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Podcast

Build Mode- Compensation, Culture, and Cap Tables With Yuri Sagalov, GeneralCatalyst

Equity

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  • Choose Investors Who Help, Not Meddle
    • Avoid investors who meddle and stress you; they harm early-stage companies more than help.
    • Talk to a fund’s portfolio founders to verify how supportive and realistic an investor is. Transcript: Yuri Sagalov Always thought that there are three buckets of investors. And the first bucket of investors are investors who you really want on your cap table, who are just like, they’re going to be almost an extended employee of your company. They’re going to help you with recruiting. They’re going to help you with hiring. They’re going to help you with go to market. And the most interesting thing with those investors is often it’s actually completely disconnected from the check size. They might be a $5,000 investor or a $5 million investor. It’s really up to the partner or the angel investor themselves. The second type of investor that you have is kind of an investor that gives you money and then disappears. And maybe they’ll reply to an email once every couple of months saying congrats. And you just don’t hear much from them. And they’re actually fine as well, especially as you’re trying to fill out year round. Obviously, if you can get the first category, focus on those. And then the only bucket that I avoid, especially for early founders, is like there’s this third bucket of investors who they give you money and they’re kind of in your kitchen meddling. They have an opinion on everything. They get stressed out when things don’t go right, which at every startup is always. And that is the only type of investor that I would like actively like steer free of. Everyone else, like obviously if you can get the very first bucket, I think that’s ideal. But the only one that I would truly avoid is that like third category. (Time 0:02:51)
  • Keep Co-Founder Splits Nearly Equal
    • Split founder equity close to equal to keep long-term alignment and avoid resentment.
    • Use tiny share differences (±1 share) to break deadlocks while keeping parity. Transcript: Yuri Sagalov By the time that I meet a company, they’ve decided on their own internal split. And what I look for is not necessarily equality, but I want to understand how they came up with a split that they came up with. And I do think that the closer they are to equal, the better. Like, it doesn’t need to be equal. It could be like equal plus one share, minus one share for one side so that you have like a clear ability to break deadlocks when you’re making decisions. But I do think that oftentimes founders over index on like I came up with the idea and so I deserve the lion’s share of the equity. And my feedback to founders, when I see that, like you’ll see a cap table where like the founder owns, one founder owns 80% and one founder owns 20%. And what I just try to remind them of is that like most of the journey of this company is ahead of them, right? Like the six months that they spend ideating on this, that’s six months out of a journey that might end up being 15 years. And so you just want to make sure that the person that you’re going to work with doesn’t wake up five years from now being like, man, I’ve put in as much blood, sweat and tears into this business As my co-founder. And I have one fifth of the equity. Right. And so I think that it helps that, like, if you’re not equal, you’re (Time 0:05:27)
  • Generous Equity For Early Hires
    • Be generous with equity for your first two or three hires to lock in culture and long-term retention.
    • Give something meaningful (e.g., ~2%) rather than tiny fractions that won’t incentivize longevity. Transcript: Yuri Sagalov A little bit, I actually think, so it’s a little bit of the same thing as the co-founder split relationship where like by the time you hire people, you have the rest of business usually Because you’ve raised some money maybe from GC or some angels or somebody else. And so it’s not as risky as quitting your job, not knowing what the future has in the hand. But it still means that the majority of the journey is ahead of you. And the thing that I usually advise to founders is also just be more generous with your first two, three hires. Then it almost instinctually feels right. It doesn’t mean like you need to give them the same equity as like you guys have as co-founders, but you know, give them 2% instead of a half a percent or of a quarter percent. And the reason is, again, you want people who will stay with you for the duration of the business. And the first two, three hires that you have will set the culture of the company. And so to me, I think that A, you should be very slow to hire those people because they will set the tone for the business. And B, ideally, you want them to stay with you all the way to IPO and beyond. (Time 0:07:55)
  • Be Honest About Risk And Upside
    • Explain risk and upside candidly to early hires and align them on the mission, not just pay.
    • Show founders take low pay too so employees know leadership shares the risk. Transcript: Isabelle Johannessen You may not get paid market rate today, but in the end, this could be great for you. Yuri Sagalov I think fundamentally what you’re looking for when you’re hiring the first few people is missionaries who beyond even the compensation want to join with you for the mission of the business And the journey of the business. And I think that that is important because if you get them aligned on the mission, then you can also get them aligned on the dream of success. And then you can have the conversation of like, look, you’re going to take a pay cut. We can’t afford you to pay what one of the big MAG7 companies will pay you, which is even though we’re well funded we can’t do that today but we’ll give you equity and you know even though The equity today is worth not a lot on a dollar basis because the business just got formed if we are successful and if we’re worth 500 million dollars here’s what your equity might look Like if we’re worth a couple of billion dollars here’s what your equity might look like if we’re worth 10 billion dollars here’s what your equity might look like and you want to be honest With them that there’s a lot of risk on the journey. This is why we want you to join. But if you’re aligned on the mission, then that’s our North Star. And this is what success looks like for us. And ideally, honestly, as a founder, you yourself are compensated in a similar manner. When I was a founder, I was the lowest paid employee at my company. And so you want people to know that like you’re not taking a huge salary yourself while you’re asking everyone to take a payout. (Time 0:09:34)
  • Vanilla Formation Docs Are A Feature
    • Non-standard formation documents often signal avoidable risk or bad advice.
    • Stick to vanilla legal terms so founders can focus on product and customers. Transcript: Yuri Sagalov Think that anything that’s non-vanilla from a formation documents perspective is always a bit of a red flag. It could be like non-standard vesting structures. It could be weird incorporation locations. It could be any number of those things. And part of the thing that I always wonder is, is this really where you want to be innovating in your business? There’s thousands of startups. There are lawyers in the Valley who specialize in this. The documents at this point are at the point where you can literally go on something like Clerky and do one-click incorporation and every VC in the valley knows that this is standard. And if you’re choosing to do a non-standard, I do ask myself, like, why? Right. Is that like, is that the most important thing to your business? So that’s often a bit of a red flag just on the legal side of things. Isabelle Johannessen So people are really trying to innovate in their company structures from that stage? Yuri Sagalov Yeah, I think it’s usually a mix of bad advice. Like somebody will give them some cookie cutter or like fortune cookie advice rather of like, I wish I had one year vesting, two year vesting instead of four year vesting or no cliff. Like, why would you do a cliff? But I think that like the more you keep that stuff vanilla and like that is truly not where you want to spend your time as a founder, right? Like build your business, build the product, get customers. (Time 0:12:31)
  • Pay Advisors, Don’t Give Equity
    • Avoid granting equity to most advisors; their value usually drops after 3–6 months.
    • Pay advisors hourly or on success instead of giving permanent equity except in rare regulated cases. Transcript: Yuri Sagalov Laughing because it’s like, I think it’s rarely a good idea. There are scenarios where it can be a good idea, but it’s like my default here is don’t do it. And then like we can work out the exceptions when I talk to founders of why you might want to consider doing it. The reality is that like most advisors are busy people. They don’t really have the time to dedicate to the business on an ongoing basis. And when you give them equity, that equity has gone forever. And, you know, the employees that you’re giving equity to are kind of vesting on a period of time where they’re going to be working with a business, including you as a founder. And the advisor’s equity usually also vests. But the reality from my experience is that most advisors are very helpful for the first three to six months. And then it just like it’s dropped off a cliff in terms of value. So I usually would encourage a founder to just like pay them hourly if they really want them to be up there to engage them, or pay them on success or something else where like on value delivered, As opposed to something much more permanent, like giving an equity brand. (Time 0:18:27)
  • Limit Seed Dilution To ~20–25%
    • Aim for no more than ~20–25% dilution by seed to keep founders meaningfully owned.
    • Clean cap tables matter because heavy early dilution is hard to unwind and scares investors. Transcript: Yuri Sagalov At seed? Yes. I care less about like, oh, there’s some random people that own like a quarter of a percent here and there. It’s more holistically of like how much of the business do the founders still own? It’s a red flag to me as an extreme example of like, you know, by the seed round, the founders all of a sudden own less than a third of the business or even less than half of the business. And like half of the business is owned by a bunch of either predatory investors or advisors who are probably not adding anywhere as much value. And that makes it difficult because they’re only going to get further diluted from there. That’s probably the biggest red flag. Usually, I like to see, as a rule of thumb, no more than like 20 to 25% dilution by the seed round. Like if they had a pre-seed round with some advisors or friends and family and everything else, like if that bucket is around 20 to 25%, that’s healthy. Beyond that, and obviously less is even better, but 25% to me is kind of like the thought of. After that, I started thinking about like, why is it so diluted? (Time 0:20:05)
  • Longer Option Exercise Windows Are Emerging
    • Extending post-termination option exercise windows (e.g., to 10 years) protects employees from losing value.
    • This trend responds to tax and liquidity frictions that force people to forfeit vested options. Transcript: Yuri Sagalov Think the best trend that I’m seeing is longer lived options. So one of the challenges for employees is that they’ll work at the company, their options will vest, and they’ll leave. And if they haven’t exercised their options, oftentimes they will expire after 90 days. And so you might work at a business for four years, the business goes up in value a lot. Like you started when the business was worth $20 million. All of a sudden, this business is worth a couple of billion dollars. And your equity is worth a lot, but you actually can’t afford the price to exercise it and then hold because you have to pay taxes. And there are, it’s a more complicated topic from a tax perspective because of the tax treatment of employee options versus non-employee options. But historically, you would have a 90-day window where you would have to decide what to do with them. And I do see more startups now trying to move to actually 10 years to exercise instead of nine years to exercise after leaving. And I think that’s really good because you deserve the options for the work that you’ve done. And so that’s probably the most interesting trend. And I hope the tax treatment will eventually change to actually support that even better. (Time 0:26:03)
  • Hire Only When You Feel The Pain
    • Hire slowly and only when you truly feel pain; premature hiring risks layoffs and morale damage.
    • Treat each funding round as possibly the only money you’ll get and conserve runway. Transcript: Yuri Sagalov I do spend a lot of time with my own portfolio founders discouraging them from hiring. My advice to founders usually is like hire when you really feel the pain. A lot of investors will actually give slightly contrarian advice here or different advice here where they’ll say hire ahead of the need, right? Like, you know, you’re going to scale this year. We just give you a bunch of money. Go hire. And that is, and maybe because I was a, what the YC and with my own fund, I was writing smaller checks where I was, you know, in my mind, this might be the only money that they’ll ever get. And so my mindset has always been like, treat the money as the only money you’ll ever get. Don’t assume that the next round will be easy. And don’t hire until you truly feel the pain. Like you’re just like, your calendar is packed with meetings. You don’t have enough hours in the day. That’s when you should hire people. And then be very diligent in who you hire. You know, hire very, very slowly to make sure that you avoid the mistake of having to do a layoff. Not even a layoff, but like letting go a single employee in a small startup can be very damaging to team morale. And so I’d much rather take my time with hiring as opposed to having to go through that. (Time 0:32:50)
  • Scale Only After Product–Market Fit
    • Find product–market fit before scaling aggressively; scale once demand pulls you.
    • Hiring sales before product–market fit can mask problems and create a negative cycle. Transcript: Yuri Sagalov A balance. I do think that, you know, you want to grow quickly, but before you grow quickly, I think it’s incredibly important to find product market fit. I think you should be, you should go deliberately until you feel like you have product market fit. And then the moment that you feel like you have product market fit, then you grow as quickly as you can. And product market fit looks different for different businesses, but it’s one of those things where it’s like, you know, the product is easy to sell. You’re getting pulled from the market. The customers are happy once they have the product. They’re not churning that heavily or at all, depending on the category of product that you’re selling. And when you feel like you’ve hit product market fit, that’s when you should aggressively scale your sales team, go to market team and start hiring. I think the mistake that founders often make is they don’t have product market fit. They hire a sales team. The sales team needs to go deliver on things. So they start trying to push the product into the market. If the sales team is really good, they might even be successful at that. And then everyone turns, right? And that’s just like a very bad cycle and a negative recipe. And so I think that that’s something that you want to avoid. (Time 0:34:12)
  • Check Investor Impact With Their CEOs
    • Ask portfolio founders how an investor actually helped post-investment; past action beats promises.
    • Look for tangible support like recruiting partners, enterprise introductions, or product-market insights. Transcript: Yuri Sagalov Best way for founders is to actually ask other portfolio founders, how did that investor help you after investing? For us at GC, we focus on a variety of ways to be helpful, particularly at Seed. We have a talent partner who spends all of her time helping our portfolio companies recruit or think about how to put together job descriptions because many of those Seed founders have Never even done that for employees one through five. And that’s a very special type of hiring compared to like employees 10, 20, 30, or 40. We have a company that we’re actually building on the balance sheet called Percepta. And that company goes and talks to Fortune 500 companies. It asks them, what are the biggest challenges that those companies are having? And then it’s able to relay that information back to our portfolio companies and actually work with the portfolio companies to go sell to those enterprises. And I think that’s very helpful from a go-to perspective. We also have a portfolio of over 800 companies, many of which now are themselves essentially enterprise scale or public, right? Companies like Circle, which is public, Stripe, Andrel, Anthropik, Mistral, and they’re all buyers of technology as well. And so I think that having a portfolio of companies to sell to, which already have an affinity to the investor, like when the investor makes the introduction, they like it. I think that is incredibly powerful. And so you just want to, you know, investors make a lot of promises when they are trying to invest. And what you really want to find out is like, what did they do post-investment? And so I think that the best way to do that is actually just ask the CEOs of those companies. (Time 0:36:03)
  • Start If You Must, But Pick Co-Founders Wisely
    • If you’re passionate about an idea, start the company; today is an excellent time to launch.
    • Choose co-founders carefully because broken co-founder relationships are a top early failure cause. Transcript: Yuri Sagalov Think the biggest one is just do it. I think if you’re passionate, like make sure that what you want to work on is something you’re passionate by. But if you’re passionate about it, just go. Like there’s never been a better time to start a company than it is today, both from market conditions, the speed that things are changing, the technologies that are available. I think that there’s just like so much you can do today. The second one is think carefully about who your co-founder is. Co-founder breakups are probably the number one reason that startups fail in the early days. It’s usually not that like people think it’s the company ran out of money or the product market fit. A lot of product market fit is real, but if the team is intact, you’ll find something else to work on. And so I think that like where things really blow up in my experience is co-founder relationships. And the third one, I don’t actually even know if I would probably just leave it at those two. Isabelle Johannessen Those are two very solid pieces of advice. (Time 0:39:23)