Genesisism

Dear readers

All posts are my independent thoughts. Please don't take anything for granted. This is not an advisory column. I am just sharing my experiences and learning.

It has almost been more 1.6 months. Today also, I fee that I am just starting up.
However, I have come across various moments during my journey when I was thinking, "Are we growing at the pace we want to", " I am not satisfied with the pace. I want speed". After encountering such moments, I became very impatient and lost focus. So, even if, you are growing slow, keep up your nerves. And focus on building your business. It is a long term haul and there is no hurry!!!! You have to earn your success over time and so, celebrate your small goalposts. As they say, "success is not a destination. It is a journey".

So, the statement to remember is "How do you eat an elephant"? The answer is simple. Bits by Bits. And you will also wonder that things don't happen to be as fast as anticipated. Things take their time. So, let events happen and patiently wait. That is why they invented the term, "perseverance".

Building is a discovery process and a process of gradual "value appreciation".
When you start, you are valued at zero because ideas are dozen a dime. Then, down the line, say 6 months, after you validated your business idea, your company is valued at some 10-12 Lacs. Then, another 6 months, your company is valued at 50 Lacs (market will tell your real valuation. And another 6 months, your company value crosses a crore. So, it is a continuous process of value appreciation.

If one is able to see this trend, one should be satisfied that worth is increasing with time & efforts. And as put up by CEO, HCL, one fine day you wake up and you are CEO of a billion dollar company. So, enjoy your journey, respect your friends, family and employees who are there with you during the journey and create something worthwhile.

Thanks
GP

This post is meant for young and wanna be entrepreneurs. it is very important that you meet the right kind of people in Indian Entrepreneurial Ecosystem. "Ecosystem" is now a buzzword these days in conferences/seminars/Start-up Events/etc.

I hate to tell you this, but there are a lot of "Bozzos" there out that are taking advantage of your lack of know-how about Entrepreneurship. Some people have built businesses around "Preaching Entrepreneurship" or . And guess what I wonder how many of the preachers are themselves entrepreneurs? Have they built some worthy businesses? So, if somebody wants to give you some Gyan, ask him/her bluntly, "Have you done it before"? In fact, I would do it. Beware of Such People!

If you wanna learn about entrepreneurship, then do entrepreneurship- Go and Start a small business or organization. You always don't need to start from Level-5. Doing is the only way to learn. Do, make mistakes,learn fast, act and move forward.


If you want to learn from other experiences, please learn from "Real On Ground Entrepreneurs". These people don't come on the surface. In nutshell, meet real people, not fancy dressed beings claiming themselves to be entrepreneurship evangelists. Meet the Right People.

Lesson of the day for all those entrepreneurs, who have misconceptions about cash flow.
A Banker's Mantra:

Revenue/sales/turnover is vanity
Profit is sanity
And
Cash is Reality

This article is authored by Sameer Guglani, Partner, Morpheus Venture Partners and can be found on his blog: http://www.guglanisam.me/. This post is a goldmine of knowledge on "Salary and Equity".

To go the article, click here

For readers convenience, I am publishing it here. All credit to Sameer!!!!!

In the beginning of a startup there are just the founders. They do all the work - making / selling / admin / HR / cleaning / finance - everything. With their enormous passion and never ending energy they start moving the wheel. They make the product / launch it / get some traction / start getting some orders and so on. Once the work load increases to a point there is need for more hands & heads. Since they have launched / been covered / have made progress - less people look down upon them and some even show interest in working with them. Through their efforts they manage to find some passionate guys ready to come on board. (Read here about What to look for in startup interviews?). So far so good. Now comes the tricky part. What should be the salary and equity for the new team members?



Salary

You need to find folks who are ready to work for much lower than market salary. Folks who value the other things they will get much more than money, things like - learn lot of cool stuff / work on hard problems / have loads of fun / work with uber smart folks / etc
To begin with it’s great if they agree to work for "survival salary" for a year or until the company either raises money or starts earning enough to pay him / her more than survival salary
Look for people who lead a fairly simple / bootstrapped lifestyle and don't have too many commitments. Specially stay away from folks with housing loans
I think INR 15-25K a month is a good range to think about
When you make the salary commitments you should ensure that you have enough cash to take care of overall expenses for next 10-12 months or more
Budget for other expenses like - Computer / Phone / Work area / misc expenses for each employee
If you can hire people who bring their own laptop - that is a bonus


Equity

Equity should be decided depending on
Stage of the company
Potential impact on the employee on the future of the company
How much cut is the guy taking on the cash side (this should be compensated)
A good thumb rule is to think 5 years in future
Assume that your company is acquired for a reasonable amount
Calculate the return which that guy will get via sale of equity
Now estimate the market salary of the guy 5 years from today
If in the 5th year he can make 5-6 times his annual salary via the equity sale - its a decent deal / anything higher is off course better for him
Read PG's excellent article on how much equity is the right equity
Overall you should designate a certain number of unallocated shares as the ESOP pool. These shares are not yet issued but have been allocated as employee stock - to be issued overtime
Typically startups keep 20% as employee stock option pool
Vesting Schedule
Equity offered to startup employees is not just for joining but for long term contribution to the company
Hence you pro-rate the equity over this period of time called "Vesting Period"
Normally this period is 4 years. But in special cases it can be brought down to 3 years
You also need to think about the minimum period the person should work for the company for making a decent contribution
This is called "Cliff" and is normally 1 year. You can be flexible on the duration but its strongly recommended that you have the cliff in the arrangement
If the employee leaves (or is asked to leave) before completion of the cliff period he / she will not get any equity in the company
So lets say you plan to hire a guy X for following terms
Equity - 4%
Vesting Period - 4 years
Cliff - 1 year
This means that you will give X 4% equity for working in the company for 4 years. But you expect him to stay for minimum 1 year
Let’s say 4% translates to 4800 shares
Total vesting duration in months is 48 months
Every month that X stays with the company he becomes owner of 1/ 48th of 4800 shares - which is 100 shares
Now the cliff kicks in, X needs to complete the cliff period of 12 months to receive any shares
So if he stays for 13 months, number of shares = (4800/48) *13 = 1300
But if he stays for 11 months, he gets ZERO shares - since he did not complete the cliff period
Additional equity
In some case companies give additional equity to employees later on as a performance bonus or as part of promotion
Each equity grant should have separate vesting schedule
Share price
In most cases startup employees are only expected to pay the face value of the shares and even that is reimbursed in some form
But at later stages companies calculate the share price with the help of their CA and offer the shares the employee for a heavy discount or subsidy
Paperwork / Agreements
Setting up a formal ESOP plan with help of a good lawyer would be too expensive for a bootstrapped startup - hence it’s a good idea to do that after you raise series A or start making decent amount of revenues
For a bootstrapped startup, you should mention the amount of equity and details of vesting schedule in the employment agreement
At the time of issuing shares you enter into share subscription agreement with the employee - where he / she only needs to pay the face value of the shares
Deciding later
In many cases people like each other and start working together without finalizing the equity %
Leaving it totally open could be a bad idea - since expectations could be totally mismatched and that could become a big headache
If you do want to defer the decision on the number, make sure that you discuss
Exact time after which equity will be decided
Range in which the equity will fall
Your expectations from the employee
Best way is to start with a firm number slightly on the lower side and if things turn out good you can always grant more equity
Ankur raised a point while reviewing the draft of this post that some times the employee will ask you back the question - Why are you guys keeping 95% and giving me only 5%? Obviously guy is not able appreciate to or realize the difference in the contribution of a Founder and an early employee. Here are some of those reasons, which quite often remain invisible to the employees:

Founders take the maximum risk while starting a company
They quit their job not to join an existing setup but they quit with nothing in hand
The startups are literally created in heads of the founders - its their DNA that the startup carries - they have the maximum impact on its outcome and the equity should reflect that
The initial days are the hardest for every startup and there is very little to show - so at that point almost no one wants to join them - during that period its the founders alone who toil and create - employees mostly come later
An employee has the flexibility to leave the job whenever they want and move on to a new job. Founders don't have that option - they need to stay with the company thru thick and thin. (In theory they can also shutdown or leave - but in practice its very difficult)
Founders also make the initial capital investment in the company and add more capital in most cases / they max out the credit cards / bring personal laptops / run office from there home / bring stuff from home to run the office and many such contributions
Founders work for zero salary for quite a long time
Founders normally setup ESOP of 20% out of which other employees are also given equity grants - so they are really are not keeping 95%
Most employees want to do specialized jobs around their core area and stick to it - so that they continue to build their job career. Founders do not have any such choice - irrespective of their backgrounds - founders need to work in every department and do what ever it takes to keep things moving and it also involves junior most jobs like - bank work / cleaning / delivering orders / making tea / pretty much every thing
A founder's career and reputation is attached to the outcome of the venture / he is the one who worries the most / looses the most sleep - the buck stops at him
As a founder -If you find a guy who can match you to a certain extent in above listed aspects - you should surely give him more equity or even bring him on board as a founder. One of portolio founders did this very recently - brought a guy as first employee with 9% equity / found that the guy can bring a lot more value and invited him to join as a co-founder with same amount equity as the first founder
As a founder - its also important that you draw the line at the right place. If you find someone really good for a particular role, but they bring no additional value and this person expects a much higher equity than what seems fair - Dont worry about it - just let them go. If they can not respect your contribution - they are anyway a wrong hire
As a potential employee - if you don't see founders with the kind of commitment and qualities mentioned above - don't join the startup

By: Vikram Sheel Kumar/Forbes India
Thanks to the biochemistry of the brain, it is not always dominant
Source: Forbes

Economists are pretty convinced they have you figured. You are rational and self-serving. You are Michael Douglas as Gordon Gekko in Wall Street who asserts that greed is good. Each of your desires has a utility function that you optimise in making a decision that leads to more wealth. Stop reading now and you will win lots of money. You stopped at lots.

These assumptions have formed the basis of free market economies professed by Jon Stuart Mill and Milton Friedman who believed markets are driven by rational and predictable actors. But is that a good picture of you? Are all of your economic decisions simply governed by the greed to earn more? Let’s play the ultimatum game to find out.

I have $10 that I can share with you in any way I choose. If you accept my offer then we both keep my proposed shares. If you reject my offer, neither of us sees any of the money. What would you do if I offer to give you $9 and keep only $1? Naturally you will accept the offer. Smart; we are now both better off.

What would you do if I offer you only $1 and propose to keep the balance $9? Studies suggest that you would reject my offer to penalise me for my stinginess. What happened to your rational and self-serving self? A greedy robot would leave no dollar on the table. The conclusion is that while greed may influence behaviour, it is constantly kept in check by
other forces.

In the ultimatum game, it is injustice that faces off with greed. A Princeton neuroscientist Jonathan Cohen had subjects play the ultimatum game while the respondent — you in our game — was being scanned using functional MRI (fMRI) technology that shows dynamic brain activity. He found that when given stingy offers, the anterior insula that is associated with negative emotions was active. Rationally, greed would ensure no money is left on the table. This study demonstrates, however, that greed is only part of the puzzle. It can be trumped by other emotions such as injustice that was observed in Cohen’s study. This gives us hope.

A quick buck or a thrill of the pursuit typifies greed. In the case of the sub-prime crisis, potential home owners were offered adjustable-rate-mortgages. The mortgages had attractive introductory rates, but could increase over time. Rationally, you would reject these mortgages given their long-term risk and uncertainty.

However, greed drives you to value immediate benefits to an extent that you ignore potential future costs. A Harvard economist, David Laibson, has coined the term “hyperbolic discounting” to explain this trait. Laibson and colleagues performed fMRI brain imaging of subjects who could choose an average offer with immediate benefits or a better offer with delayed returns. Those who chose the offer with immediate benefits showed increased activity of their emotional areas of the brain.

Greed is fuelled by dopamine, a busy hormone. Apart from keeping greed in business, dopamine’s influence extends from voluntary movement to your involuntary sex life. The anticipation of a reward shoots off dopamine that makes you feel good. In fact, it makes you feel so good that often if you actually win the award, you feel a let down.

The big lessons from neuroscience are that while there is a biochemistry of greed, decisions are not made simply on account of greed. The timing of the reward, notions of injustice, and apathy that sets in when the race is over work to influence greedy behaviours. Understanding these further may bring greater balance to Wall Street and levers to control
its Gekkos.

The author is a columnist for Forbes India.