When You’re Not CEO Material

TL;DR: Before you even talk to VCs, know your own strengths and weaknesses as a leader, and work on them. Know your VCs by asking honest questions early on, and verifying answers in the market. And be proactive and honest about what you really want to be doing at your company, and what matters most to you. When CEO succession drama starts to damage a company, it’s almost always because the founder and the VCs failed to (i) align themselves on their approach to Company management and recruiting early on, and (ii) create an environment of trust and transparency where founders can give up some control without fearing that the fruits of their hard work are being given up as well.

Background Reading:

No matter how much certain investors market themselves as “founder friendly,” no competent VC can guarantee a Founder CEO that they will stay CEO. VCs have a job to do: to turn other people’s money into more money. To the extent they are convinced that keeping a founder as CEO will maximize their chances of doing that (long-term), they will do so. Otherwise, they will tell a founder CEO, sooner or later, that a new CEO is needed.

“Founder Friendly” VCs are the ones who’ve concluded that being friendly to founders helps them make more money.  They are not your BFFs, and you shouldn’t need them to be.

The below are some thoughts, from someone who’s seen it play out many times, on how founders should approach the “Are you CEO material?” issue; both before the hard conversation has arrived, and after.

First: Answer Your Founder’s Dilemma: Rich or King?

If staying in control of your company is much more important to you than achieving an excellent financial return, you should significantly reconsider whether venture capital is right for you at all.  Remember: VCs have a job to do, which is to make lots of money. You bring them on to align yourself with them so that when they make lots of money, you make lots of money.

It’s fine and common if you have a certain ‘mission’ that runs alongside the goal of building successful, profitable business; most great founders do.  But if you’re working with VCs, (i) that mission better be the kind of mission that unlocks lots of benjamins, and (ii) you better be OK at some point handing over the crown and becoming a part of, but not the leader of, management. Because, statistically, most founder CEOs eventually get replaced; voluntarily or involuntarily.

Second: Find Out if a VC is a Coach or Underminer

While all VCs are in it to make money, their philosophies regarding how much “coaching” to give founder CEOs vary wildly. Some VCs know that a founder CEO most likely will need to be replaced once the company has become a true enterprise, but they see value in keeping a founder in the CEO seat for some time and coaching them on their gaps, and also helping them fill some those gaps with other senior hires.  Other VCs virtually never let a first-time founder CEO remain in their position post-Series A. They are fine having them as CTO or COO, but they will almost always make their large check contingent on bringing in one of their preferred professionals.

There is no way to know whether you are working with a Coach or an Underminer other than to (i) directly ask (early) the VC what their perspective is on senior management post-closing, and (ii) examine the existing portfolio of the VC to see what has in fact happened every time they’ve closed a round. Trustworthy advisors who are active in the market are helpful here, as is LinkedIn.

If you’re working with an Underminer, and there are no other options, it is what it is. Work within that reality (see Step 4).

Third: Realize that you are being “sized up” from the moment you first speak to investors.

No one should pretend that “good CEOs” fit neatly into some contrived stereotype. Their personalities, appearance, backgrounds, etc. can vary significantly. However, the core jobs of a CEO, particularly at early stage, are quite uniform: (i) recruit employees, (ii) recruit investors and strategic partners, & (iii) manage and lead everyone to execute effectively on the strategy. From the moment you first interact with investors, they are asking themselves whether a founder CEO can do those things.

Fact: everything about your interactions with lead investors, from the tone and confidence of your communications, to body language and eye contact, and how you respond to push-back and calculated aggression, will influence their perception of whether you are “CEO material.” Complain all you want about prejudices, bias, judging books from covers, etc., but that is just reality. Leadership is not handed charitably. It’s asserted by behavior and results. The concept of “executive presence” is something worth familiarizing yourself with.

No, this does not mean you need to pretend to be some gun-slinging, type A alpha executive. Many great CEOs are calm and collected. But the fact of the matter is that being a CEO of any company requires the ability to have hard conversations and take some heat. If you can’t hold your own in a direct conversation with a VC, they will infer that you can’t do so in the many other key conversations that a CEO needs to have to lead a company.

I’ve lost track of how many times I’ve heard something like “That founder? He’s got a bit of an ego,” to which I usually respond, “What do you think it takes?” Ego? Thick skin? Stubborn? Chip on their shoulder? A little prickly? You better f***ing believe it.  Industries usually don’t get blasted open by people overflowing with tenderness and sensitivity.

Fourth: Focus long-term on transparency and influence; not control.

I’ve found over time that many founder CEOs do not actually enjoy being CEO, especially as the company starts growing significantly (~post Series B). They insist on staying in the CEO seat, not because they truly think it best suits their skillset, but because of a fear that stepping down from the top automatically means totally losing influence and visibility into where the company is headed. A culture of transparency and clear communication at the board level can resolve this disconnect and avoid dysfunction.

The key issue here is not whether the Company needs a new CEO, but how to handle succession. The perfect way to create mistrust between founders and their board/management is for VCs to parachute in C-level hires with minimal founder involvement in the recruitment and selection process. It looks something like “We are getting a new CEO, and it’s X (often who was a CEO at a prior portfolio company).” In this scenario, the recruitment of new executives feels far less like the leveraging of much-needed, independent new talent for the benefit of everyone, and more like the investors taking control over management by hiring their loyalists under the pretense of ‘upgrading’ the team. 

When a founder CEO is able to propose her own candidates for the CEO position (and other C-level positions), and play a lead role in interviewing, vetting, and training the prospects, succession goes substantially smoother for everyone. In that scenario, much like a truly independent director, the founders will view the new CEO and other C-level hires as balanced people whose long-term vision and values are closely aligned with the original team. Trust is preserved, and that trust, along with a continued seat at the Board table and contractual protections around their equity and compensation, frees founders to move to positions in the company that are better suited for their skills (CTO, Chief of Product, Chief of Strategy, COO, etc. etc.), and which they usually enjoy more.

Again, different VCs have different philosophies on how to approach CEO/Executive succession, including timing. The only way to find out is to get a dialogue going early on, before term sheets are delivered, and verify the answers by talking, privately, to portfolio companies. As always, having your inner circle of advisors to, confidentially and off-the-record, help you gather that information is key.

Don’t Rush a Term Sheet

TL;DR: No matter how many blog posts and books are out there (many of which I recommend) attempting to explain the mechanics of VC term sheets in simple terms, the reality is that VC term sheets are complicated, both in terms of how their math works and in how the various control-related provisions will impact a founder team over time. Take time to understand them, and don’t rush to sign, even if investors make you feel like you have to.

Background Reading:

Similar to the ‘automation delusion’ that I’ve written about in Legal Technical Debt, which has led some very confused founders to think that most of what startup lawyers do is getting eaten (as opposed to supplemented) by software, there’s a sentiment among parts of the founder community that VC deals have become so standardized that the only kind of analysis needed before signing a term sheet should look something like:

“$X on a $Y Pre?”

“5-person Board, with 2 common, 2 Preferred, and 1 Independent?”

“Great, here’s my signature.”

Take this approach, and you are going to get a lot of ice cold water splashed on your face very quickly, and not at all in a good way. I’ve seen it many times where founders run through a VC deal, so excited about how awesome their terms were, only to realize (sometimes at closing, sometimes years later when things have finally played out) that there were all kinds of “Gotcha’s” in the terms that they failed to fully appreciate. Having solid, independent, trustworthy advisors to walk you through terms before signing is extremely important, and it needs to be people whose advice you take seriously. See: Why Founders Don’t Trust Startup Lawyers and Your Best Advisors: Experienced Founders. 

Some simple principles to follow before signing a term sheet are:

A. Fabricated Deadlines Should be Pushed Back On – It is very common for a term sheet to end with something like “this term sheet will expire on [date that is 48 hours away].” That deadline is very rarely real. It’s just there to let you know that the VC expects you to move quickly.

It is unreasonable to sit on a VC’s term sheet for weeks without good reason. By the time they’ve offered you a term sheet, they’ve likely put in some real time diligencing your company, and the last thing they want is for you to take their term sheet and then “shop” it around to their competitor firms to create a bidding war.  Doing so is not how the relationship works, and will almost certainly burn your deal. So expecting you to move somewhat quickly in negotiating and then signing is fair, but if a VC is pressuring you with anything remotely like “this needs to be signed in 24/48 hours, or the deal’s gone,” what you have there is a clear picture of the kind of power politics this VC is going to play in your long-term relationship.

Move quickly and be respectful, but make sure you’re given enough time to consult with your advisors to fully grasp what you are getting into. It should be in everyone’s interest to avoid surprises long-term.

B. Model The Entire Round – VC Lawyers are usually the best people to handle this because they see dozens of deals a year and will be the most familiar with the ins-and-outs of your existing capitalization, but having multiple people running independent models is always a good idea, to catch glitches. You want to know exactly what % of the Company your lead VC expects for their money, before agreeing to a deal.

I have seen many situations where founders get distracted by a ‘high’ valuation, but when everyone is forced to agree on hard numbers they realize that the VC’s definitions were very different from what the founder team was thinking.  This is absolutely the most crucial when you have convertible notes or SAFEs on your cap table, because how they are treated in the round will significantly influence dilution. The math is not simple. At all.

C. Understand The Exclusivity Provision – Most term sheets will have a no-shop/exclusivity provision “locking you up” for 45-60 days, the amount of time it typically takes to close a deal after signing a term sheet. This is reasonable, assuming it’s not longer than that, to protect the VC from having their terms shopped around. But it also means that if you are talking to other potential VCs, the moment one term sheet arrives, everyone else should be told (without disclosing the identity or terms of the TS you have in hand) that it’s time to put forth their terms, or end discussions. Because once signed, your job is to close the signed term sheet.

D. Focus on Long-Term Control/Influence Over Decision-Making – Thinking through the various voting thresholds, board composition, and consent requirements is extremely important. Will the board be balanced, with an ‘independent’ being the tie breaker? Then being extremely clear on who the independent is, and how they’ll be chosen, is crucial. Will one of the common directors have to be the CEO at all times? Then understanding exactly how a successor CEO will be chosen is crucial, because usually at some point it’s not a founder.

If X% of the Preferred Stock is required to approve something, then you need to know (i) what %s of the Preferred will each of your investors hold, and (ii) who will the other investors be? Usually the Company gets discretion as to what money gets added to the round apart from the lead’s money, ensuring there are multiple independent voices even within the investor base, but some VCs will throw in a provision requiring that only their own connections fund the round. That heavily influences power dynamics.

There will be many situations in the Company’s life cycle where everyone on the cap table doesn’t agree on what’s the best path for the company. Ensuring balance on all material decisions, and preventing the concentration of unilateral power, is important, and yet not simple to understand without processing terms carefully. 

E. Shorter Term Sheets are Not Better – There is debate within the VC/VC Lawyer community as to whether shorter, simpler term sheets are better than longer, more detailed ones. I fall squarely in the camp that says you should have clarity on all material terms before signing and locking yourself into exclusivity; not just the economic ones.  That means any sentences like “the Preferred Stock will have ‘customary’ protective provisions” (meaning they will have the right to block certain company actions) should be converted into an exact list of what those provisions will be. I can guarantee you your counsel’s perspective on what’s ‘customary’ is going to differ from their counsel’s.

The view among those who prefer shorter term sheets is that you should sign as soon as possible, to avoid ‘losing the deal’ (as if VC investment is that ephemeral). I don’t buy it. The moment you sign a term sheet, you are going to start racking up legal fees, and you are now bound by a no-shop/exclusivity. That means your leverage has gone down, and you are much more exposed to being pressured into unfavorable terms to simply ‘get the deal closed.’ Politely and respectfully negotiate a term sheet to make it clear what all of the core economic and control terms are. The alignment and lack of surprises on the back end is well-worth the extra time on the front end. 

In short, the core message here is know what you are signing. Make sure your VCs know that you are committed, and aren’t going to play games by shopping their terms. But also make sure you are talking to the right people to ensure that the deal you think you’re getting is in fact the one in your hands.

Founder Compensation: Cash, Equity, Liquidity

TL;DR: Before investor money shows up, founders should pay themselves very little, if anything. As the company reaches milestones, including fundraising milestones, founder compensation increases as a % of market comp, although it rarely reaches full ‘market’ until a Series B/C or later. As a general matter, investors want founders (i) focused on the long-term success of the company’s stock and not on a lofty cash compensation arrangement, but (ii) also comfortable enough financially to pay their bills and not be distracted by financial worries.

Background Reading:

As with many things, how different parties assess and calculate appropriate founder compensation is far more of an art than a science.  One thing to keep in mind is that all comp numbers at each stage are heavily influenced by (i) location and cost of living, (ii) industry, and (iii) life circumstances of the founders.  Older founders with families tend to have slightly higher salaries than younger single founders. The same goes for founders in more expensive cities, and for founders in industries (like biotech, energy) where the founder team is made up of seasoned executives that have taken very large pay cuts to join the venture.

There are also tax nuances involved that are not the scope of this article. That being said, the below is an outline of the overarching common principles that I’ve observed among companies along the various stages of their life cycle.

Pre-Seed: Cash In, Not Out

Money in should be documented as a Founder Note or SAFE. Paying yourself a salary  at this stage makes little sense, unless there’s substantial revenue. If you need to get some money back, a small bonus upon raising a larger ($2MM+) round is sometimes kosher. 

If a startup is currently bootstrapped and not running on a sizable amount of customer revenue, paying founder salaries amounts to taking cash from one pocket and placing it in the other, while allowing the IRS to take a percentage of it. It is very rarely rational. Keep what you need to survive in your own bank account, and only fund the company with the rest.

Contributions of capital from founders beyond minimal amounts should usually be documented as a founder convertible note or SAFE (see articles above), with the expectation that it will convert later into preferred stock, providing that founder a “little extra” on the cap table and eventually in a liquidity event. It should not, however, be expected to be paid back.

However, occasionally founders will put in such a large amount of money that they really need to get some of it back much earlier than in an exit. In those instances, discussing a small ‘performance bonus’ with your seed or Series A investors can often work, as long as the amount isn’t too large of a percentage of the overall round. I’ve seen founders get a $50K ‘performance bonus’ upon raising a $2MM+ Series A, with the logic being that they were taking barely subsistence salaries for the past year and need something to help cover deferred expenses. Sometimes it works. Sometimes it doesn’t. Usually founders with personal obligations, like student loans or families to support, are able to make a more credible case for an early cash bonus. 

I would also put “Friends and Family” round territory in this category, although it depends. If you’ve raised $250K or less, which is usually what I see for F&F, paying yourself any kind of salary often doesn’t make sense. For larger F&F rounds that are meant to last for over a year, very small founder salaries can work. As a general matter, however, anyone looking to build a company without at a minimum 6-12 months of cash reserves to live off of should re-consider whether they are in the right position to start a company.

Seed/Series A: Enough to pay the bills

Founders get paid ‘subsistence’ salaries; enough to cover expenses, but low enough to where they’re still hungry for growth. 

Once investors are on the cap table and/or the company is generating real revenue, discussions about founder salaries start to make more sense. The core principle to understand in this stage is that investors will want to avoid paying founders such high salaries that they’re no longer hungry and are just enjoying the ride. The vast majority of a founder’s long-term payout should come from their equity stake in the company, and investors want founders laser focused on turning that stake (and the investors’ stakes) into cash with a successful liquidity event.   That being said, most investors also do not want founders to be so desperate for cash that they are worried about paying their mortgage, or their kids’ schooling, which will be distracting from company matters. 

While this is an extremely rough benchmark and there are all kinds of variations, if you assume 100% as being the aggregate cash compensation of a C-level executive in a respectable, matured middle-market company in a startup’s industry and geography, seed-stage founders will often get paid 20-25% of market, and Series A founders bump up to something like 35-50%. So, as an example, if $250K is ‘market’, a seed-stage founder CEO might earn $50-60K a year, and $85K-$125K at Series A; with the universal understanding that industry, cost of living, and the personal circumstances of founders will push it in either direction.

At this stage, any discussions of founder liquidity (taking some money off the table via a secondary sale) will be non-starters, and even send a negative signal to investors that the founder isn’t as bullish as he/she should be on the company’s long-term prospects. If a founder needs more money (often family circumstances), cash comp, like a special bonus, should be the focus.

Series B/C and BeyondEdging Toward Market, Liquidity

Now we’re running a real enterprise, with the market compensation to prove it. 

It’s at true “growth” rounds when cash compensation starts to edge closer to ‘market,’ and when discussions about some small founder liquidity start to make more sense.  A ‘growth round’ would generally mean that the company has found strong product-market fit, growth is going strong, and they just need gasoline (cash) to propel the rocket ship. At this stage, founder cash comp would usually be closer to 75-100% of market for the founders’ position in the company, which may still be C-level, but might not be. See: Rich v. King: The (Core) Founder’s Dilemma.

A dynamic that starts to arise at the growth stage of a company is the feeling among a founder team (and, frankly, their spouses and families), that even though the company hasn’t exited yet, they’ve ‘made it.’ They’ve made it through the sleepless nights, the chaotic weekends, and the strained personal lives, and have built something with sustainable, sizable market value… but the ‘big pay day’ may still be years away.

It’s at this stage that a spouse might ask a question like, “So… you’ve been at this 5 years and your company just raised $20MM. Why can we still not afford to buy that house I told you about?” Those types of thoughts, which are often not unreasonable, prompt discussions about founder liquidity; meaning the sale of a portion of a founders’ common stock for cash beyond an amount that would be reasonable as a cash compensation package directly from the company.

Some VCs, when prompted by a founder looking to take a little money off the table, will respond bluntly, “absolutely not.” The logic being the conventional “I want you to be hungry” mindset. Over the past few years a counterpoint to that perspective has emerged that is reflected in It All Changes When the Founder Drives a Porsche and Some Thoughts on Founder Liquidity. The logic goes something like this:

  • Once a founder has built demonstrable enterprise value and their equity stake represents a life-changing amount of money, personal psychology and (often) family dynamics can lead them to become impatient toward converting that stake into cash;
  • This impatience can lead founders to become overly conservative in company decisions, edging toward smaller, but earlier exits (early acquisition), when a little more patience and longer horizon could achieve a significantly larger outcome (larger acquisition, IPO);
  • Therefore, allowing founders a small amount of liquidity in growth stage – enough to bring something significant home to their spouses/families/friends to reflect their achievement and calm the financial impatience, but not enough to take their eyes off the much larger pot at the end of the rainbow – can maximize the value of the company, and the eventual payout to investors, in the long run. 

You’ll still often run into both the “keep them hungry” and “let them take a little off the table” mindsets within a single cap table, but I would say the latter view, that some founder liquidity (think 5-10% of their stake) in true growth rounds can push founders to achieve bigger exits, is winning out. It depends a lot on the context, and on the particular investors.

So to summarize, while there are wide variations in the market, some reasonable, rough guidelines for founder comp are:

Pre-Seed / F&F: All equity, minimal or no cash comp, liquidity impossible.

Seed: 20-25% of market cash comp, liquidity impossible.

Series A: 35-50% of market cash comp, don’t ask about liquidity.

Series B-C+: 75-100% of market cash comp, small liquidity possible in right circumstances.

Did you get a “good” valuation?

TL;DR: What a “good” valuation is depends highly on context: geography, industry, timing, size, team experience, value-add of money, control terms, and a dozen other variables. Be careful using very fuzzy guidelines/statistics, or anecdotes, for assessing whether you got a good deal. The best valuation for your company is ultimately the one that closes.

VC lawyers get asked all the time by their clients to judge whether their financing terms are good, fair, etc; especially valuation. And that’s for good reason. There are very few players in ecosystems who see enough volume and breadth of deals to provide a truly informed assessment of a financing’s terms. Executives have usually only seen their own companies. Accelerators see only their cohort’s. Most advisors/mentors have even more limited visibility.

But VC lawyers/firms with well-established practices see deals that cross geographic, industry, stage, etc. boundaries.  In addition to a firm’s internal deal flow, there are third-party resources that can be subscribed to with data on VC valuations across the country and the world. Those resources tend to be expensive (5-figure annual subscriptions), and only firms with deep VC practices will pay for them. Given how much you’ll be relying on your lawyers for advice on your financing terms (for the above-mentioned reasons), ensuring that they are objective (and not biased in favor of your investors) is crucial. 

The above all being said, founders should understand that determining valuation at the early stages of a company (seed, Series A, B) is far far more an art than a science. It is for the investor making the investment, and it is for the people judging whether the terms are “good.” That’s why relying on broad metrics like “median Series A valuation is X” is problematic; there are simply too many variables for each company that could justify deviating from the median, in either direction (lower or higher).

What some people call a seed round, others might call a Series A. Some companies raise a Series A very early on in their company’s history because the nature of their product requires serious capital expense to even get to early milestones. Other companies bootstrap for a decade and only use a Series A as true growth capital (the way others would use a Series C or D). I saw a $150MM ‘Series A’ once. I’ve also seen $500K ‘Series A’s. And everything in between as well. So whenever someone asks me “what’s a good Seed or Series A valuation?” the answer has to start out with: “it depends.” 

Below is a break-down of the mental analysis that I might use in assessing a company’s valuation. Remember, it is an art, not a science. There are widely varying opinions here, and this is just one of them. Consider it a set of suggested guidelines, not rules.

1. What was the last valuation a professional investor was willing to pay, and what progress has been made since then?

The easiest answer to “what is X worth?” is “whatever price someone was willing to pay.” While not entirely helpful in the VC context, it certainly is relevant. If you’re doing a Series A and you have institutionals who invested in a convertible note at a $5MM cap a year ago, the obvious question then is “how much progress has been made since then?” This, btw, is why it’s dangerous for companies to set their own valuations without a true market check from professional investors. Your earlier valuations will influence your later ones.

2. What city are you in?

Location. Location. Location. One of the strongest determinants of valuations is the density of startup capital in the city your company operates in; because density means competition. Silicon Valley valuations are not 2-3x those of the rest of the country because the VCs there are just nice guys who are willing to pay more. It’s a function of market competition. SV has the highest valuations. NYC follows. And then there’s the rest of the country, with variations by city. Austin valuations are generally higher than Atlanta’s, which are generally higher than Houston’s or Miami’s. General deal terms are also more company-friendly where there is more investment density.

While the entire concept of “founder friendly” investors does have an important moral/human dynamic to it, people who play in the space enough know that at some foundational level it is a form of self-interested brand differentiation. The ‘friendliest’ investors are the ones in the most competitive, transparent (reputationally) markets. Why take our money over theirs? Because we’re ‘founder friendly’… which can mean a whole lot of things; some of which are relevant, and others which are nonsense.

Yes, online networks are breaking down geographic barriers and you are seeing more capital flow between cities/states, but the data is still crystal clear that if a Silicon Valley VC is investing in an Atlanta or Austin company, they are going to want to pay something closer to Atlanta or Austin (not SV) prices. Much like all the Ex-Californians buying up Austin homes, they likely will pay slightly above the local market (and in both cases, it pisses off local buyers), but not much. 

3. How much is being raised?

Valuations can (and often do) vary widely between markets, while the actual dilution that founders absorb doesn’t vary as much. How is that? Because founders in markets with higher valuations raise larger amounts of money, and founders in markets with lower valuations raise smaller amounts of money; in each case getting the VCs/investors to their desired %. A $1MM raise at a $4MM valuation produces the same dilution as a $5MM raise at a $20MM valuation.

You should never close any round without modeling (lawyers often help here) the actual dilution you are going to absorb from the round, including any changes required to your option pool. Many investors focus first on their desired % and then back into the right valuation and round size. Smart founders should focus on %s as well. It’s not intuitive; especially if you have multiple rounds involved.

4. Who are the investors?

Value-add, known-brand institutional VCs and professional angels that will be deeply engaged in building your company after the check hits are (obviously) worth a lot more than investors who just bring money. And they will often price themselves accordingly (lower valuations). Some money is greener.

Diligencing the valuations your specific investors were willing to pay for their past investments is a smart move. Again, it still requires discussions about the differences between companies, but it can help address any statements like “we never pay more than $X MM for Series A.”

5. What are the other terms?

A $4MM valuation with a 1x non-participating liquidation preference looks very very different in an exit from a $6MM valuation with a 2x participating liquidation preference. So does a $3.5MM valuation with investors getting 1 out of 3 Board seats v. a $5MM valuation with them getting 2/3. The non-valuation terms matter. A lot. Juicing up valuations by accepting terrible ‘other’ terms gets a lot of companies in trouble. 

6. Other Business-Focused Variables

  • What are valuations within this specific industry looking like over the past 12 months?
  • What are the obvious acquirers paying for companies they buy?
  • Where is the company in terms of revenue? Revenue-multiples generally don’t have a place in early-stage, but a $25K MRR v. $300K MRR absolutely influences valuation.
  • Any serial entrepreneurs on the team? Good schools? Other de-risking signals?
  • What’s growth look like?
  • Size of market?
  • etc. etc. etc.

Obviously, multiple term sheets are a great way to have a very clear idea of where your valuation should be, but in most non-SV markets that is a privilege bestowed on a small fraction of companies.

Take-homes:

A. If your friend’s startup got X valuation for their Series A round, that can be totally irrelevant to what valuation you should get,

B. Other terms of the financing matter a lot too, as well as who is delivering them, and

C. If you have in your hand a deal that isn’t exactly at the valuation you wanted, remember that there are thousands of founders out there who got a valuation of $0.

Over-optimizing for valuation can mean under-optimizing on a host of things that matter far more for building your business. Get the best deal that you can actually get, given your business, location, and investors, and then move forward. And ignore the broad market data, particularly the Silicon Valley data, that isn’t relevant to your own company.

It’s Not Introvert v. Extrovert. It’s Whether You Can Sell.

TL;DR: People from various intellectual/technical backgrounds tend to over-value IQ and undervalue EQ; meaning that they neglect just how crucial communication/sales skills are for executives/founders, especially a CEO.

I spend a good amount of my time training lawyers not only on how to use technology effectively (because lawyers are second only to doctors in sucking at tech adoption), but on the key ‘soft’ skills that underly client satisfaction. As a profession, lawyers dramatically over-value their credentials and under-value basic human skills like the ability to charismatically start, lead, and end a serious conversation. But when you step back and analyze how lawyers perform throughout their careers, it becomes extremely clear that far less ‘intelligent’ lawyers are the employers of lawyers with significantly better credentials.

Why would that be? Because for lawyers, legal skills get you a job, but communication skills get you clients. And without clients, no one has jobs. Any lawyer who wants to move from being a “worker bee” to leading client relationships needs to self-critically assess and devote serious attention to her/his communication skills: reading people for their pain points/values and adjusting your message, building rapport with diverse people, speaking crisply and confidently, etc. And the exact same can be said about a founder who wants to be and stay CEO.

Everything is Selling

When investors want to discuss investment, when employees want to discuss employment, or when key early customers want to discuss the product/business, whom do they ask for? The company’s technological savant? No. They want to talk to the CEO. The 3 core jobs of a founder CEO are to find customers, recruit employees, and close on investment. All three of those require strong sales and communication skills, because 90% of the work is deep, serious conversation. As the company scales, those tasks become more segmented, but at early-stage the CEO, and only the CEO, can get them done effectively.

All the time I see founder teams full of MIT, Stanford, etc. technical degrees, and a CEO who went to an unremarkable school. But 5 minutes into a conversation with them you know exactly why he’s CEO. He can sell. And I’ll see VCs who are fine keeping X founder as CEO, but insist that Y step aside for an outside CEO. Why? Because Y can’t sell. Sure, I may be over-simplifying a bit, but not by much. Assuming you aren’t dealing with a VC who always replaces founders purely for control purposes, whether or not a VC trusts you in the CEO seat often boils down to whether you can look them straight in the eye and convince them, through well-articulated conversation, that you are ‘CEO material.’

Sales Skills ≠ Extrovert. Find a Coach.

Like any other skill, sales skills can be learned, practiced, and taught, but it takes honest self-criticism and time. And they do not even remotely boil down to whether or not you are an extrovert. Shyness/social anxiety/bad communication are dysfunctions. Introversion is not a dysfunction; it’s just a personality orientation. Sales/communication skills tend to come more naturally to extroverts, but there are extroverts who are terrible at sales (often because they are glad-hander loudmouths), and there are introverts who are fantastic at it. Apart from self-practice, there are excellent executive coaches who can be engaged to help founders improve their ‘presence’ in conversation.

By no means should the above be interpreted by smart, technical founders as that they absolutely need to go out and find a schmoozer MBA to put on their team. The best lawyers (and executives) are extremely technically smart and know how to communicate. It should, however, be read to mean that you should rid yourself of the delusion that your technical skills/intelligence alone will ensure your position on your company’s executive team. ‘Soft skills’ are at least as important as ‘hard’ ones, and the faster you improve yours, the greater chances you’ll have of getting customers, employees, and investors to not only ‘buy’ your product and company, but ‘buy’ you as an executive as well.