Customer dissatisfaction cost – The cost of unhappy customers

We all have heard phrases like “Customer is King”, “Customer Delight”, “Customer Experience Management” etc. and we rightly value (paying) customers above everything else for our startup. Especially in the early stages of the startup, the “customer acquisition strategy” is one of the first things that we focus on.

While you focus on critical things like targeted customer segments and customer acquisition cost for your business plan of your beloved startup, we invite you to consider “customer dissatisfaction cost” as well. The below useful infographic from Vision Critical demonstrates the importance and impact of the cost of unhappy customers with some surprising numbers that startup teams (even big corporate firms) often overlook.

Happy reading!

 

Why Businesses Can't Afford to Upset Customers (Infographic)

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The importance of vesting

Image courtesy of FreeDigitalPhotos.netYou most likely heard about vesting. VCs often talk about it in their blog posts. Somehow startup founders still find it tricky to understand what vesting is about.

We’ll try to explain it here in the easiest way possible. It’s hard to overestimate the importance of vesting. If you are a founder you need to get used to this concept as early as possible in your entrepreneurial career.

Otherwise, you may find yourself in a situation Mark Zuckerberg talks about: He didn’t know what vesting was at the point when he started the company, and it cost him billions of dollars because of his co-founder Eduardo Severin.

The notion of vesting comes from a legal universe. Vesting is a common provision in equity schemes. Vesting means receiving the right (to the shares of equity).

To put it simply, if founders agreed to divide equity with a vesting condition, what they get at the beginning is unvested equity, which is just a promise. A promise that they will get their shares of equity as agreed only if they certain vesting conditions are met. The most common vesting condition is to stay with the company long enough for the equity to vest. Vesting conditions may include various milestones important for the company. An example would be getting 1 mln. of registered users – if this happens, founders may agree to have accelerated vesting of 25% of their shares of equity.

Vested shares are the shares the founders already earned. Founders can walk away with those shares if they decide to leave the company. That will be fair, as they received those shares for all their hard work.

Vesting is important even for teams with unequal equity splits. In fact, vesting has little to do with equal or unequal splitting. Imagine there are three of you, you split your startup equity 45%-35%-20% and get to work. In a month a founder with 35% looses interest in the project and leaves… taking 35% with him! The other two work hard, get VC money, become famous and in 6 long years launch an IPO. Of course, over those years 35% get diluted to, say, 7%, but that’s 7% of a billion dollar company – not bad for a month of work, heh?

That’s a made-up example, of course, but if there were a vesting provision in place the founder who left in a month would get no equity. And this would be fair to those who stayed and made their company a huge success.

Image courtesy of FreeDigitalPhotos.net

What it takes to build Facebook

To continue our series of weekend videos, here is a nice one from Y Combinator in which Mark Zuckerberg talks about early days in Facebook. Highly recommended to watch. For those who don’t have time for a 36-min. piece, here are our favorite lessons-to-learn from the video:

– On motivation: Stay inspired by what you are doing. There will always be skeptics saying that your thing can’t be a business. Just care about what you are doing, and that’ll drive you forward.

– On hiring great people: The only way to determine whether a person you are hiring is really good is to realize if you would want to work for that person.

– On making decisions: Out of a hundred things that you can potentially go do, pick up the one that actually matters.

– More on motivation: In the early days Facebook had a serious competitor called “College Facebook”. Every time the competitor would launch at a new school, the whole Facebook team would literally not leave the house and work until they address the problem. They still have this concept of “lock-down” at the company and many teams do it themselves.

– On founder equity (we couldn’t miss this one!): All founders must be on vesting schedule. Mark heard nothing about vesting at the time when they started the company. They just divided equity, and then his co-founder Eduardo left. “That mistake probably costed me billions of dollars” – says Mark. But even when things like this happen, it’s important to move forward.

The score is 4:1 – do you still have doubts on how to split founders equity?

You may still have doubts whether an unequal equity split between founders is worth all that fuss. Calculating founders’ input into the startup, having conversations about involvement, commitment and future expectations, making promises to each other and feeling anxious about not being able to live up to them. Wouldn’t it be easier for founders to split equity equally and get right to work, feeling mutual trust and respect?

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In order to resolve this issue we decided to bring to your attention the most influential posts on dividing equity between startup founders that are out there on the web. If you are like most tech startup founders we know, you should believe in numbers. So, we decided to count voices in support of unequal equity splitting and voices in support of equal equity splitting. The results turn out to be quite convincing.

 1. A very old post by Dharmesh Shah on OnStartups.com – a blog for entrepreneurs with more than 23,000 subscribers. In spite of the date of its creation, the post hasn’t lost its relevance. It talks about different factors which lead to unequal splitting. And its definitive answer to the question “Should we divide equity in our startup equally” – is “no”.

1:0 for unequal splitting of equity

2. The most well-known advocate for equal splitting of equity is Joel Spolsky. He wrote a widely-cited post on “totally fair splitting of 1:0 for unequal splitting of equity ownership in a startup” which features an interesting method of splitting equity not just between founders, but between the whole team including employees. Joel’s website where this post was originally posted got closed, but luckily there are plenty of reposts on the web.

1:1

3. In reply to Joel Splosky’s post on fair equity splitting in a startup Dan Shapiro writes quite an expressive piece on this topic with the headline: “The only wrong answer is 50/50”. In his post Dan gives examples of what should be counted in when dividing founders equity – things like coming up with the idea, creating an early product, being a CEO, full-time commitment and cash contributions. He also gives his estimations of how valuable are these factors relative to one another.

2:1 for unequal splitting of equity

4. A great post on this topic by Mark Suster (I love his posts for always being so much to the point). Among other important things Mark talks about something nobody else mentions: that 50/50 splits between founders are in fact unstable. They create no true leader. They create a feeling of shared responsibility, which is not a good thing for startups in which one founder is always more involved and committed than the others.

3:1 for unequal splitting of equity

5. Not just entrepreneurs and VCs discuss the topic of equity splitting in startups – business professors do too. A huge supporter of unequal equity splitting is Noam Wasserman, a professor at Harvard business school, whose brilliant case study of equity splitting in two startups we discussed earlier in this post.

4:1 for unequal splitting of equity

To conclude:

The results are quite convincing: 4:1 for splitting equity unequally between founders even in spite of hard negotiations and calculations (which can be made a lot easier if you use a formula or a model like the one we created at Founder Solutions). This is not to say though that 50/50 split is always a wrong decision. In very rare cases, as one can imagine, even the most sophisticated formula might point to this result, and then you should proudly go for it. But even then a question will remain: if your team has founders who are so much alike, wouldn’t some diversity of experience and expertise add more value to your startup?

Feeling right about an unequal split

FounderSolutions Here founders of Zenlike are sharing their story of how they came to a decision to split unequally and why it felt as a right thing to do.

For a short resume: they agreed on a 55/45 split. Founder 1 got 55% for two reasons: first, he had been working already for 2 months on the project and secondly he had made a significant investment into the project. No premium was given for the idea. As for other factors, the two founders seemed to have a comparable level of experience, expertise and network value.

Recommended reading for those who are in the process of negotiating equity division with their co-founders. It clearly shows that in truly successful ventures even equity talks are more about fairness and cooperation than about “splitting” or getting into a more advantageous position in comparison to your co-founders.

We were also happy to see that the logic of Zenlike founders can be absolutely replicated in our FES model. While our model by default assigns some equity premium for an idea, this can be easily overridden by indicating that all founders are the “idea persons”. And FES helps founders consider even a wider range of their strengths and competencies which can be vital for the startup and which should therefore influence their equity splits.

FounderSolutions

Two real-world stories: a good and a bad decision on equity split

This video is definitely worth watching. It’s a case study of two startups and their decisions about equity splits between founders. Two real-world stories with lots of wisdom to learn from them.

In short, the first story is about a 50/50 handshake (the equal split!) the Zipcar founder Robin made with her co-founder – and how much angst and regret it caused her shortly afterwards. “It was the stupidest handshake to make” recalls Robin.

The second story is about Ockam co-founders and their decision to split unequally. The decision was very logical because, for instance, one co-founder had worked for the other one for seven years as a junior before they decided to start a company. It was clear that their contributions to the startup wouldn’t be the same. And they did a great job of evaluating different scenarios of how much they would be involved with the startup (what if one of the founders wouldn’t quit his full-time job to work for the startup and so on) and identified different equity splits for every scenario.

Here are the key lessons to be learnt from this video:

  • if you don’t want equity split issues to ruin your startup deal with them early
  • when you deal with them, keep in mind that a 50/50 split is almost never a good solution
  • it’s better to find out early whether you are compatible with your co-founder. Equity talks are the best time to do that.
  • go through several scenarios of how your startup is likely to evolve. Decide how your equity split will be changing depending on the scenario.

9 types of founder conflicts that can sink your startup

Are you working on a new business idea with a small group of friends or colleagues? Is this the first time that you start a startup? Then you absolutely need to check out this entertaining infographics below from an infinitely creative FundersandFounders team.

Do any of these issues sound familiar to you? Beware of these founder conflicts, as they can easily sink any promising venture.

And yes, we would recommend any of those solutions – except just one. When answering the question “Who gets what” you should never jump to a 50/50 equity split. This is the only wrong answer, as Dan Shapiro put it in his widely cited and much discussed blog post.

Use Founder Solutions model instead and find out immediately what’s a fair equity share for each and every member of your startup team.

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