to change your energy and how it's going to impact your ability to move forward and actually do something great with the company knowing that essentially you're now the only horse hitched to the wagon, right? And you're still pulling and now you're pulling twice as much for the same outcome for yourself, right, right? When all of a sudden this becomes twice as much work, is it still worth the work.

Wil Schroter: Well, I think part of the challenge and kind of what I saw with some of the founders who were talking to last week was they didn't realize there was another option. They just thought, I guess this person takes half and they just leave with half. And I guess I'm just stuck. You're not, you're not, you can allow yourself to be right. You can put yourself in a position where, um, I'm saying to myself, well, I guess that's the breaks, right? It's not the way this works right. And you should not be okay with it because it's awful. We're going to assume in this episode that most people have not planned for this. There's, there's no provision within the operating agreement, etcetera. There's no reverse vesting or anything else like that. We're going to assume you're kind of stuck holding the bag and Ryan to your point, we'll talk about larger equity holders in this case, just for the sake of gravity of the situation. But let's, let's start to build the argument, um, that we're gonna have with ourselves and therefore with the person that we're going to talk to. And I think the basis of the argument is the equity was implied based on contribution, here's where people get messed up on that. They say, well, I made my contribution. Now, I'm done. Now, I just hold the equity forever. And it's like that works If somebody else doesn't have to, to work for their equity to. So Ryan, let's let's say, you know, you and I are 50, 50 co founders and our new deal And I say, Hey Ryan, I'm gonna go work on something else. Here's what I'm saying, similar to what I said to my partner 25 years ago. Uh, the first thing I say is, hey Ryan, this is really awesome for me because now I get to go work at another company, I get another salary, I get another equity stake. What do you get in return? Ryan? Nothing. You get exactly what you had five minutes ago despite

Ryan Rutan: where it benefits

Wil Schroter: me and all the work you're about to put in is going to be for the exact same reward. That's bullshit. Right? And again for folks that are dealing with this right now and they're, they're thinking about this, that's bullsh it. I want to be clear that the situation isn't okay. It's not like, oh, it must happen all the time. So I have to deal with it. It's bullshit. And you need to unwind that thing with all the power in your being to make sure you're not saddled with this ridiculous anchor that you're going to carry for years and years and years and the more time that goes on, the worst you're gonna feel about it,

Ryan Rutan: the heavier gets, well, there's, there's also something I want to back up on, right, which is that we do the, we're gonna have to, So there's two ways to look at it, right? Like assuming that you can pick up and carry whatever that person who left load was, you're gonna do twice as much work for the same outcome very rarely does that actually happen, right? What ends up happening is you have to bring on other people right to do that. So it's either employees ie overhead, so you're cutting into profits or you're going to have to bring in somebody else part with more equity, dilute yourself even further. So now you're gonna end up doing the same work for even less of an outcome, right? Like talk about like it's a painful situation to begin with that can get more painful as it goes on in a number of ways, right? It's not just the compounding like angst and anger over being the one who's doing all the work and still getting the same pay now, it's like I'm doing more work and I'm deluding myself and I'm doing all the work right? Like what in the hell am I doing right and why? Like what gave them the right to do this? Well we talked about this a few episodes back. What gave them the right to do this was not properly structuring things in the first place. I don't think we need to dig too too deep into that today. Um I think there's one specific thing that we can talk about towards the end of the episode, which is some course correction on how we can fix this, but um go back a couple of episodes and you'll find one where we talk about, you know, parting with the co founder and we do dig into some of the mechanisms that have to be in place from the very beginning or is early on before things become contentious, essentially the prenup of of a startup, right that deals with these situations, if those aren't in place, then it's gonna come down to arguing, negotiating, um, and maybe still not getting a good outcome for yourself at the end. Right? So I think that's, you know, worth revisiting. Go back, take a look at that and say like, okay, yeah, this makes sense. We need to make sure that we're structured this way because if you're not at some point you're ensuring a dogfight, right? Because there's no other way around this, this will be contentious. Um, even if you're dealing with somebody reasonable, right, they're still going to be contention in this and I would argue that at the point at which somebody wants to leave in the middle of this, they're probably not being particularly reasonable. So let's be really careful about preempting as much of this as we can

Wil Schroter: you bet. And I think here is where the argument breaks and I think if you're on the other side of this and on either side of this, you should understand this. But if you're on the side, we're getting hosed to this whole thing. Here's what you have to explain in the argument, Equity is compensation. Yeah, take our salary. If we were to say as the departing partner. Okay. In this example Ryan, I'm the departing partner, Ryan. I would like to keep all of my equity. I like to keep all my equity. And guess what? I also want my salary forever because all of the arguments that I'm going to make about why I should have my equity should apply to my salary as well. Right? I've made a contribution and therefore, you know, my salary is what it was. And if I leave, why wouldn't I stopped getting paid? And rightfully you would say because you don't work here anymore, literally, I got to hire someone else to do your job. Well then why is equity any different? Right? If equities compensation, what we're missing in the argument because it's not talked about enough is that we have to continue to create value for that compensation right? In the same way it works for a salary. If I stop creating value by stop showing up for work. Same thing. You wouldn't keep paying me and I wouldn't expect to get paid. Right?

Ryan Rutan: That's,

Wil Schroter: that's the problem.

Ryan Rutan: That's the problem. And I think where it gets a little bit twisted is that people don't understand that the contribution needs to continue to add to the equity, right? Because theoretically the equity continues to grow, right? That's how we get to a bigger outcome. It wasn't worth much in the beginning, it continues to grow, not on its own, This isn't like equity doesn't just sit around and earn compound interest on itself, right? Equity grows through a lot of effort, through good and bad decisions and, and, and, and, and course corrections and all sorts of things. Right? That's how equity grows through continued contribution. And where it gets twisted is that because it's doled out early on and often talked about and this is, I think a problem. And sometimes how we couch this is founders. It's like, look, I can't pay you market salary right now, but we're gonna make up with that make up for that with some equity. Right? Right. And so the assumption is that I've already earned that equity and I'm entitled to it forever now. Right. You gave me that instead of cash. And sometimes that's literally how it's described. But there's a couple missing sentences from all of that right? Which is that in order to maintain this equity in order to add value to this equity in order to continue to deserve this equity, you have to continue to contribute to the value of that equity, correct? Right.

Wil Schroter: And that's the broken mechanic.

Ryan Rutan: That's the broken mechanic, right? We, and, and I think sadly, we set it up that way right through the discussions, we have. Um, and part of that is founders misunderstanding exactly. You know, how how equity works, that can happen, right? Um, part of it is always assuming that this is just going to be perfect forever and will always be buddies and everything will be great and everybody's just gonna, will be here until the very end will sell and everybody right. It doesn't, it's just not the way it typically works out. And so there's, there's a couple of misconceptions that I think allow us to leave out some really damn important caveats to this. Yes. This is part of your compensation, but to your point it is compensation right? You didn't get equity for showing up right? It wasn't just because you happened to be here. It's because you're being compensated for what contribution when the contribution ends. There has to be a change in relationship between you and that equity that you have or maybe in the future had. Right. And I think that's kind of really important piece of the discussion that often just gets left off to the side. Or again, we talked about this a lot lately. One of those one sided conversations that we had with ourselves or it's like, well, in the future, if they were to leave, what would probably happen is this Yeah, it's probably not going to happen if it's not explicitly stated and you haven't talked about it actually, I can guarantee you, it won't be like, yeah, that sounds good. And I'm glad we didn't talk about in the beginning because I probably wouldn't have signed on if I'd known that.

Wil Schroter: Well, look, I think part of the discussion has to be if you can make this move if I can make this move again in our example if I can make this move, how how do we compensate you for staying? Right. That's really what we're talking about. If you're going to compensate me and I can leave and keep getting compensated by virtue of my equity value creation, how do I in turn compensate you for staying? Right. That's the powerful part of the argument. And that's where that's where the discussion has to turn so that the person that's departing in this case me has to understand that there's a cost of my departure, right? And again, if I'm going to say hey Ryan I'm gonna take off and I'm gonna go work at another company, make another salary, do whatever but you stay behind. Your argument should essentially be cool, I'm going to do that too. And then you're gonna say well wait a minute now no one works there. Exactly. If no one works there are value is worth nothing.

Ryan Rutan: Yeah it was cool when you were going to do it but if we're both going to do it it's not cool. Right. How does this work? Right. That's and so

Wil Schroter: that's where the argument starts. The argument starts with with you saying, okay let's start from here let's say we both leave right? How does how do we compensate anybody for staying here because we're gonna have to pay someone to stay here, Guess what, That's you Ryan, you're the one getting paid to stay here, right? You're the equivalent of a new employee, so to speak. So how are we going to compensate that person accordingly if you say, well, you're going to still be making your salary? So I'm gonna make my salary no matter where I work, right. How do I get compensated with equity at this company for doing what's essentially to people's job, right? We have to reset the stakes and that's what never happens.

Ryan Rutan: Yeah. Unfortunately, it rarely does. It's just like you said, founders just sort of accepted there. Like, I guess this is what I'm stuck with, right? Right? You're not, you're not, you're not and you shouldn't accept it without, without a pretty serious fight now, of course, depending on how things were structured, depending on what the operating agreement looks like, depending on your ability to negotiate, your willingness to argue um with somebody who probably was close to you at some point. Um, and maybe still is right. These things don't always end on a sour note. This isn't always like a bad breakup. Um, This could be, you know, just a very amicable parting of ways that happens to have one piece of it that's just really skewed um, in the favor of one individual, which could then easily erode that relationship. So I think that's important to consider too. And that's one of the things that that I do see leaned on, um in terms of, you know, how, how these things do get resolved, It's like, look, you probably didn't like in your case, go back in time, you didn't realize what you were about to do to your partner until he explained it to you. And at that moment you went, oh yeah, shit, I wouldn't do that, but it wasn't my intention. Um I just hadn't thought about it that

Wil Schroter: way. In that case. I just hadn't thought about it, you know, in the moment he said it, I was like, shit, I understand the logic in about one second. But here, here's the interesting thing. I think that Ryan, if if if you're the person saying I'm the person leaving, we should say, cool, you're leaving, let's have a compensation discussion. How will you compensate me for working for your equity, yep. Yeah. And had my partner said that to me and he said, look, I need to be compensated for working for your equity? Um, I would have been like, well, okay, that's a really interesting conversation. Like, you know, how much am I willing to give up, give back, et cetera to make sure that you're incentivized to keep creating value. If I say you get nothing, I'm just gonna take it because legally I'm entitled to it and go fund yourself, right? And look, I can take that position, you have the position to be like, okay, well, here's what I'm willing to do with that, right? And, and we'll get into this a little bit later, but there's a lot of ways to play hardball on this one as well. You're not totally back against the wall.

Ryan Rutan: Well, I think that, you know, one of the things that they have to consider, you referenced it just now. I have to continue to, to, to work here and create value for that equity to have any value. If you completely disincentivize me to the point where it's like I'm either demotivated or perhaps crippled in my ability to move forward, right? Like depending on when this happens, if this is a company of two, when this occurs, you have now laid off half the staff right now. One person has to continue and try to make this work even if it's a company of 20. But let's say it's the, you know, you're, you're filling, you know, you've got two co founders, one handles like Ceo CFO one handles product and and and technology and you lose the product and technology. How is that person who's remaining, what are they, what are they executing? Right. What are they marketing? What are they doing? Because they've now lost product and technology, which if that's what your startup was based on kind of important to its future growth. And so you're definitely going to have to either replace that person with another equity partner or you're going to have to hire out and I think this can be some of the basis for that conversation you were talking about in terms of compensation, it may not even be direct compensation to the person who stayed it. Maybe the compensation that's required to replace the function so that this thing can go forward and add value, right? So if I also didn't have to go and pick up a $250,000 C. T. O. Um and let's say 100 and $50,000 head of product that has to come from somewhere. Right? That's now foregone cash, which is exactly how we ended up in an equity position to begin with. Right? So if they don't understand that conversation now, how did they possibly understand it when we did this in the first place. Right. So that foregone cash is exactly where you start to decide how much and on what schedule are we going to start to dilute or bring back some of your equity. Right? That becomes the basis that true cash cost is one aspect of it. I do think that there's another side of that entirely, which is what the person who stays behind is entitled to from an additional equity standpoint or from additional compensation standpoint, but at a bare minimum, you can look at it as just replacement cost and what the current value of your equity is versus that replacement cost in real cash, by the way, your equity is still worth. Actually nothing at this point, right until it goes liquid. Um, so we're talking about trading real cash for your may be worth something someday. Equity. And I think that's a huge piece of leverage. Um that can be used or at least a nice piece of logic that can be used as a basis for determining the basis of that conversation.

Wil Schroter: You know, by the way, I just want to mention if what we're talking about today sounds like the kind of discussion you wish you were having more often you actually can, you know, we're online all day everyday working through exactly these types of topics with founders, just like you. So any question you would have or maybe some problem you just want to work through. We're here and we love this stuff and we're easy to find, you know, head over to groups dot startups dot com and let's just start talking. I think part of this episode two could be useful for schooling folks that are looking to leave, right? You have a right and entitlement to leave, right? What we're talking about is how to be cool about it, right? How to leave under terms where like you're being considerate of the people that you're leaving and you're being mindful of how they're going to maintain pace without you. Going back to my example of me and my partner had, I known then what I know now I would have sat down with him and said, look, here's how I planned on compensating you for my next move, right? And he would have looked at it very differently, not combative. He would've said, is this adequate compensation? And that would have been a great conversation and maybe that would have led to where we wanted to. In retrospect, I'm glad I didn't sell. But that's a that's a whole other discussion for what we're talking about. I think that again, the person departing needs to learn how these departures work, right? So they can be good at it. I think the person who's left behind needs to understand both what leverage they have and what options they have, but they

Ryan Rutan: shouldn't. None

Wil Schroter: of this involves them just saying, I guess I'm stuck because you're clearly not. And I think with that, let's let's try to dispel one other argument. And that's the argument that says, well my contribution was worth so much that I should get fully compensated for life based on that moment in time from the beginning, broken at so many levels. Tell me how you see it.

Ryan Rutan: I I think it is. And and it's funny because you'll we've seen this, we've seen this argument over and over and over again, right? Sometimes it's, well, I came up with the idea to begin with, it was my idea because sometimes it is the original, you know, the the originator of the idea, right? The the original founder of the business made the person who started to pull it all together, you know, went out and found the co founders gave up the first piece of equity and, and they're like, well, it was my idea. Therefore, without that, this never would have become a business. And so therefore I have a different level of entitlement because my contribution is what made any of this possible to begin with, that's bullsh it on about 25 levels.

Wil Schroter: It's just an inexperienced feeling.

Ryan Rutan: Exactly because we know it takes execution. Um, it also implies that those people would have been doing nothing else with their lives, had you not come along right, they would have just literally been sitting on a couch waiting for somebody to come along with an idea so they could participate in it not true, right? There was opportunity cost for everybody involved, typically salary cost everyone involved, right? There's a lot of risk here that everybody took on, right? And that's, that's, you know, that plays both sides, right? So that is also the argument that people who are, you know, maybe weren't the original idea, but, you know, kicked off marketing or, you know, was was part of, you know, an important growth initiative or, You know, was the chief operating officer and handled the onboarding of, you know, 80% of the staff in the early days and helped to build that, that team and the process and procedure. Yes, all important things at that time. But like we said earlier, that got the equity to the value that it was at at that point. Right. Right, right. A builder doesn't get paid all of the money simply because they laid the foundation.

Wil Schroter: Right. Right.

Ryan Rutan: It has to continue to progress and that progression comes from continued contributions. So I don't think we need to circle all the way back on that. But that's really where that argument starts to break down. It's around the continued contribution. Right? So whether it was the idea or whether you were the first CFO and, and you know, made some great decisions early on around how to structure finance for the companies such that, you know, we were always in a cash deposit position. That's fantastic awesome. Until the moment you leave. Right, right. Have you will ever seen a process or procedure that was put in place that got a company to a certain level that then just became the policy procedure process that carried it from then all the way into the future. That just never changed again. Cool. You wrote the playbook and now we've just followed it for the next five years after you were a ghost in the cap table. And it all turned out fine.

Wil Schroter: Here's, here's here's a great way to dispel that and get, you know, let's say you're the Ceo the CFO, you know, whatever your title might be a great way to dispel that is like, Cool. Now we never have to hire for your role ever again. Your your role will go on to manage people, your your role will continue to innovate, your role will show up every day and actually produce some new work because the work you've done is forever valuable, right? That's where people like, oh well I guess you put it that way, that doesn't actually make any sense your role, Whatever your role might be, if it's not delivering value every single day, you shouldn't be getting paid every single day because once again, we're going to have to back fill you with somebody who does contribute every single day in order for that role to actually contribute for life. This kind of like, it's it's it's really a bit of an arrogant notion That what we did in year two is somehow going to never be replaced. And again, is this fountain of value for the rest of our time at the company um when we're in year three and we're making that call, it's easy to say what we're missing what a lot of people don't understand about this process Is that it takes 7, 10, 15 years for a company to evolve when we're in the year three, we just haven't seen it yet when we're in Year three were thinking, oh well shit, um I'm going to leave and next year we'll sell. So I pretty much got us to the finish line, We don't understand how far the finish line is, but that's okay? And we can talk about some of the mechanisms where we can account for that, meaning if the finish line is in 12 months, well then you'll get you'll get paid a lot because your contribution is still relevant but at the finish line is in 15 years. Dude, nobody even knows who you are anymore right? You're so far removed from the from the success of this company. What you worked on is so far away from what it took to actually get us to an exit or whatever. Our final step is that you're just not going to get paid that way again, equity is compensation, but the value of that compensation has to be ongoing. You can't just work you know, a few years and like I'm good, my job is done forever. It's not doesn't work that way

Ryan Rutan: now and it's it's you know, it's it's funny but I mean like when you when you lay it out it's sort of easier to understand when you talk about how much longer this is gonna take, but I think that's that's Twofold problem, right? People don't understand how long this takes. Um they don't they don't understand that the other thing that happens is they look at their contribution at that point and they say, look, everything that's happened in marketing up until this point has been me. So therefore I am 100% of the marketing contribution, right? I'm the one that did all this. What and, and they're comparing it to as opposed to The future state where nobody has yet done anything. Well, it's not that they won't, they will, they will go on to do things, they will go on to grow the company. Um, said differently if they don't, your equity is worth this much anyways. Right. zero. Uh, so why are, where in the world can that argument be valid? Right. It just, it just isn't. And yet when you, when you fail to account for those two factors, which is that, Yes, your contribution up to this point has been 100. Um, that will diminish literally every day from this point forward. Um, and things will change. And hopefully so, right. Because if they don't, it's going nowhere. So your equity will either be worth zero or your contribution will have diminished every day. From that point until the point where it does become worth something, Right? And those are the two things that people can just somehow willfully ignore, stand in the middle and go, well, i it's mine, Right? It's just mine. Like I did my thing. I came, I saw I conquered, I'm leaving. Um, but now you guys continue fighting. Um, and, and please send me the check when, when it arrives. Right.

Wil Schroter: Well, so, look, you've got two options. If you're on the ascent of this problem, you've got two options and there are actually a few more, but, you know, for the sake of time, let's cover two. Uh, and we'll go through, I'll mention, and then we'll go through. Option one is once you take on more capital, you actually have a great opportunity to reset the cap table at that point. And we can talk about that in a minute. And the second is, you can do the smartest thing, which is just essentially reverse vest, which says that, look, every year that goes by, I'm going to give a little bit back, um, to recognize that my, the value of my contribution in year three, if it's year eight ain't the same, right? And so, so I'm giving a little bit back each year. And I think that both of those options can be presented. So let's go through each one and a little bit more detail because I think folks probably have never gone through this. So I want to understand how it works. So, option one, uh, we say, oh, shoot, I guess there's nothing we can do about it right now, let's take it to the investors and let's see what they think this is implying that you've got new investors coming on. And they're gonna look at the current cap table. And in about two seconds, they're gonna look at where there's dead equity in a cap table. It's called a broken cap table, uh, for those of you don't know understand the cap table is your register of everybody that owns stock. And they're gonna look at that. And they're gonna say, huh? Uh, will owns 50% of this company. And he doesn't work there. Why the hell would I, you know, invest on that basis? And they're going to say if you want my money, you're going to have to reset the cap table. Ryan, we're gonna compensate you with this um, investor be investing in this, I guess in this case is going to get this and then this idiot will that guy is going to get next to nothing. Uh and those are the terms if you choose not to take them. Um, so be it. But if you want to take our money, those are the terms. And I think that's where we start to create a little bit of a force function, you know what I mean?

Ryan Rutan: Yeah, it does. And I mean like I think that just hearing that you go, well, why on Earth would, would will accept any of this? He would just say no, he still has 50% of the cap table. Um, so he's going to be involved in this decision. Um, he's not going to be forced into into signing this. He's not going to accept these terms. Um, and yet you do have leverage there, right? Because if this is again, like this is required for the survival or the growth of the company or this is likely what's going to take it to the next level to get it to a point where the out of the equity has any value whatsoever. This may be a necessary step. Right? And again, if they're, if they're rational people, even if they're greedy people or, or irrational people, they may still be able to see through the math on this and go, okay, like this is what's required for me to actually ever end up getting anything out of this, where else can this happen? And so as we look at, like as well, using the funding round, um, continue the example where else can that be used as a point of leverage to force this

Wil Schroter: really, The funding round is the only consistent, uh, you know, force function that I've ever seen and here's why typically by the time the company is raising money, it's out of money. So it's more of a,

Ryan Rutan: we take this food

Wil Schroter: or we die type thing. Whereas it's not like, oh my God, we're about to go public and we're just taking this on as extra capital. That's a whole different discussion. And frankly, if you get that far and the person still has equity, they have a fair amount of, of latitude and control and you're probably messed up by not clearing this up earlier. Um, but often what will happen, It's not just, um, co founders, let's say that this becomes a problem with, It's also early investors where the early investors put in money seven years ago, nothing really happened. We pivoted a bunch of times and we get to the new investors and they're like, hey, you know, that's cool that they put in money a long time ago. But that money isn't actively gonna do Jack sh it for what we need to do now. And so we're going to nuke the entire cap table, start everything over and here's, who's gonna get, what were the new investor? These are our terms and we can set whatever terms we want. You can choose not to abide by them. That's on you. But if you're going to take these terms in any, any reasonable investor is going to look at the cap table and say, I'm not going to invest a bunch of money and people who don't work here. I don't care what they think they're entitled to. I need people guess what that work here still and are earning the value of that compensation. Okay, so

Ryan Rutan: funding around good time to clean this up. Um, not ideal. Obviously because it still requires acceptance. Um, depending again on, on what steak they have in the company of what control they have over your ability to make this decision. They may have a lot. They may have very little. Um, it's an okay time, right? It's, it's one of the, one of the major points of leverage, the better time would have been to, to preempt this with some type of an agreement essentially around, you know, the the equity clawback or the reverse vesting. Um so let's dig in on that one a little bit because I think that one is one that when I, when I talked to founders about this, they're like, you can do that because you can do that. I think

Wil Schroter: where it makes the argument indigestible is that when you go to your your departing founder and you say I'm going to take it all right now, it's too sudden, it's too much of a shock, right? There's so much that hasn't been represented. I'll give you a good example Ryan, if I'm the the departing founder On day one, I still feel the weight of all of my contribution. It's right there, but six months a year from now, this is almost like a relationship. Two years from now. I'm on another stuff, man, right? I got compensation elsewhere. Like I I sort of remember what I did there, but like it doesn't feel as strong and so what we're doing, you know, you as the remaining founder, what you're doing with me if you're making it. So it's not a shock to the system you're hunting where the pain will come from, right? And frankly you're punting it to a time where it's not that big of a deal anymore.

Ryan Rutan: Right? That's the thing. I mean, just the calculus of it makes sense here, right? If if you leave today and I take all of your equity

Wil Schroter: back and

Ryan Rutan: I sell four days from now, that whole argument about my contribution is what got us here still really damn valid unless I brought in somebody who in four days managed to kick so much ask that you didn't now suddenly selling right now. This doesn't happen very often. So of course I'm using a really extreme example, but like, yeah, that that's not fair either, right? Because at that point your contribution still has the bulk of whatever value was created is attached to what you did. So like if you've been there for three years. Um, and, and we sell a year later, let's say Now the time that you put in represents 75% based on time alone, right? Is to keep math simple here, 75% of the value that was created. That may not be true at all that somebody else may have come in and, and and built on what you did and kind of doubled or tripled or quadrupled. Um, those efforts, right. That gets pretty complicated. But just for sake of simple argument to understand how this reverse vesting looks and why you would do it. Just even from a time decay perspective, it makes sense right now. You can no longer say after a year has passed or two years of pastor, let's go to three years now at best you're 50% of that contribution from a time perspective, right? Your contribution is now half of what has been contributed from a time perspective to whatever your function was. Right? And so I think that's that's, you know, an easy way of kind of looking at this and understanding it um where this conversation conversation usually falls flat is when I talk about reverse vesting, um, and and I hear what's vesting and I go, oh, okay, well, right, so you both started with whatever equity you had from day one, So if you didn't vest into your equity, the idea that it's, you know, you didn't work your way into it over time, the idea that you're gonna work your way out of it over time is going to be a much less popular conversation. So, again, a lot of this has to go back to structuring this properly from the start. And if it wasn't, it just makes the conversations that much more cumbersome because you have to explain a concept and then explain how we're going to reverse it, right? So, you know, just try to get these things right from the beginning. If you haven't, um try to correct them before you're in a situation where they're actually a required discussion because that point it's just so much harder to get everybody on the same page.

Wil Schroter: I think we haven't gotten there though. Like, you know, again, and a lot of folks haven't, as we both know, um if you haven't gotten there essentially, here's the mechanism you're trying to put in place. The first question is How do I get compensated for staying here and continuing to build value for your equity? Right. Here's here's simple math. Right? Um, I'm going to say again, departing employee in this case. Um, I want, I've got 50% of the company. I'll give you back 10% per year over the next five years. Now. That would imply that after five years I have zero, I'm gonna go ahead and say you're probably not gonna get away with that conversation, right? You're probably going to have to say I'm gonna give over a four year period, 10% of my equity and then year five, that kind of ends and I'm going to remain with 10% of the company. There's there's almost always going to have to be Some remaining hold on because saying you're going to take some 120 you're just gonna get nowhere with that conversation. Now, if you're really adamant that you want them wholly out of this thing, you could have a discussion that says, look, um, if at any point we want to buy you out of the rest of your equity, here's maybe the terms that we would use. So a buyout clause always makes sense, right? And it could be for some percentage or multiple of the evaluation. And so what we're trying to do though is we need the departing person me to recognize that I have to compensate you for not working there anymore because you're gonna be working there for my equity. I'm not, and if I'm not compensating you, I'm gonna have to compensate the person that's gonna back fill me, right? But the reality is my contribution will degrade over time, right? It will become less valuable. And if at some point, if 2.5 years in, we sell, then I still get whatever my pro rata share of my equity is, so not the end of the world, I'm not going to zero. Um, but, but we just have to kind of get me sober about what departing a company means and what the contribution has to be. If you're really saying, hey, I'm a, I'm a co founder of this company and I've got half the company then act like it act like somebody that has to compensate people for doing the work. Alright, So that was fun. But let's actually keep this conversation going. You've heard what we think about this. But you know, Ryan and I would really like to hear what you think and we're online, like all day long, pretty much talking about every startup topic you could think of from fundraising, the customer acquisition to just really had to get all of this crazy startup stuff out of your head and there's tons of other founders, just like you, they're weighing in on these topics, so you'll get a chance to just hang out and meet some really smart founders were also super, super easy to find. You head over to groups dot startups dot com and let Ryan and I hear what's on your mind. Let's get to know each other a little bit and let's just start having more of these conversations.

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