Pay Yourself First
Practical Tips for Startups: Keep priorities, avoid getting nibbled to death by ducks [Part 8]
Picture your startup business as a patch of land, you as a peasant farmer, casting seed in your field by hand. Your sole objective is to grow a crop to eat and sell. It’s long hard hours in the sun, planting, weeding, watering, etc. long before there is any harvest to reap.
From time to time, people walk by you, offering advice about many things, weeding, watering, selling your produce. If they pitch in and do real work, chances are you’d offer to cut them in for a share of the profits at the end of the season.
You would be unlikely to pay them cash, when you yourself are cash-strapped and you still run the risk of a drought year or a weak market come harvest time.
If you have a new startup business, especially one that will need outside investment, you probably find yourself networking like a fiend to find investors to keep the business moving. Inevitably as you do this, you’re going to meet a lot of people who want to consult or advise you. If they are real help doing real work, that’s great. But too often they are more like ducks — more likely to eat your seeds as you scatter them than provide any meaningful help doing actual work.
I see far too many early stage founders who can’t shake the ducks, nibbling away at their time and money. You must. Here’s how.
- Pay yourself first.
There are some services with hard deliverables you’re likely going to have to use cash for, such as legal services, software/web development, etc. Beyond that anyone who is “helping” you with advising or sales or “strategy” should be comfortable working for commission (they only get paid if they bring results) and/or equity in the business.
Well run businesses — no matter the size — rely on incentive to drive people forward. Making sure people have the right incentive and skin-in-the-game are always top priorities but in a cash-strapped startup these need a laser focus.
Everything is likely to take longer, be harder and cost more than you expect. Conserving cash is essential to give your new business enough runway to get airborne. And, who is going to be called upon to loan or invest more money into the company when things get skinny? The founder(s).
If you can’t attract advisors and sales people and get them excited enough about the business to accept compensation based on results then you either need to find better people or take a hard look at your business.
2. Require skin-in-the-game.
Regular readers know I harp on this. So I’ll harp on it. I’ve never met a single startup entrepreneur — even the really successful ones — who are not WAY too optimistic about getting early sales. Sales is the hardest part of business. That’s why it is crucial that you only use cash for things you absolutely MUST use cash for. That is also why it is so important for everyone on your team to have a strong motivation to deliver measurable results in the form of actual sales.
In a startup business compensation for the work should (mostly) be based on results — at least until such time as you raise sufficient money to justify a payroll. If you have a team member who can’t accept this, you need to weigh how valuable they truly are and/or shop around for someone with the same skill set who will. Chances are the better talent will work for equity because they;
A) Appreciate the value and importance of skin-in-the-game, and;
B) Are confident that they bring value and thus willing to bet on themselves.
And please do not let some adviser who paints himself as highly valuable invoice you for time with a promise that you can defer payment until you get money. The last thing any investor wants to see is a pile of unfunded liabilities that will eat up investment as soon as it comes in the door. And the last thing you need is debt on the books — and that’s what it is. The answer to this question is always a simple, no, sorry, we can’t do cash compensation for your role right now, but we’re happy to offer you a SAFE (simple agreement for future equity) that will provide you with some shares when/if we get funded.
3. Work harder to get the right team, even if it is at the expense of focus on your product.
You heard me right. People are 80% of the value in a startup, financing is 15% and the idea itself is dead last. If you get the people right, financing will come sooner and executing on the idea will get easier.
Tying compensation to the overall success of the business roots out the ducks who only want to eat the seed. What will emerge is a team of focused, skilled pros who are aligned with your goal of getting the business to its first sales and first financing.
4. Get a partner.
Life as an entrepreneur can be lonely. Finding a good co-founder is highly recommended if you are a solo entrepreneur. This can be difficult but is well worth the work. This article by venture investor Adam Callanan does an excellent job of explaining why it is so important: https://www.entrepreneur.com/article/239945
Lastly, keep in mind that as a startup entrepreneur you are doing a bold and rare thing. It’s also scary as hell. Don’t let the fact that it’s scary cause you to bring in 2nd rate talent and advice that will suck out more value than it creates. Demand results, demand skin-in-the-game. Your venture deserves nothing less.
