Skin in the Game

I was reading an interesting post on Gaurav’s blog about founders of startups taking significant paycuts when raising funding from VCs. i was going to post a comment but am having some trouble connecting to Gaurav’s blog.

VCs in India are applying what they’ve learned operating in the US and Europe to an economy and economic conditions which are very very different. This isn’t to say Gaurav is right and Sundar and Krish are wrong. However, there’s probably a medium that is a bit more amenable to both sides. VCs need the founders to be up to their eye balls in the business for many reasons. However, having a founder who is financially struggling, on top of all the other issues related to doing a startup increases the risks associated with the investment. It is conceivable for a founder with significant negative cash flow to throw in the towel and pack up her bags or worse, to stay on and throw themselves into a deeper and deeper grave, potentially filled with debt.

On the other hand, most entrepreneurs start a business because they are confident of their abilities and they are sure they can hit a home run ( or a century for all the cricketers out there ). Ideally, an entrepreneur will raise money from a VC when the business is moving in the right direction and there is revenue coming in. The founders might need the additional money to grow exponentially, diversify, or gain the valuable advice of an experienced team. Hence, it’s important that the founder takes a substantial pay cut in order to show the investor that they are “believers”. What “significant cut” means is relative. To a VC, a 75% cut is significant but to the entrepreneur, 25% is significant. At the end of the day, the entrepreneur must decide how much control she is willing to cede to investors and how costly the capital raised will be. A good negotiator might convince investors that it’s in ther interest to give the founders a 10% paycut from market rates.

Each founder has to evaluate their financial position and decide whether the delayed gratification is an economic reality and if they can afford to do it. If they can’t, perhaps it’s time for them to leave the bargaining table, or worse, leave the business.

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Joining an Early Stage Startup or Joining “The Man”

Joining or doing a startup is not for everyone.  It doesn’t matter whether you are in the US, China, the UK, France, or India.  It takes a certain amount of energy, self-discipline, determination, creativity and faith to be able to survive in a startup. Most of all, it takes an incredibly strong constitution to deal with the stress of being at a startup.

I have been involved with a few failed and one very successful startup.  My advice to people considering joining a startup, do it if you’re more interested in learning above everything else.  A startup is where you will learn more than any of your peers at a large organization.  You will have much more responsibility and you won’t have time for BS.  It’s all about getting things done, frrom cleaning the office, to picking up the water, to budgeting, to raising capital, to developing the business.

If you’re afraid of working 18 or more hours a day, seven days a week, then a startup isn’t for you. If you’re limited in what kind of risks you can take because of responsibilities and obligations then don’t go to a startup. If you have a need for current income and cannot easily risk any current income by taking stock options and living on a very tight budget, then don’t go to a startup. If you’re interested in a paycheck that pays you market or above market, then you’re better off going to a larger, more established company.

Startups will usually pay less than market, but they will provide you with an experience that will be quantifiable only when 1) you leave the startup and look for a job at a large company and 2) if and when your startup grows up, management adjusts your total compensation to be more in line with the market.  Of course, there are many other factors involved in negotiating higher compensation and there are many books on the topic.

Stock option plans are very difficult to structure and put together unless you’re an experienced entrepreneur and know exactly how things are done, or if you have deep pockets to pay the right lawyers.  I’m sure in places like India it’s much more difficult since the legal and business infrastructure for startups is in its infancy. Many resources are becoming available to tech entrepreneurs in countries like India but it will still be a few years before the legal and business infrastructure matures. This is a significant risk for the startup, the entrepreneur(s), and those employees who took a chance at making this startup the next big thing.

My experience has taught me that the most nimble (and many times – chaotic) startups are the ones that have very flat organizational hierarchies. Adding multiple levels of management in a startup creates confusion, bureaucracy, and slows things down. At the early stages of a company, it’s incredibly important to be quick and be able to adapt to changing market conditions. Multiple layers of management along with too much procedure slows things down. There’s a time for procedure and process to be embedded into a company but doing it too early can cripple a startup.

A startup is all about risk and taking chances. If you can’t bear the stress of not getting a paycheck next week because the company is short on cash, then you really need to think about whether a startup is right for you. A startup is always changing. You might have been hired to be a biz dev associate but three months into the job, you could get moved into operations. If changing positions and careers at the drop of a hat doesn’t allow you to build the skills that you want in one specific area then a startup may not be right for you.

Each individual must assess their risk tolerance separately before even thinking of interviewing at a startup.

Joining a pre-VC startup « sameer’s blog

Joining a pre-VC startup is not only a job or a career choice; it’s a lifestyle choice. This is truer for folks who join in early and join as part of the early management team (senior/m

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Entrepreneurship and Open Source Software Charity?

Rajiv Poodar has a great post on Wireless Utopia: Open Source and Charity about his frustration in explaining open source business models to others in Bangalore. It’s not a problem specific to Bangalore, though.

Charity is a dirty word in business circles. Free Open Source Software is considered charity. Therefore FOSS == Dirty. Free Software Business == stupid idea. FOSS Entrepreneur == BIG LOSER.

Wireless Utopia: Open Source and Charity

I think it is impossible for most people to comprehend that OSS is not charity. Open Source Software is a way of increasing the value of software faster than proprietary software and it is a way of improving software development efficiency (some will say it improves software quality but I’m not so sure about this). OSS allows people to customize, build upon previous works, improve upon previous works, and add value faster than closed systems can do. This isn’t to say that there isn’t a place for closed systems but it is meant more to highlight that a company built on open source software (and creating open source software) can be much more valuable than a company building only closed source software.

Creating a technology business is more than creating software. Most people don’t understand that. They believe that the software is the secret sauce. It’s usually just a very important ingredient of the secret sauce. As most successful entrepreneurs will tell you, the secret sauce is the execution, not the software, not the team. These are all ingredients in having flawless execution.

Though the Linux source code is free and open source software, it is not charity. It is the underpinning of a multi-billion dollar software industry (RedHat, Novell, IBM, HP, Mandriva, etc). The source code for MySQL is widely available, though no other companies have been as efficient at building services around MySQL than MySQL AB.

Preach the open source business model to those who have a chance of understanding it. Those that can’t get it, will eventually be left behind.

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Another Cog in the Wheel

Here’s a great post on Amit Ranjan’s personal blog about how large technology and outsourcing companies in India are turning the cream of the crop engineers into just more cogs in their wheels.
I worked at a very large Wall Street firm for a few years and then I’ve worked at small companies (small in terms of the number of people). The best part of working at a small company, by far, is seeing the results of your labor on a daily basis and how it directly affects the business. Good luck seeing how busting your hump on a daily basis benefits Infosys.

There are, however, significant drawbacks to working for a small company.

  1. The likelihood that your family and friends will know the name of the company that you are working for is close to zero.
  2. The pay is usually lower at small, unknown companies.
  3. The benefits are usually not as good as they are at large companies.
  4. The dangerous of a small company going out of business is generally higher than a large company going out of business.

The benefits of working for a small company are:

  1. You’re a name, not an employee number.
  2. The excitement of helping to build a business is enormous.
  3. Seeing how your work affects the growth of that business is an even bigger high.
  4. Working at a small firm helps you develop a sense of camaraderie that goes deeper than the relationships you can develop at a large firm.
  5. You could be learning and contributing much more in a small company than a larger one if you prove that you’re a doer not a talker.
  6. There’s more work and less politics at a smaller firm.

For more, in depth, details, jump over to Amit’s blog below.

Ques- What warning sign is written on the boundary walls of the TCS office in Madras?

Ans – ??Beware Trespassers- If you are not careful, you will be recruited??

amit ranjan

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