One of the most important decisions an early-stage founder must make is who to bring on board to be part of the founding team. The first five to 10 employees have a huge impact on a company's culture, and the precedent they set is difficult to change in the future. That's why this season's Build Mode takes a deep dive into what it takes to build a world-class founding team.
To kick off Season 2, Isabelle Johannessen is joined by Yuri Sagalov, Managing Director of General Catalyst, former founder of Wayfinder Ventures, YC Partner, and Seed Investor. Mr. Sagalov has worked with hundreds of pre-seed and seed-stage companies and has seen firsthand the best (and worst) practices in early hiring.
In this episode, Sagalov offers his best advice for founders looking to hire their first team, strategically build their cap table, and form a compensation structure that scales with their company.
3 types of investors (and which ones to avoid)
Sagalov categorizes investors into three main groups. One is deeply involved and acts as an extension of the team, one is handed a check and disappears, and the other is a micromanager.
The first type of investor is the most valuable, according to Sagalov: “They'll help you recruit, onboard and go to market. And what's most interesting about these investors is that they're often completely separate from the size of the check.”
It may feel counterintuitive to turn down an investment, but working with a VC who gets overly involved in the process can do more harm than good in the long run. Sagalov said, “The only investor I avoid is this third investor who gives you money. They're like in your kitchen and interfering. They have an opinion on everything. You get stressed when things don't go well.”
Everyone is trying their best when it comes to fundraising, so Sagalov suggests reaching out to your current portfolio companies before committing to an investor. “The best thing you can do as a founder is actually talk to your portfolio companies, talk to other founders they've worked with, ask them for specific examples of how they've been helpful, if they've been helpful, and ask them what it was like when things actually didn't work out.”
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How to split shares with co-founders
As an investor, Sagalov looks for co-founders with a stock split that is fair and hedges against future discrepancies. He suggests making small differentiations, plus or minus one stock, so there's a clear path to breaking the impasse.
Sagalov also reminds early-stage founders that these early decisions have staying power. “Oftentimes, founders focus too much on ‘I came up with this idea, so I deserve a big part of it.’” This is where most of the company's journey comes from. I don't want you to wake up five years from now and feel like you own a fifth of the stock, having put in as much blood, sweat, and tears as you. ”
Discuss risks and compensation with early employees
The first few hires need to be fully committed to the startup's mission. Often, joining an early-stage startup can be perceived as risky. Mr. Sagalov emphasized the importance of discussing risks and potential benefits. “Essentially, what you're looking for when you hire your first few people is missionaries who will go beyond even compensation to join you in the mission of your business,” he said. “I want people to be honest about the fact that traveling involves many risks.”
Next week on Build Mode, we speak with Sarah Lucena, Founder and CEO of Mappa. Learn how Mappa's AI tools can help founders consider compatibility and hire the right people for their teams the first time.
Isabel Johannessen is our host. Build Mode is produced and edited by Maggie Nye. Audience development is led by Morgan Little. And a special thanks to the Foundry and Cheddar video teams.