Founder Friendly Standard gives founders 24:1 super-voting equity. Here is the rationale behind it.
This weekend, I’ve been reaching out to startup influencers to coordinate a twitter campaign where we celebrate Indie Hackers, bootstrappers, customer-funding, and Zebras during the unicorn-obsessed Tech Crunch Disrupt conference in San Francisco, October 2 – 4, 2019. If you want to join us, we’re using the hashtag #DisruptVC.
One of the influencers I approached asked why Founder Friendly Standard gives founders a 24:1 voting advantage. The reason is to keep founders in control of their companies. Here’s an excerpt from the email:
Yes. There are lots of templates available, and you should start by retaining an attorney who represents founders. Your attorney may have a set of templates that you can have adapted to the Founder Friendly Standard.
After learning hard lessons about the tension between investors and founders, I teamed up with my former business partner, Dan Flanegan, and my former attorney, K. Adam Bloom, to create an open-source standard that you can attach to any bylaw agreement, term sheet, employment agreement, etc.
It’s called the Founder Friendly Standard. It has 17 sections that can lay common disputes to rest such as who gets to vote, who gets liquidation preferences, what is the scope of non-compete, etc.
The data table below shows the odds of starting a High-Growth Company in each major city in America. This data serves as a baseline for the fund I’m modeling based on the book, Grays Sports Almanac for Venture Capital. I am sharing my research notes here so that you can incorporate this data into your angel investing or venture capital models.
Founder Friendly Standard and customer-funding can help founders avoid “No market need, Running out of cash, Not the right team,” and 7 more reasons startups fail.
The above graph shows the top 20 reasons why startups fail from CB Insights. I marked up the graph with green checkboxes to show which risk factors customer-funding (also called bootstrapping) can help you manage. Orange checkboxes denote risk factors that Founder Friendly Standard can help manage.
Risk Factor: No market need
If you’re bootstrapping, you’ll find out pretty quickly if there is no market need. Unlike your angel and VC-funded cohorts, you’ll be able to make fast pivots while they’re lining up their organizations’ change management strategies.
Risk Factor: Ran out of cash
If you are bootstrapping, you are financing innovation with organic cash flows. This is a key growth driver in the Credit Suisse Family 1000 research. If your company is controlled by its founders, you’re more likely to pace yourself, spending the money like it’s your own vs. your VC-funded competitors who are quick to spend (principal–agent theory).
Founder Friendly Standard v1.0 has been updated today. The new version of the standard is 1.1. Here is a description of the change:
Section 2.4 – clarifying language (in bold) has been added for companies outside of the United States. The section now reads: Due to potentially devastating tax consequences, the company tells individuals receiving sweat equity in the United States to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code. Founders who live or pay taxes outside the United States are similarly advised to consult tax professionals about applicable local and national taxes.
Grays Sports Almanac for Venture Capital proposes a new risk management strategy for venture capital. In this investment hypothesis, I outline why a venture fund might beat the odds by purchasing 2,208 to 4,416 warrants on startups. Startups would operate under a governance framework called the Founder Friendly Standard, which gives entrepreneurs control of their companies. In exchange, the venture fund would have the option to exercise warrants for 15 years—purchasing discounted equity only in the startups that become successful.
This text appears in the introduction to Grays Sports Almanac for Venture Capital, available on Amazon, Audible, and iTunes.