One of the most important decisions early-stage founders have to make is who to bring in as a founding team. The first five to ten employees will have a huge impact on the company culture, and the precedents set with them are difficult to change along the way. That’s why this season in Build Mode, we’re looking at what it takes to build a world-class founding team.
To kick off season two, Isabelle Johannessen is joined by Yuri Sagalov, CEO of General Catalyst and former founder, YC partner and lead investor at Wayfinder Ventures. Sagalov has worked with hundreds of prep and startup companies and has seen firsthand the best (and worst) ways to hire in the early days.
In this episode, Sagalov offers his best advice for founders hiring their first team, strategically building their board, and setting up compensation structures that can scale with the company.
The three types of investors (and who to avoid)
Sagalov categorizes investors into three main buckets: those who are heavily involved and act as an extension of your team, those who will give you control and then disappear, and micromanagers.
The first type of investors is the most valuable according to Sagalov: “They will help you with recruitment, recruitment, go to market. And the most interesting thing with these investors is that it is often completely disconnected from the size of the check.”
While it may seem counterintuitive to turn down investments, working with VCs who get too involved in the process can do more harm than good in the long run. Sagalov said, “The only bucket I avoid is that third bucket of investors who give you money and are kind of in your kitchen, messing around. They have an opinion on everything. They get stressed when things don’t go well.”
In a fundraiser, everyone is putting their best foot forward, so Sagalov suggests reaching out to current portfolio companies before committing to an investor. “The best thing you can do as a founder is talk to portfolio companies, talk to other founders they’ve worked with, ask for specific examples of how they’ve been helpful, if they’ve been helpful, and then ask what it’s been like when things haven’t gone well.”
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How to split shares with a co-founder
As an investor, Sagalov looks for co-founders who have created an equity allocation that is fair but also hedges against future misalignments. He suggests creating a slight differential with plus or minus one stock so that there is a clear way to break the deadlocks.
Sagalov also reminds early-stage founders that these early decisions have staying power: “Often founders overestimate the ‘I got the idea, so I deserve the lion’s share.’ Most of the company’s journey is ahead of them. You don’t want someone to wake up five years from now feeling like they’ve put in equal amounts of blood, sweat and tears but own a fifth of the equity.”
Talk to frontline employees about risk and compensation
The first hires should all be on the startup’s mission. Often, joining an early-stage startup can be perceived as risky. Sagalov emphasized the importance of discussing the risks and potential benefits: “Basically, what you’re looking for when you hire the first people are missionaries who, beyond compensation, want to join you for the mission of the business,” he said. “You want to be honest with them that there is a lot of risk involved in the journey.”
Next week on Build Mode, we’ll be talking to Sarah Lucena, founder and CEO of Mappa, who discusses how founders can consider compatibility and hire the right fit for the team the first time using their AI tool.
Isabelle Johannessen is our host. Build Mode is produced and edited by Maggie Nye. Head of Audience Development is Morgan Little. And a special thanks to the Foundry and Cheddar video teams.
