“Top Startups” Lists and Accelerators

TL;DR: “Top Startup lists” are being used as complements, and in some cases replacements, to accelerators for helping entrepreneurs signal their talent to investors.

Background reading:

The value proposition of elite universities is a fairly straightforward 3-part bundle:

A. Education

B. Talent Sorting / Signaling

C. Network

Data showing that top students who attend elite universities perform on average the same as those who are similarly accepted but attend lower-ranked schools proves that the actual education elite universities provide isn’t nearly as important as some people think; at least for most students. But their talent signaling and network functions are fairly important and durable, and it’s very hard for competitors to build viable business models to deliver them; though some are succeeding.

Respected employers willing to not require elite educations are, for example, talent signaling competitors to elite universities. Being  “Google Alumni” can be seen as more value determinative than being “MIT Alumni.”

Now, the value proposition of top accelerators is also a fairly straightforward 3-part bundle:

A. Education

B. Talent Sorting / Signaling

C. Network

Look familiar? Many post-accelerator founders will tell you that the actual educational content accelerators provide is hardly that big of a deal to them. I’ve definitely known some entrepreneurs who find it useful, but the more hustler autodidact types will say it’s just re-hashed versions of what you can find online and in books. But the other two propositions (talent signaling and network) are harder to build.

To the extent accelerators build respected brands – and by that I mean respected by investors and other ecosystem players entrepreneurs want to connect with – their ability to sort through the ecosystem’s “noise” and signal talent, and therefore reduce search costs, is extremely important for founders. I would say most of the founders we work with understand instinctively that the main reason to attend any accelerator is to simply make it a lot easier to connect with investors. And yes, for the right accelerators, it works. Big time. 

Sidenote: Attending a B-class accelerator can be worse than attending none at all. If the A-accelerators reject you, you can just pretend to be one of the many companies that never even try to attend them; and just find other “signals” to use. But by attending a B-class accelerator, people now know you tried and were vetted, then rejected. Can be a scarlet letter.

Education? The best information is online and in books. Network? Not proprietary. Founders who can hustle know how to access all the same top people, many of whom want to ensure their own personal brands aren’t captive to an accelerator; ensuring significant “leakage” of the network. The networks of accelerators are compilations of the personal networks of individual people, and by bringing all of those people together for a period of time, without the leverage to lock them in, they’ve made it far easier for the network to be unbundled and re-bundled without the gatekeeping fee.

But it’s the reduction in search costs for connecting with investors (the talent sorting / signaling) that is the real money maker for accelerators. And yet talk privately with many investors, and they’ll tell you they resent the “hunger games” demo day and investor herding dynamics some accelerators produce, even if it’s the price for having someone else do a lot of the company filtering for you.

A short list of accelerators have built real and durable talent signaling brands, and are worth their cost tenfold. The challenge for some has been maintaining them, and not supplementing themselves with business models misaligned with the goal of being very selective. Accelerators heavily tied to real estate/co-working, for example, are tempted to dilute the accelerator brand by accepting a lot more people, because they can still monetize them with offices (even if their equity isn’t worth anything). Lower your standards to fill office space, and your talent signal weakens, which means fewer top people show up to your events, which dilutes your network proposition, which further weakens the quality of your startups, and now you’re in a death spiral.

One thing you’re seeing all over the place in startup ecosystems today is “top startups lists.” “Top startups to watch.” Top this, top that. Top 50. Top 25. Top 10.

Initially, my reaction was to judge these lists as just PR plays. Politics/brand driven founders who want a bit of an ego stroke pander to publications to get on them, and in turn the publications get eyeballs and visibility, and can make money off of ads.

But analyze what these lists are, or could be, from the perspective of the talent sorting/signaling function of accelerators, particularly at early stage. To the extent some publications can build highly credible “top startup lists” – the kinds that investors and other players pay close attention to, they could prove to be viable competitors to the talent signaling proposition of accelerators.

I actually think many entrepreneurs understand this, and it’s why they care so much about getting on these lists, and why the lists are proliferating. If your ultimate goal is just to connect with investors, “top startup lists” that get real brand credibility could, much more cheaply, get you the “signal” you need to get meetings with selective investors.  Of course, it boils down to whether the right publications are willing to put in the time to build the needed credibility, and not make them simply politics or “pay to play” schemes. I suspect many won’t, but some will.

By no means am I under the delusion that accelerators and top startups lists are direct competitors; especially not at the highest tier. Many smart founders use them, wisely, as complements. The most important thing is for founders to understand what their real purposes are, and to judge them accordingly.  If many founders view accelerators as simply fast-tracks to getting the attention of investors (and they do), then you can fully expect there to be demand for cheaper alternatives, and players willing to experiment in delivering them.

Why our lawyers work fewer hours

Background Reading:

When you hire a typical large high-end law firm, the lawyers you work with are generally required to work 60-80 hour weeks non-stop if they want to keep their jobs; and at the higher end of that range if they want to make partner (in 8-10 years).  This is considered totally normal among that tier of law, as a “price” for the privilege of working there. If you want to see the inevitable end-result of that kind of culture, read the NYT article I’ve linked to above. It may seem extreme, but that profile of life is far less rare in law than most outsiders would think.

On top of the work expectations, most non-partners take home about 25% of the revenue they generate from clients. The other 75% goes to firm overhead (infrastructure) and partners. So when elite BigLaw charges you $695/hr for a senior associate, maybe $175/hr goes to the associate, the rest goes elsewhere. Obviously, the big question becomes how much of that “other stuff” is really necessary; and the answer varies depending on the type of client.

The causal chain here is pretty straightforward: bloated overhead and bureaucracy -> lower take-home for lawyers (and higher rates for clients)-> elite lawyers work insane hours to make good money -> divorce, depression, therapy, drug addiction, etc. etc. This is why, as we’ve built and scaled out our leaner but still high-end boutique firm, people have often heard me speak of “bloat” as if it’s the next incarnation of satan. Because I know that, from having studied that causal chain very closely, the extra piece of bullshit technology, or administrative person who just over-complicates processes, is directly tied to why many lawyers’ marriages fall apart, or their kids end up in therapy; or why they can’t get married or build families/relationships in the first place.

If I generated a dollar, and you want to take a cut of it, you better believe I’m going to make you earn it. And I say “no” far more often than I say “yes.”

At E/N, our lawyers, including partners, work on average 25% fewer hours than their BigLaw counterparts, at rates about $200-300+/hr lower; and our credentials speak for themselves. Top-performers (on a number of metrics, not necessarily hours) actually out-earn what they’d expect to make in BigLaw, while everyone generally makes more than what they’d expect as a GC or in some other “lifestyle” lawyer-type job.

It hasn’t been easy to piece together – getting extremely intelligent (the 1%), highly-trained professionals to coordinate and integrate together into a new brand is way more complicated than most would think, and it’s why precious few boutique firms reach any meaningful level of scale before falling apart. It still takes quite a lot of scalable “infrastructure,” just designed very differently from how old firms build it. But ultimately it’s a great set up for clients and for lawyers; not just those at the top of the hierarchy. It works, and we’re growing, sustainably, by knowing what we’re building, and who we’re building it for.

I am 100% convinced that our emphasis on quality of life for lawyers translates to better service for clients, in terms of responsiveness, creative solutions, and ultimate value add for our time. When your lawyers aren’t forced to over-stuff their “plate” all day, every day, the clients they work with get better service. That’s demonstrated in our client testimonials.

Part of our focus on client satisfaction is in selecting for clients who, themselves, have a strong sense of balance. They want to build great things and make great money – and work hard, but they reject the toxic values, pervasive in so much of the market, that myopically celebrate the neglect of so many other important things in life in order to “win.” Trust me, we’re winning and our clients are winning, but at a much broader, more important game.

In my value structure and those of our lawyers, there’s no bigger “loser” than the guy with tons of money, but a failed personal life, horrible health, and nothing meaningful to come home to other than more work; and there’s no amount of spin that can get us to reframe that life as “crushing it” or “strong work ethic.”

I have no doubt that the hard-grinding culture of traditional elite law will continue, in the same way that it continues in big pockets of tech ecosystems. It has its place in the world. We see our role as simply building out an alternative, and letting people – both clients and lawyers – self-select for what they want and support.

 

 

 

Don’t be an Asshole.

TL;DR: You probably can’t afford to be one.

Background Reading:

A regular theme of SHL involves different ways for founders and executives to protect themselves from bad actors – often via advice that I’m able to give by being in a position of not representing any institutional investors, deliberately. If you want more on that, see: How to avoid “captive” company counsel. 

The purpose of this post is to flip the topic, and discuss why there are very real, non-warm-and-fuzzy, reasons why entrepreneurs/execs should be very careful not to behave like bad actors themselves.

If you apply Maslow’s Hierarchy of Needs to the business world, you arrive at one very real truth: the most talented, value-additive people in any industry are virtually never in it just for the money. They have enough, and trust their ability to earn more. Their talent allows them to care about other things: like challenging work, trust, friendship, impact, fun, respect, etc. By no means does this suggest they don’t care about money at all – in some cases money is a way for them to ensure they are being valued and respected for what they deliver. But it does mean that anyone who approaches these people with a kind of opportunistic cost-benefit analysis is likely to get ice cold water poured on them, very fast.

Startup ecosystems are full of these kinds of people. If all they cared about was money, they’d never touch early-stage.  If they’re working with startups (and your very early-stage risky startup), there are non-financial motivations higher on the hierarchy of needs at play, and you need to be mindful of that as you interact with them.

When you’re building your brand new or very early-stage company, unless you have a LinkedIn profile that screams “winner,” people all around you are going to be risking their time and money in working with you. There are 1,000 reasons why they might say no, and move on to someone else with a different risk profile. The absolute last thing you want to do is give them a reason to walk away, because they smell an asshole. And trust me, they will walk away. 

“Startup people” react much more viscerally to assholes than “corporate people” do, because the startup world often selects for people who won’t do or tolerate anything for a big payout. The large hierarchies of corporate environments enable, naturally, more hierarchical behavior among peers. In contrast, the “flatter” nature of startup ecosystems generates, and enforces, more “democratic” (respect everyone) norms.

As startup lawyers, we’re often in a position to see firsthand who the assholes in the entrepreneurial community are. They treat lawyers and many other service providers as line items to be deferred, discounted, and written-off to the very last dime, as much as possible; and will play games to manipulate people into giving them more for less. Thinking extremely myopically, these assholes think they’re doing what’s best for their company by grabbing as much as possible on the table – but played out over time, they’re actually whittling down the number of people who will work with them to those who simply don’t have other options. And when someone doesn’t have options, it’s often for a reason. Interestingly, assholes have a way of ending up stuck with other assholes. 

All of this applies just as well to top investors, particularly angel investors (with more freedom than VCs) who know they deliver a lot more than money. God help you if you give them even the slightest reason to think you’re an asshole. Information travels fast.

The definition of a mercenary is someone whose every decision is cost-benefit calculated for money. The fact is that if you build a reputation in a startup ecosystem for being a mercenary – always maximize the valuation, minimize the equity grant, discount the bill – you’re dramatically reducing your chances of making money, simply because of the personalities and values you tend to find in the startup world.

Be careful out there. Don’t be an asshole. On top of it being simply wrong, you probably can’t afford it.

Startup Employee Offer Letters

TL;DR: A few simple principles can help founders avoid big legal landmines in making offers to their employees.

Background Reading:

Hiring an employee is one of the first areas in which I see poorly advised founders really start messing things up from a legal perspective; exposing themselves to liability and errors that can have very long-lasting effects.

Here are a few simple principles to keep in mind as you hire people and paper their employment.

An Employee Offer Letter is NOT the same thing as an “Employment Agreement.”

In the United States, the default for employer-employee relationships is “at will” employment, which means broadly speaking an employer can fire the employee for any reason, even without warning, apart from a narrow set of discriminatory reasons that violate labor laws. This is very different from other countries, which typically have more robust statutory defaults for employees.

When most people speak of an “employment agreement” they are referring to a negotiated document, usually reserved for high-level executives, that provides more robust protections to the employee/executive; including protections around how that executive can be fired, and the consequences of firing her/him. True employment agreements are quite rare in the very early days of startups.

When a startup hires a typical employee, they provide an Offer Letter that states high-level details like their position, compensation, etc., but also makes it clear that the relationship is at will; in other words, they don’t have the protections a high-level executive’s “employment agreement” would often provide. Offer Letters are not Employment Agreements. Know the difference, and that you should start with the assumption that an offer letter is what you need.

Everyone who works for you is not an Employee. Know the difference between a contractor and employee.

I often see founders casually, without really thinking about it, call everyone who does work for them an “employee.” It seems harmless, but in labor law the word “employee” can have very material implications for what you owe them, how you treat their compensation, how easily you can modify their terms or terminate them, etc. Don’t use that word indiscriminately.

Don’t forget IP / Confidentiality, which is not covered in the offer letter (usually).

The conventional structure of startup employee documentation is (i) a simple offer letter, and (ii) a more robust agreement covering confidentiality, intellectual property ownership, and (unless you’re in California or a few other states) a non-compete. This second document is usually called something like a Proprietary Information and Inventions Agreement (PIIA), Confidentiality and Inventions Agreement, or some variant of that. Missing this document can be a huge problem, and in some states fixing it is not as simple as having an employee sign it later. Don’t forget it.

Unlike most legal issues, local state law tends to govern in employment relationships. Docs vary by state.

Most tech startups are incorporated/organized in Delaware, and if they have a national footprint, a lot of their agreements will be governed by Delaware law. With respect to employees, however, that is rarely the case, unless the employee is actually located in Delaware. In employment documents, the location of your employee will often determine the documentation they have to sign, and that means the documentation can vary significantly by state. Work with your lawyers to ensure you don’t use the wrong forms.

Your offer letter might promise equity. But you still need to issue it, which is more complicated.

If you’re promising options or some other form of equity, the offer letter will usually cover that. But you need to understand that the letter is only promising the equity. To actually grant/issue the equity, more steps need to be taken, including a Board Consent and other processes.

Early-stage founders often get in hot water by signing lots of offer letters thinking that’s all they need to do for employee equity purposes, and then waiting a long time (as the value of their stock continues to go up) to be told by lawyers that the equity was never issued. Then they end up (for tax reasons) having to issue the equity at a much higher price than they would’ve if they had done it sooner, and the employees are understandably angry. Promise, then quickly grant. The offer letter is just the first step.

Small Business v. Startup

TL;DR: Small business law is nowhere near the same thing as Startup Law. Many of the expensive legal errors that we see founders make often result from not understanding their distinction.

Background reading:

As I’ve written many times before, what separates startup lawyers from the vast majority of other kinds of services that an early-stage founder will need to engage is the extremely high cost, and in some cases permanence, of errors. Making a mistake in coding, accounting, or other areas is often a matter of issuing a version update, changing a report, or perhaps paying a small fee. Making a mistake in a contract (which can’t be unilaterally fixed), or taking a misstep that exposes you to legal liability, can create irreversible exposure that in some cases blows up companies, or in others proves 10x-20x+ more expensive than simply having done it properly the first time.

This is why smart entrepreneurs building serious companies take far more seriously what lawyers they engage – their background, credentials, experience, network and reputation – than they do for other professionals.

One way to avoid huge costs in engaging lawyers is to understand what distinguishes startup lawyers from other lawyers, and to really understand the difference between a small business and a startup; because it’s “small business lawyers” whom I usually encounter making the most egregious mistakes that harm startup founders.

A “startup lawyer” is a corporate/securities lawyer with a heavy specialization in early-stage companies. I have seen litigators, real estate lawyers, patent lawyers, etc. who for some reason represent themselves also as “startup lawyers,” and any founder who understands how legal services work should be completely terrified of using them. See: How fake startup lawyers hurt founders.

A “startup” is a business that, while starting out small, expects to (i) grow much more quickly relative to a typical new business, (ii) expects to have more cross-jurisdictional legal issues (less local) either via hiring across state/country lines or customer relationships across state/country lines, (iii) usually intends to use equity in some manner for recruiting purposes, instead of keeping it closely held by 1-2 founders/partners, and (iv) often, but not always, expects some form of capital injection from angel or seed investors in the near future.

Contrast a “startup,” with a small business, like a coffee shop, or a boutique clothing store. In the small business case, early customers and employees/contractors are expected to be geographically contained, it would be highly unusual to use equity ownership for recruiting purposes, and beyond money from a partner or two, it would be very unusual to raise outside capital for years until the business has proven successful and an expansion plan has been put in place.

Startups, as defined above, hit far more complex corporate, securities, tax, financial, intellectual property, labor/employment, etc. legal issues far more quickly than small businesses, and that is why startup lawyers and small business lawyers are very different people, with very different credentials. If you contrast a highly regarded startup lawyer with a small business lawyer, you’ll find the former will almost invariably have graduated from much higher ranked schools, trained at much larger firms early on in their career, and generally be connected and have access to specialists in a much wider variety of legal fields; because startup law is way more complicated, and prone to expensive errors, than small business law.

And this is why so many of the expensive errors we encounter when startups arrive at our doorstep come from founders engaging small business lawyers lacking the background and resources to properly do the work; on top of services like LegalZoom and Rocket Lawyer, which are not structured for startups.

A small business and a startup are not the same thing; not even close. From a legal perspective, they are totally different worlds. In fact, I rarely/ever encounter specialized startup lawyers who even represent themselves as small business lawyers; but I too often see the reverse, where small business lawyers will throw in “startup law” on their website to see if they can train on a founder’s dime.

Do your diligence, or you’ll regret it.