Stock Distribution for Start-Ups

You’ve got a commercially viable idea for your start-up. You’ve successfully secured funding for your idea and in the process (we hope) managed to avoid “rock fetches” and other bad VC behavior.  Now, how do you optimize stock distribution to make your company successful?


Mike Stonebraker says:

Mike Stonebraker

I should start with the template for my experience.  

I have started companies with an initial A round investment by a VC.  I have also started companies with an initial seed round investment from a VC.  In this case, the seed has always been structured as a “down payment” on an A round: that is, an A round with the same investors has been pre-negotiated, with a clause added that allows them to walk away if they don’t like the result of the seed effort.  I have never had angel funding, so I can’t comment in that area.  I also have never self-funded a start-up.  In my opinion, that creates far  too much domestic stress with my wife!

Anyway, my experience has been negotiating A rounds.  My last seven start-ups have conformed to the following.  The VCs have gotten between 45% and 50% of the company in exchange for $5M to $7M of capital.  The range is determined by how attractive the VCs think your idea is and how strong your initial team is.

The rest of the ownership is split into two buckets, one for the founders and then a pool for yet-to-be-hired employees.  In general, the pool is intended for the rest of the company hires during the A round period.  However, the VCs will typically insist on covering a complete complement of executives, all of whom will not be hired before a B round (for example, a CFO).  Hence, the pool is almost certainly larger than you will give out in the A round, and is designed to knock down the size of the founders' pool.  So, in round numbers, figure on 20% for the pool.

That gives you 30+% for the founding team.  I have seen two kinds of initial teams:

Initial Team Format #1

One executive, with the company idea

A collection of supporting programmers

Initial Team Format #2

One or more technical people with the initial idea

Additional technical people, recruited into the team

An executive, recruited into the team

With the first kind of team, the initial executive can expect 20+% of the company and allocates the remainder to the supporting programmers.  If you are such a supporting programmer, you should expect at least 2%: therefore,  don’t let the initial executive be too greedy.

With the second kind of team, the initial executive can expect 10% or so.  The remaining 20+% can be allocated among the technical founders.  Again, supporting programmers should expect at least 2%.

Always remember that the VCs will never let the founders control the company.  They will make sure that they can “outvote” the collection of founders.  Hence, a typical scenario is the VCs with 45-50% and the founders with 30-35%. 

Also, the VCs may well veto the stock distribution proposed for the founders.  This will occur if the VCs think the value of the various individuals is not reflected in their percentage ownership.  They will also typically insist on approving everyone’s salary.  Again, they will veto salaries that are out of whack.  I have also seen them make everybody “take a haircut,” if proposed salaries are too generous.

I would like to close with one plea.  The VCs have a lot of information on the above numbers: they see far more deals than you do.  Hence, the current negotiation (yours) is conducted with them having all the information (many deals) and you having none.  They will very often respond to a proposal with “That’s not market.” 

In a sense, it’s similar to the way we used to negotiate with a car dealership when buying a car; blindly, because the dealer knew the numbers and you didn’t.  With the advent of Web sites like Edmunds, there is now much better new-car cost information, and the playing field has been leveled. 

I would love it if somebody would put up a Web site so entrepreneurs could share stock information among themselves – an Edmunds of deal flow.  That is the only way that the information playing field will be leveled. 

Until then, I hope that this information about my personal experience is helpful.


Andy Palmer says:

In my experience, the key to stock distribution is to take the long view.  Stock distribution is a strategy not an event.  And, if you do it right, it can be a highly effective strategy for attracting, keeping and motivating good people.  I’ve published some of my other thoughts on The Fundable blog in the past. You can read them here.

Andy Palmer

To build a great company, you need an inspired, non-incremental idea and the people who can turn that idea into a solid starting point for building a great company.  Then, you need a bunch of people who can scale the idea into a repeatable business.  Through this you’ll need great leaders who can find their way through seemingly insurmountable ambiguity and a roller coaster of big wins and brutal setbacks ―without giving up or believing their own BS. 

In taking the long-view approach, remember two important things:

Starting Companies is a Team Sport: Given all the different kinds of essential people, stock compensation can be a difficult balancing act.  All of the people who are necessary to create a great company from scratch are going to be prone to overvalue their own contributions.  Many will truly believe that, without them, the company would not have been successful ― and many of them will be right.  However, starting companies is a team sport.  Over-allocating stock to any one individual or group of individuals can prevent you from having enough stock to compensate the other people required to start and scale a great company through its life cycle ― from birth through adolescence to adulthood and maturity.

Don’t Get Distracted by the Screamers:  The biggest stock-distribution pitfall that a company can fall into early is basing allocation on who screams the loudest or is the most aggressive. Tech start-ups tend to be littered with business people who overvalue their contributions and are good at screaming louder than the average engineer.  As a result, in general -  engineers end up being under-compensated just because business people are more aggressive.  Now, the converse can and does happen, where engineers/technologists view the business work that needs to be done as “intellectually trivial” and thus undervalue the benefit of strong business execution. 

I think that the best companies are those that (1) appreciate the mix of talent and the quantity of people required to build a great company and (2) are thoughtful and conservative about stock distribution throughout the full company life cycle.

There are many ways to be successful with stock distribution.  I’ve been part of companies where one person owned more than 95% of the stock and other companies where no one person owned more than 5% of the stock.   The most important thing is to pick a model that is right for you as a Founder/Co-Founder and then work towards that model, managing the development and motivation of your team accordingly. 

If you’re generous in sharing stock with the people who work at the company, they should be expected to align their behaviors with the best interests of the company in the long term to maximize the value of their stock.   If you hold the stock close and don’t share with many people, don’t expect folks to make unnatural sacrifices in the interest of the value of the long-term value of your stock. You’re probably going to have to pay them a lot more and be more deliberate in how you motivate them.

Avoiding Rock Fetches and Other Bad VC Behavior

Raising money for a start-up is never easy. But it’s often made unnecessarily hard by the behavior of prospective investors.  A common piece of bad behavior is giving founders endless and often pointless “homework assignments”– essentially making you do their research while they buy themselves time. Great, huh?  We call these assignments “rock fetches,” and we’ve seen more than a few of them. 

Mike Stonebraker says:

In my opinion, VCs are generally lazy.  Hence, as I noted in my last post, they will try to get you to do their homework for them.  Here are some strategies for avoiding such rock fetches.

Deal with a VC who isn’t lazy.  By and large, the reputation of VCs is pretty well known in local areas.  Hence, ask your friends about any prospective VC you might be interested in.  Avoid VCs who have a reputation for rock fetches, as they will endlessly jerk you around requesting more information.  Also, VC behavior at this stage of the process will be indicative of behavior later.  In other words, the willingness of a VC to work hard to make your company successful after the consummation of a deal can usually be predicted by behavior before deal consummation. 

The best VC is one who will start adding value to your company during this pre-deal “beauty contest.”  Putting you in front of potential customers or potential executives is very helpful, as it “moves the ball downfield.” 

If you find yourself being jerked around by rock fetches, my advice is to just say no: terminate the process, and go engage with a less lazy potential investor.

Some other VC characteristics to avoid:

Bottom fishermen. Avoid VC firms and individual VCs who have a reputation for low-balling you on valuation.  Life is too short to walk around feeling like a VC has screwed you. Again, asking around will usually identify the bottom fishermen. 

No operating experience.  Believe it or not, many VCs have never actually been an executive in an operating company.  You really want somebody who has been in your shoes before. 

Bad Rolodex.  Ask any VC you might be considering for leads to important customers or potential executives.  Any VC worth his salt will be able to supply you with a bunch.  If he comes up empty-handed, this indicates he does not have a good Rolodex.  A very important feature of VCs is help in this area.  Make sure that any VC you are considering has many many many contacts.

Excessive spread.  The ideal VC partner is an investor in 10 or fewer other companies.  Avoid VCs who are spread much thinner.  They simply won’t have the bandwidth to pay attention to you.

Conflict of interest. Make sure the VC firm you are considering does not have a previous investment in the same space as you.  There is nothing worse than getting advice for a VC that he is also sharing with a competitor.  In general, VCs will try to convince you that there is not a conflict, when, in fact, there is one.  In this case, run, don’t walk, away.

Slow pokes.  Some VC firms move at the speed of paint drying.  If it takes six months to get a deal done, then you will probably starve in the meantime.

"Humility is a characteristic that I admire in VCs, and one that is rarely found." - Mike Stonebraker

Arrogance.  Many VCs, especially older ones who have made a lot of money, believe they have all the answers.  You want a VC who is a partner, not one who is going to be your boss.  Humility is a characteristic that I admire in VCs, and one that is rarely found.  This was especially true around 2000, right before the dotcom crash, when many VCs thought they were God’s gift to investing.  One VC at the time was arrogant enough to say that he was only interested in obvious home runs – his time was too valuable to waste on working hard to build value.

Gunslingers.  Avoid VCs with a gunslinger reputation.  In other words, you want carefully reasoned advice and counsel from VCs.  Any VC who comes to a Board of Directors meeting and starts shooting from the hip is usually not a helpful VC.  Again, ask your friends about any potential VC.  Moreover, ask a VC for references of CEOs they are working with.  Call the references and ask the hard questions.

About this time, you are probably figuring out that the set of “good” VCs is empty. It will be a challenge to find one who is fair, fast, humble, with experience and a good Rolodex; who is not over-committed; and who wants to work with you as a partner. The general adage of “you have to kiss a lot of toads to find a prince" certainly applies here.

So, figure on spending a lot of time sorting this out.

Andy Palmer says:

The process of raising money is fundamentally an information exchange and trust exercise. The earlier stage the company, the more trust is required and the less information matters. Here’s why.

Before investing, an investor conducts due diligence.  His goal is to minimize his risk by knowing as much as conceivably possible about a company at a given stage of its founding and development. 

One way that investors attempt to mitigate risk is by asking a bunch of questions.  Some early-stage investors are self-aware enough to know that the companies that will provide the best returns are those that have the biggest risks – and that often this risk manifests itself as fundamental ambiguity in the companies’ earliest days.  

For really early-stage investors, functional behavior is marked by a willingness and ability to stop asking questions and make a yes/no decision within a reasonable period of time.  Dysfunctional behavior is marked by continuing to ask questions of an early-stage opportunity, knowing that the “right” answers just may not be available. My partner Mike appropriately refers to these as “rock fetches.”

The worst investors will ask you to do these rock fetches regardless of their intent to actually invest.  From their selfish perspective, they’re just learning from the process.  But this learning is costing you time and may or may not result in any equivalent  learning for the company.   And imagine how you’ll feel if you do a bunch of rock fetches and then find that the requesting investor funded another company that is doing something similar to your idea. (This  happens more frequently than anyone will  ever admit, but you’ll never hear much about it because of the embarrassment factor.)

"Ask investors these four simple questions to help ensure appropriate expectations." - Andy Palmer

To minimize rock fetches, I suggest that when you first meet with a potential investor, you ask these four simple questions to help ensure appropriate expectations:

“Do you have the money to invest in our company today without approval of your limited partners?”   This question will help you figure out where the investors are in their fundraising cycles – and what is required to get cash in the bank.  Some venture funds have to get approval from their limited partners before they can make an investment.

“Can you share the investment thesis of the fund that you would be using to invest in our company?”  This will help you judge directly if the limited partners of the fund are expecting to invest in companies like yours.

“What is a reasonable period of time required for you to make a decision about investing in our company?” This will help you judge whether the investor is truly serious or not.  The right answer is not “it depends.” The answer should be definitive and measured in days or a small number of weeks. If it’s longer, just walk away.

“What is your standard due diligence checklist for a company at our stage?” I’ve seen  some investors (either consciously or subconsciously) use a due diligence checklist that is inappropriate for the stage company. Some will even use this as a strategy to help retain an option on investing in your company – giving you more and more rock fetches to buy themselves more research time or just retain their option without making a decision.

As an entrepreneur, you have a portfolio of ONE: Unlike investors, you are not hedging your risks: you are relentlessly pursuing your mission. You can’t afford to spend your time on the rock fetches required to educate an intelligent but overconfident young junior partner or a senior partner so distracted with later-stage investments that he will never get enough answers to justify spending time on your new, highly ambiguous deal.  It’s good discipline for investors to get to a quick yes/no and move on without spinning up never-ending rock fetches.

By asking the right questions and pushing for answers, you can head off rock fetches and minimize your risk:  wasted time.  

Meeting Funding Requirements for Your Start-Up

Serial Entrepreneurs Mike Stonebraker and Andy Palmer Sound Off 

Ok, you have the #1 requirement for starting a company:  a good idea that’s commercializable. Now, what’s the best way to get the money you need to build your start-up? 

Andy Palmer says:

Andy Palmer

First, figure out how much capital you really need – before you go out asking for money. Then, go and get it – carefully.  Just because someone wants to give you money doesn’t mean you should take it.

Determining capital requirements: Having done start-ups in biotech and information technology, I’ve seen first-hand that different types of companies have very different capital requirements. (More on this in a minute.)

Regardless of your industry, be thorough and dispassionate about determining your capital requirements. Push yourself to figure out how to be capital-efficient. Ask yourself: “How can we make the most progress on the least amount of money in the shortest period of time?” How well you optimize the capital you raise can make a huge difference in how quickly the company progresses and how you protect the value of common shareholders’ equity.

In biotech in particular, the landscape is littered with companies that raised (and spent) so much money that the value of their common stock at company sale is lower than when the company started.  I know – bummer – right?  Especially if you are successful in achieving your mission and building a successful companyL.

Some companies are fundamentally capital-intensive in their early days. In biotech, you often need a great deal of physical infrastructure, which can consume capital.  In information technology, some companies can be completely bootstrapped all the way through to profitability. This is increasingly the case because technology companies today can use cloud-based resources to radically reduce start-up costs. 

Regardless of industry, capital efficiency is ALWAYS a good idea. Often I watch entrepreneurs spend a huge amount of effort and time trying to raise money. Later, even those who are successful often realize that they might have created more value for the business and avoided the need for fundraising altogether if they had invested more time, energy and effort in acquiring customers or building product. 

So, it’s a good general practice to ask yourself “How little money could I raise and still achieve my mission and exceed my expectations for the company?”   

Getting the money:  If and when you do go out to raise capital, develop a strategy and set of tactics that minimize the time and the number of people you need to meet before you get the money into the bank.  Remember that venture investors get paid to meet with you: don’t automatically interpret their interest as an indication that they think you’re doing great (either pre-funding or post-funding). To venture investors, all that really matters is that you make them money and improve their “batting average” (returns relative to all their other deals.)   

Assuming that you know what kind of capital you need in order to be successful, my recommended approach is as follows. It’s pretty simple.

(1) Identify an investor (or two) that you trust.  I’m not talking about a firm, but a person. Without someone who you trust, the start-up process (a roller coaster on a good day) will be riddled with second-guessing, a lot of time wasted on educating investors, and more angst than fun. (For more on the importance of trust in funding relationships, read Jo Tango’s posts on trust. Jo really gets it.)

(2) Line up people who can reference your character, abilities, commitment and values.  This step is often the hardest for first-time or young entrepreneurs, but it’s essential. Make sure that your prospective investors can talk to people who know you well and can describe – empirically, openly and honestly – your strengths and weaknesses. 

(3) Prepare a simple and thoughtful description of your idea and how you will make money.  This is the area where a lot of start-up founders get into trouble.  They spend a lot of time writing detailed business plans with lots of text, tables and charts.  Often detailed business plans created early in a company’s life-cycle are nothing more than a confidence-building exercise: you were trying to convince outsiders that you know for certain things that are fundamentally uncertain. Investors strongly prefer a short, powerful and direct summary of your plan.

(4) Write – and commit to memory – a pragmatic description of how you will execute on your mission.  How will you hire and retain the people you need at the company? What are your key challenges – technically, organizationally, operationally – and how will you meet them? I’m not suggesting a long document. But you must know these things well enough so that, if asked, you could stand up at a whiteboard and communicate the important points and drivers.

Steps #1 and #2 may feel “soft and fuzzy,” but in my experience, they’re required.  Who you take money from and your mutual trust with those individuals and their firms are essential for both short-term and long-term success in achieving your mission.

When meeting with first-time entrepreneurs, I always work hard to make the sessions informal.  I prefer to avoid the filter of PowerPoint slides and try to understand people’s primary motivations and the clarity of their core ideas and principles.  (That’s not to say you shouldn’t have a PowerPoint presentation or equivalent prepared – just don’t hide behind it.)

If you have a solid idea, know how much money you need to raise, have good primary motivations and have clarity of your core ideas and principles, you should be able to raise the money required.

Mike Stonebraker says:

So you have a good idea.  The next question everybody asks me is “What does it take to get it funded?”  The requirements differ for angel-funded start-ups and venture-capital-backed start ups.  Since I have never had angel funding but have arranged VC backing for eight start-ups, here is my simple (but depressing) answer to the question of VC backing.

Mike Stonebraker

You need “lighthouse customers.”  I discussed this in my previous blog post as a requirement.  To recap, these are real-world potential customers who will say “I like the idea, and if it works as promised, I will buy it.”  Every VC will ask to talk to a few of these sorts of people to validate that a market exists for your product.

You need a prototype.  In effect, you need some sort of demo that you can show the VCs.  The secret is that this demo can be hard-coded with limited functionality: for example, it only runs the queries in the demo script.  Hence it can be very “quick and dirty.”  However, I have not seen a VC who will open his checkbook without being able to see a demo.  In addition, I have never seen a lighthouse customer who will bless an idea without a similar prototype.  Hence, if you don’t have a prototype, figure out how to get one. 

You need a pitch deck.  This should be a PowerPoint presentation that surrounds your demo. The presentation (plus the demo) should be no more than 20 minutes long, since VCs typically have limited attention spans.  It should concisely state the problem you are solving, how you are going to solve it, and how you will market your resulting product.  You should also have a slide indicating how much money you are looking for, what you will spend it on, and over what timeframe.  There is no need to write a business plan; your slide deck should summarize what such a plan would have in it if it existed.  A VC will almost never let you go through your deck in order, so you will be forced to skip around. Make sure your deck is structured to make this possible, and that you can change course quickly.

You need a core technical team.  This is two or three programmers who can hit the ground running.  Presumably, they have been involved in thinking up the idea, and/or coding the prototype.  Hence, they should already exist.

You need one business executive.  This is usually the hard part.  VCs have the adage “If you haven’t done it before, you can’t do it.” In other words, they want to minimize their risk by betting on somebody with a track record.  If you are a techie with a good idea but little or no hands-on experience running a business, then you will need to recruit this person.  If you are an MBA-type, then you will have to recruit a “gray beard” who has done it before.  If you have done it before, you are golden; you pass this particular hurdle. 

So how do you find this person?  I have two answers.  First, network like mad in your local area.  In the Boston/Cambridge area, there are any number of business executives looking for the “next great thing.”   Tell everyone you know what you are doing, and ask for referrals.  Second, try to get an audience with a friendly VC.  Say you are looking for talent.  The VCs have big personal databases of business executives and are used to matchmaking.

Get an audience.  Have the business executive start calling VC firms.  Invariably, he will have enough clout to get them to ask for your pitch deck.  Based on the deck, you may get an audience: that is, an hour of some VC’s time.  An audience does not mean much of anything these days; see the next bullet point.

Be ready for “rock fetches.”  The result of an audience is one of two things.  Either the VC will go silent: i.e., he is not interested.  This will be the typical VC reaction.  However, sometimes the VC will be interested.  In this case, he will try to get you to do the “homework,” that he would ordinarily be expected to do.  The usual way this happens is that the VC will ask you to present the same pitch to a few of his “friends.” 

For example, I am routinely asked by VCs to evaluate pitches for them.  The VC gets a few trusted eyeballs to look over your idea and will base next steps on what they say.   These friends are usually people the VC has funded before or possible executives that might be interested in joining your team.  Usually rock fetches occur sequentially: please pitch to my associate X, now pitch to my associate Y, and so on.   Be prepared for a lot of these. 

The depressing fact of life is that it may take months to get past the rock-fetch stage with a VC.  As you have probably surmised, you will be in this stage with several VCs simultaneously. Be prepared to log a lot of hours. 

The good news is that this process will help you refine your pitch, find and fix holes in your story, and perhaps get a business executive in the process.  The bad news is that it takes months, and is very distracting from your real mission: to move your company down the field.

To Start a Company, Start with a Good Idea

What Makes a Commercially Viable Idea? It Depends.

Mike Stonebraker says: 

I hang out in a university where new ideas are everywhere.  In fact, the product of the CSAIL lab at M.I.T. is arguably new ideas.  I am asked routinely “What constitutes an idea that is commercializable?”  Put differently: “How do I tell if my idea is commercializable?”  I have three different answers to this question.

Mike Stonebraker

Here is some context for why I have three different answers to such a seemingly straightforward question.

During the Internet bubble of the late 1990s, almost any idea could get funding.  For example, one company proposed to sell pet food over the Internet.  On the face of it, this is a bad idea.  Pet food is much like cement – it does not travel well.  Shipping cement in huge quantities to local depots (your neighborhood building supplies store) where you pick it up is clearly the right distribution model.  Sending cement via FedEx is obviously silly.  Because pet food is very much like cement, Internet sales in small volumes is not going to work out well. 

However, practical realities like this did not dissuade venture capital investors from backing multiple companies of this sort. 

Hence, my first answer is: “If the times are right, any hare-brained idea can get funded.”   There’s a famous chart presented by Gartner Research that depicts the lifecycle of new technologies, from inception through a peak in the hype cycle (where totally unrealistic expectations are set) through the trough of disillusionment (when the technology fails to live up to its hype) and finally to some stable market.  Using this model, I would formalize the following adage:

Adage #1: In a technology area at its peak of the Gartner hype cycle, almost anything is fundable.

Or: “Almost any idea is fundable if the time is right.”

The second answer to this question is “I have no idea.” There has been any number of companies that presented me with their business propositions and I reacted with “I don’t get it.”   Embarrassingly enough, several went on to be successful.  Especially in the area of the consumer Internet, hare-brained ideas can apparently be very successful.  These include goofy games (e.g., Angry Birds), avatar adventures (e.g., Second Life), and even broadcast text messaging (Twitter).  Therefore, I am beginning to think I have little idea what will be successful, at least in this market.  This leads to Adage #2.

Adage #2:  The goofiest things may be successful.  Don’t listen to naysayers with gray hair.

The third answer to this question is: In the area of enterprise technology, where I have a fair amount of experience, I can actually answer the question with confidence.  If you have an idea that you want to commercialize, go build a quick and dirty prototype.  Then go find three or four enterprise customers who will stand up and say “If this thing works as advertised, I will buy it.”  Ultimately, venture capital investors will believe a market exists if you prove it in the above fashion.  Hence, I actually believe Adage #3:

Adage #3:  Commercializable ideas are those for which you can demonstrate that a market exists using a prototype and your shoe leather to find real customers.

An example of this adage was the stream processing engine, StreamBase.  We built a prototype (Aurora) and then made the rounds of Wall Street firms (our target customers) to get positive endorsements.  We expended a fair amount of shoe leather to ultimately get our A round investment.

Boiling all this down, I think it’s pretty simple today: To find out if your idea is commercially viable, start by building a prototype and getting buy-in from your target customers.

Andy Palmer

Andy Palmer says:

My short answer is: technical innovation that delivers radical new value to users.  

Start-ups are new companies, not just new technologies. So, your idea must be significant enough to inspire the mission of a new company that will pursue that mission for many decades. In other words: your great idea is just the starting point, so it needs to have implications that are broader than just being a better mousetrap.     

Yes, there are certainly successful, profitable companies without technically innovative ideas that have created value for their customers by making them more efficient. In the software industry, there are many examples of companies that create value through rationalization and efficiency: Computer Associates, Progress Software, and Trilogy are just a few.

In fact, I believe that there’s a valid argument that says the software industry should go through a significant change and that efficiency of engineering matters a lot more than pure technical innovation. (Most large software companies spend far more on engineering than is actually required to maintain their products for their customers.) 

There are also many ideas that are innovative – just not innovative enough to create the kind of non-incremental value for customers that makes a great start-up.  Most ideas in software these days fall into this class: perhaps interesting, perhaps innovative, but essentially incremental improvements on existing products and services.

I don’t believe that either of these “idea categories” are the stuff of great start-ups today, however.

Mike and I have tended to found companies that create value through technical innovation rather than creating efficiency. Why?  Because we’re usually inspired (or annoyed and frustrated) by big unsolved problems – the solutions for which will make a big contribution to the world. And get other entrepreneurs thinking about how to displace our solutions, continuing the cycle of radical innovation.

So, if you:

·         want to start a company that is based on technical innovation AND

·         want to start a company that has a huge potential contribution to make to the world AND

·         you have an idea that is radically differentiated

You next need to ascertain whether your idea is significant enough to be the starting point for a great new company.

Ask yourself these three questions:

(1)  Who will buy and use my product? Does he need what I’m selling – and how do I know? (Hint: The “who” is NOT a company. It’s a human being with a job, a paycheck and a responsibility to his employer. His goal is not to help you with your new idea. Your job is to help that person with your product.)

(2)  Is there an easier way for that person to achieve the benefit that my product provides? (The right answer is “no.”  If there is an easier way, go home.)

(3)  Does my product instinctively make that person question the way he or she is currently doing something? (If so, that’s good because it usually takes a big, non-risky idea to make most people change their behavior.)  

If you get the good answers to these three questions, you probably have a good idea.

Lastly, behind every truly great idea are two vitally important ingredients: mission and commitment.

Great companies are defined by great missions.  Having innovative technology may be enough to start a new company, but building a successful, independent new company requires an inspirational and aspirational mission.  Think about Google’s mission statement: “Manage the world’s information.” It’s accurate, simple, powerful, inspirational.  The best missions are like that. Our mission at Vertica was to prove that “one size does not fit all in database systems” (we proved this).  By the way, if you have to hire a consultant to define your mission, you’re probably doomed. Better to stop and go work for someone else.

Great companies are also defined by great commitment. There are many people who are happy to start companies that serve their lifestyles. Sometimes these companies experience tremendous growth, but, more often than not, their growth and contributions are incremental. As a company founder, you’ll need to constantly push the boundaries of technical innovation to create the radical value that will change your customers’ lives. This requires discipline, focus and often sacrifice. But the rewards – monetary and emotional – can be substantial for the right kind of entrepreneur.

Introducing the Starting-a-Company Blog

The Top 10 Questions We Get – And Our Answers

As technology entrepreneurs, we’ve jointly launched more than 13 start-ups.  Most of these ventures have been pretty successful, like Vertica Systems, which we co-founded in 2005 and sold to HP in 2011. Others were less successful.  But we love launching start-ups and so we soldier on, both in founding new start-ups and investing in other entrepreneurs’ start-ups.

In our many encounters with entrepreneurs and company founders, we get a lot of questions about how to start a company.  Everything from sweeping questions like “What one thing made Vertica a success?” to the basics like “What makes a Series A different from a Series B?”

In this blog, we’ll put our heads together to identify the questions we hear most frequently and give you our individual answers to each question, presented in pairs.  Since we work together as well as independently on starting companies, this exercise should be interesting.  We may disagree on some things, but we guarantee you’ll get candid, practical and road-tested advice that you can put to work in your ventures.

Here are the top 10 questions we will be answering in the coming weeks and months:  

How do I turn my great idea into a business?

What are the “musts” I need for securing financing?

How can I avoid “rock fetches” and other wastes of my time?

How do I determine the best stock distribution plan for my business?

How should I get the best terms?

What’s the difference between seed, Series A and Series B?

When do I need to change the CEO?

How do I avoid spend and feature creep?

How do I manage my VCs?

How do I protect my intellectual property?

We may answer other questions or address other newsworthy topics along the way, but promise that we will get to all 10 questions.

We hope that you’ll follow us, comment, and share your own experiences.