Q&A with Techstars Founder David Cohen
This post covers David’s answers to several questions about startups such as how to negotiate ownership with cofounders, how to protect your idea, resources startup founders should read, and more. The article is based on the Codementor Office Hours hosted by renowned investor and the founder of Techstars, David Cohen.
How to Negotiate Ownership with Cofounders
The most important concept for people to understand here is the concept of vesting. It helps you sort of form how you think about this.
The idea of vesting is, to bring somebody in that you think is your equal and if they are not, you’re going to get rid of them and their ownership has not fully vested. You’d typically have, say, a four-year vesting schedule. Your cofounder would get twenty-five percent of ownership after one year and 1/36 ownership every month after that. After four years, the cofounder will have actually earned that fifty percent or thirty percent or whatever you’ve given them. You want to bring somebody in that you are so excited about that you expect them to be worth that much.
Once you have that mindset, you can get rid of them if you know that they are not living up to that standard. It is easier to view cofounders as your equal if they are everything you think they are, and if they are wholly into the company with you. You might want to give them 50%, but you let them go within 6 months, they get nothing. The best people who want to join you should be willing to take that risk because this is a high potential startup. They are got to perform in it. They’ve got to live up to the expectations.
As far as what percentage you can give them, I cannot answer the question for you. It is all over the map. Many founders who are just starting out will make everybody equal because the dynamic is worth it. Through vesting, they will have the control to get rid of people that aren’t performing.
When I personally brought in partners, I retained most of the ownership of Techstars because it was already pretty valuable at that point. Only you and the people you are negotiating with that you are bringing in, can answer that question. Vesting is the tool that you want to make sure you are using in any case to make sure they are worth every bit of what you gave them.
Do mentors get a cut of the final sale of the business?
Not unless you give it to them. I define a “mentor” differently than an “advisor.” I think advisors ask for options or a part of the company. Mentors give first and only take what you offer it. Investors invest money in exchange for equity. If someone comes up to you and says, “Well I’ll help you but only if you give me equity,” I think it’s a big of a red flag, right?
What I would say is, “I’ll help you by either investing or just by being helpful. And if you want to give me something, fantastic, but I’m not asking for it.” Those are the best mentors. Keeping that definition in mind is important. Many people would say, “I’ll help you raise money for ten percent of what you raise.” People like me, who get in contact with those people, we have allergic reactions. We don’t want to deal with them. It’s fake.
Are you willing to outsource that to somebody? It’s fine to take advice, but paying for advice before the value has been delivered is not necessary.
Diversity in the Tech Startup world
There’s quite a lack of diversity from Latin American and African-Americans in tech, especially in the developer and engineering side, and this is an important issue. There is a sort of supply and demand issue. You need more people who come from diverse backgrounds, interested entrepreneurship, and internet technologies.
Techstars has done a few things that I hope are impactful. One is we started a program they call Rising Stars, where we take our fifteen hundred or so alumni and make them a mentor to an under-represented group of entrepreneurs.
Some of those companies have gotten into other accelerators like UB. They ended up in the UB accelerator and then raised a few million bucks. I think we need to make heroes of the people that don’t look like most of us. We need to blog about them more; we need to interview them more. We need to show that does happen and that they can inspire others.
Since Techstars doesn’t ask questions about people’s race or gender on applications, so we don’t have the data sitting around. We’re going back and trying to get it. We’ll then publish it and track it over time. I think we’re doing well with the female entrepreneurship; we have lots of female CEOs – people like Brielle, who runs Class Pass in New York – lots of great female CEOs. But I think the rest of the diversity issue we need to address much better than we have and be more focused on it as a community.
The Best Way to Protect Your Idea
I’m an investor in software where you’re shifting bits and bytes around for the most parts. I think patents are great for investing a pharmaceutical drug or a piece of hardware that truly does something special and different, but it’s not necessary for startups to worry about parents. When they do, they should use them defensively and not offensively.
The Twitter innovator’s patent model is growing in that. It causes the companies that acquire these patent portfolios to promise that they won’t use them offensively, and that they never would use them without the permission of the inventor who sold it to other groups because they want to go with the intent of the patent creator.
The intent is not to stifle innovation. The intent is to protect something that’s truly an invention, and in software we do not have a lot of that. So, on some level I find software patents to be a waste of time. Now, it is also the sport of kings. You cannot win it unless you have a bunch of money. You’re not going to beat Microsoft in a patent dispute as a startup, so you need to find ways to win that don’t rely on IP in the software world.
I usually tell people not to worry too much about patents. It’s not a question I ask as an investor, since you don’t have the money to win that game. If it’s a truly unique idea, go ahead and get yourself a patent – probably get a provisional patent first, especially if it’s a physical thing or some chemical formula that is super hard to figure out. But in software, we’re doing the math, and we’re displaying stuff on a screen. It’s probably not worth patenting.
I think execution trumps a patent. You might be able to protect your secret sauce, if someone does a better job of delivering that thing, you’ll realize you are not going to beat people because of the patent.
We open-sourced the accelerator model through an available accelerator network. We still think we do it better than other people, but we want to help more entrepreneurs. That’s what we’re all about.
When Should You Give Up on Your Startup
I get diverted from my problem statement or lose motivation every now and then. A lot of people ask me: “When should I quit? When should I give up?” And I think when you’re having multiple, rough days in a row like I did with my first company, I punched the wall. I hurt my hand doing it. I was so frustrated. I would go in the stairwell, and I would yell about how much I hate these customers.
Recognize that you’re building a startup. Don’t quit. Everything you’re feeling is part of the experience, including the frustration and anger. It takes a while to get through that stuff.
However, when you just don’t have the passion anymore, it’s time for you to quit. You’re not doing the startup for the right reasons anymore.
It’s normal to have lots of frustrating days and not very many good days in between because it should be highs and lows. However, when it’s all lows and when you cannot motivate yourself to go work on the thing, your motivation is coming from the wrong place. It’s coming the head, not the heart. By then, it’s time for you to give up.
We only live once. We only have a certain amount of projects in us, so let’s focus on the things that get us out of bed and get us motivated where we don’t need external stimulation. You will find that you’re more successful doing what you love, even if it doesn’t seem like as big an idea. So when you’re losing that motivation, ask yourself why. If it’s because you just don’t care enough, that’s probably not a startup, that’s probably a job.
General Resources Entrepreneurs Should Read
There’s this amazing book called Do More Faster.
I like to read books outside the startup space as I think we get hung up on kind of the conventional wisdom in the startup world. Brad Fled has written a ton of awesome books that are very specific to finding out these things in the startup communities, about how these things function in our communities.
Some of my favorite books are sort of Zen than they are motorcycle maintenance. Things like how to keep your vision and your composure when things go wrong (which they inevitably will). So, it’s not about startups but rather a metaphor for startups/life to me and entrepreneurship.
One book that impacted me very, very heavily is a book called The Soul of Money. It raises the question of why we’re all doing something. Are we just collecting credits in a bank somewhere, or are we trying to impact the world? And I believe the money follows the good intention.
I learned part of what’s in the Soul of Money from one of my favorite mentors, Bill Warner in Boston. He told me when I was early in Techstars, “You have an amazing center flow. That center flow’s not going to generate any money. You’re trying to help entrepreneurs. You’re giving first; you’re running these accelerators. That’s cute, but it’s not going to be a scalable, huge thing. But you have to keep doing it because people feel the passion and they feel the reasons that you’re doing it, and you’re going to have co-flows alongside your center flow. As long as you focus on the center, you’re going to have opportunities that come along.”
To me, those have been corporate accelerators. We run the Disney accelerator, we run the Nike accelerator, we run the Ford accelerator, we run the Barclays accelerator. Those have been huge opportunities for us. We manage venture funds. That never occurred to me when I started accelerators; it was never the goal. These are the co-flows that came along but if you kill the center flow, that passion and the reason you’re doing it, the other things would disappear. And so The Soul of Money teaches us to focus on what we care about and how we spend our money and how we use our resources in this world to really represent who we are. And I was very sort of motivated by that. So I think it’s a great book. Thanks for listing it under the comments there for people.