How the startup struggles of three entrepreneurs inspired Founder Friendly Standard
What follows is the story of the startup struggles that inspired Dan, Adam, and me to write Founder Friendly Standard in 2017 to help other entrepreneurs avoid our mistakes. The story is called, “I’ll be the Sean Parker to your Mark Zuckerberg.” It was originally written as a speech about entrepreneurship I delivered one time at Southern Methodist University (SMU) on March 2, 2018.
When I was in my 20s, I met Gk Parish-Philp, a co-founder of DivX. I asked him how to get investors for my startup. He said, “You don’t want investors. They’ll take too much control.”
“That can’t happen to me,” I thought.
Years later, when I was getting forced out of a successful company that I started, I realized Gk was right.
I hired attorney Adam Bloom. I asked him, “Why does Mark Zuckerberg get to run his company?” Adam explained that Mark Zuckerberg’s paperwork was founder-friendly. Mine… not so much.
Adam and I tried to liquidate my holdings, but the investors wouldn’t cooperate. I couldn’t compete or I could lose my equity. I was stuck.
Then I realized I wasn’t alone. The same startup struggles happened to Steve Jobs at Apple. Sean Parker at Plaxo.
Sean Parker is interesting because after being forced out of Plaxo, he met the young Mark Zuckerberg. Sean helped Mark come up with an uncommon answer to a question that often causes entrepreneurs (me included) to get pushed out of their companies.
Root of my startup struggles: “Do you want to be rich, or do you want to be king?”
The “Rich or King” dilemma is the most common and difficult startup struggle that founders face according to Professor Noam Wasserman who researched 10,000 entrepreneurs.
Many entrepreneurs don’t realize that there is a better answer to this old question. It’s an answer that Sean Parker helped Mark Zuckerberg come up with when Facebook was just getting started.
It’s an answer that let Mark Zuckerberg walk into a room of Wall Street analysts in a hoodie during Facebook’s IPO in 2012. It’s an answer that—to this day—keeps Mark Zuckerberg as Facebook’s CEO. The answer is the founder will not make the tradeoff at all, and that is what’s best for the company.
A young investor who bought into Facebook’s IPO has more than quadrupled her money today. A shareholder who bought into Google’s IPO grew her money by more than 18 times. (Google is controlled by its founders too.)
Both Facebook and Google appear on a list of companies that Credit Suisse calls the CS Family 1000. The average cumulative returns of the Family 1000 have outperformed their peers by 400 basis points per year since 2006. The list includes companies like Berkshire Hathaway, Nike, Oracle, and Alibaba.
The commonly peddled startup “wisdom” that founders must give up control of their companies to maximize investor returns is a lie.
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Credit Suisse calls founder-controlled companies an asset class with a “compelling” investment case. Investors win when founders don’t make the tradeoff between rich or king. The commonly peddled startup “wisdom” that founders must give up control of their companies to maximize investor returns is a lie.
One standard to rule them all.
During my drawn-out struggle with my startup’s investors, I called my friend, Lindsey Miuccio, to vent. She asked, “Why don’t you channel all this energy into something that makes the old way of investing obsolete?”
“Huh,” I hadn’t thought about that. What if we could model the contract that Sean Parker helped Mark Zuckerberg get and give it to every founder in the world?
There was just one little detail. Companies’ legal documents are all different. Changing them can involve a lot of legal heavy lifting. I wasn’t ready for that kind of heavy lifting.
Then, a miracle happened. My startup’s investors and I settled our differences.
As soon as the ink dried, I was ready to pay it forward to other entrepreneurs.
My attorney, Adam, and I made a list of everything that was wrong with my old contract. I called my friend Dan Flanegan and asked him what went wrong with contracts he had signed in past startups. Adam, who is also an entrepreneur, added lessons from his past ventures.
We wrote. We debated. We studied the boards of public companies. We researched the bylaws of Google, Facebook, Snapchat, and others. We did this for six months. What we came up with was a standard that any startup term sheet could be adapted to.
It’s called the Founder Friendly Standard. It comes with an attorney review form that an entrepreneur brings to an attorney. The attorney checks a few boxes to show an entrepreneur how a deal compares to the standard before the founder signs. (It would have been nice to have in my 20s!)
With the Founder Friendly Standard in place, entrepreneurs can focus on creating value instead of overserving investors. This is what Mark Zuckerberg did at Facebook.
A new economy starts with a new question.
The National Institute for Standards and Technology (NIST) calls standards details of “mega” importance.
Imagine if there were no standards for the electrical grid. It would be hard to find a toaster that wouldn’t burn your bread or a washing machine that could spin your clothes clean. Standards are behind many aspects of modern life. There is even an ISO standard for brewing tea.
We put all this thought into breakfast, laundry, and tea leaves … Where are the standards for how the next Oracle, Nike, SAP, Facebook, and Google will be funded?
The Founder Friendly Standard is ready to fill that void.
What if a family office or pension fund indexed startup equity on the Founder Friendly Standard? Indexing can outperform stock picking over the long-run. Could indexing be applied to early stage equity? (I later wrote a book on this idea, called Innovation Casino, three years after giving this speech.)
What if a Fortune 500 company spending 4x more on M&A than R&D invested in startups? Could the enterprise bring innovation into its digital ecosystem faster and save on acquisition costs down the road? The Founder Friendly Standard can provide the structure for this collaboration.
Even before the Founder Friendly Standard, entrepreneurs have found ways to build innovative companies. Now, imagine the next generation of Facebooks and Googles we could have with the standard in place.
The new question is, “Where is the hands-off capital?” Entrepreneurs who build their businesses to attract this kind of capital will lead us into a new economy. That is what the next chapter of my journey is about. To read how my story is unfolding, get the books, Grays Sports Almanac for Venture Capital and Innovation Casino.