Scaling Strategic Counsel

TL;DR: There is no shortage of entrants into the legal market who pretend that some magical formula, or piece of technology, or amount of money, is the key to “disrupting” law firms with prominent reputations. For the kinds of lawyers who do far more than just push paper, it usually ends up as different versions of the same flawed story.

Background reading:

I’ve spent a lot of time analyzing how the consumers of legal services think and behave. In doing so, I’ve had a fun time watching the evolution of various hypotheses held by legal market entrants (firms, solo lawyers, technology companies), and predicting where they would go. Success in any business (including the legal business) doesn’t require psychic abilities, but if you have good instincts for human behavior and psychology, you can surprise people with how accurately you can predict the future.

“Faster and cheaper” can take you far in many industries. And while “startup law” isn’t entirely an exception to that rule, there are subtle but extremely material factors that make it particularly challenging to build and scale a serious emerging tech law firm.  The below are some personal thoughts on how emerging companies (startups) select their lawyers, the flawed hypotheses that lead many players in the legal market to fail or stall, and principles we’ve held as we’ve patiently grown E/N from a handful of people into a leading emerging tech/vc boutique law brand scaling outward from Texas.

1. Long-term, quality really matters. A lot.

“The bitterness of poor quality remains long after the sweetness of low price is forgotten.” – Benjamin Franklin

When you purchase a family vehicle, or select a surgeon, more likely than not price is not the final determining factor in what you end up buying. But for a lot of people, I would bet price plays a bigger role in purchasing a meal, or a piece of clothing.

Why? Because the stakes, and consequences of a serious error, are much higher for the former. Long-term thinking purchasers of legal counsel understand this extremely well, and it’s the reason why despite there being a glut of lawyers broadly, those in the top quartile, particularly those who serve the C-level among companies, have never done better. “Minimally viable lawyers” are not doing very well.

“Move fast and break things” is an extremely valuable philosophy in a context where mistakes are easily, and unilaterally, fixable; which is why it emerged from software entrepreneurs. In the legal world, where something broken very often cannot be fixed, and something as minute as the absence of a few words, or a single missed step, can completely and permanently alter the outcome, it is a stupid and dangerously reckless way of approaching things.

Efficiency is absolutely important. To say that quality really matters is not at all to say that cost is irrelevant, or that smart clients don’t dislike seeing waste. We love adopting new technology, and the speed at which we (as a boutique) can do it makes us a magnet for legal tech startups. However, a foundational principle of E/N’s sustainable growth has been that we deliberately filter out prospective clients who clearly do not value legal counsel; no matter how promising their business may be.

Just like the economic viability of Tesla, or any high quality brand, requires consumers who are willing to pay what it takes to deliver quality, the viability of any serious law firm requires clients for whom low cost is not their primary principle in assessing legal services. All early-stage startups face challenges with legal budgets, but smart law firms learn to identify when the issues are coming from real budget pressures that can be accommodated v. a personal sentiment that legal services are just overhead spend to be minimized.

I’ve seen many law firms fail by thinking that “we can do it cheaper” is, alone, an effective business development strategy. First, that strategy inevitably attracts the worst, most disloyal, clients; who treat lawyers as fungible commoditized vendors. Second, the smartest clients know that, without trustworthy evidence that quality has not been hit, very low prices signal very low quality, which is too risky for a high-stakes service.

2. For strategic advisory, independence and creative judgment really matter.

There are two levels of legal work that a serious corporate law firm can provide. One is transactional counsel, where the goal is to get it done, correctly. Precision (quality) and efficiency are the primary values for transactional legal work. You definitely want a law firm that can demonstrate that they take precision and efficiency seriously.

The next level of service is a lot rarer in the market, but the smartest clients seek it out: strategic counsel. Strategic counsel isn’t about executing a plan of action with precision.  It’s about creating a plan, and that requires creativity (stepping outside of a standard playbook) and social intelligence (what does this specific client care most about?). What should you do? Why should you do it? What will happen if you do X or Y? How will other players respond?

To use metaphors, merely transactional lawyers help you play checkers, but strategic counsel helps you play chess. And at the highest C-level issues in complex markets, you better believe you are playing chess. For that kind of work, the judgment of the particular lawyer (apart from the firm) you are working with is extremely critical, and it’s why I’ve written before that avoiding “captive” counsel (getting independent judgment) in this context is essential. For startups/emerging companies, very very few advisors are able to integrate deep knowledge of legal issues, market norms, contract comprehension, financial structures, and strategic analysis the way that a top VC lawyer can.

A big area where I’ve seen law firms fail in recruiting is a lack of appreciation for this transactional v. strategic divide. They care so much about credentials and “IQ” skills, which are important for accuracy, that they neglect to hire for the kind of strategic judgment that the smartest clients seek out, and are willing to pay for. Good strategic judgment is as much about instincts, situational awareness, and character as it is about intelligence. Fail to recruit for them, and you’ll get high-precision paper pushers. 

Even within large firms with very prominent brands, you often notice a wide disparity among partners in terms of their ability to attract clients. The driving force behind that disparity is judgment. Clients know most of the lawyers at that firm can execute a task properly, but the number of lawyers who can really advise on core strategic matters (like a term sheet, or a key hire) – and particularly the ones who will do so for a small (but promising) company – is significantly smaller.

3. You cannot assess quality without diligencing reputation.

As I wrote in “Ask the Users,” for the most important people building your team of advisors, service providers and investors, you cannot afford to rely on highly ‘noisy’ signals like social media, PR, public reviews, or even blogs. The level of BS spin that money can buy you on the internet is boundless. You must go directly, and confidentially, to people who’ve worked directly with those people, and get their off-the-record feedback.

There are certain qualitative aspects of legal counsel that are highly visible to a client very quickly in their relationship with a law firm. These are usually things like responsiveness, soundness of advice, efficiency, technology, etc., and they are very important. Delivering on these variables is very complex and hard for a law firm, so hearing good user feedback on them is a good sign.

However, legal services are somewhat unique in that the full truth about their quality can take years to reveal itself to a client. At very early stage, where a lot of documentation is heavily precedent driven and transactions move fast to keep bills down, founders/executives often don’t spend very much time actually reviewing the work product of lawyers in depth. They assume it says what it should, and they often don’t even know what it should say. 

It’s in Series A or M&A diligence, with serious counsel on the other side of the table reviewing the legal history, that the wheat really gets separated from the chaff among VC counsel. And people who’ve played the VC/Emerging Tech game in depth know that there’s a lot of “chaff” even among prominent law firm brands.

You can think of the end-product of a law firm as software code that truly only gets reviewed/run every few years in major milestones. Major “bugs” can sit there for years, compounding enormous legal technical debt, without anyone on the business team being aware. When you diligence counsel, you want to hear about what errors/mistakes were discovered in VC or M&A diligence, which means talking to companies that actually got there. Doing a great job at pumping out option grants or convertible notes is not a reflection of the kind of legal quality that matters long-term; nor, frankly, is having worked for a few years at a prominent law firm brand. People deep in the game have many horror stories about how the B or C-player at a firm with a marquee brand screwed something up badly. 

Conclusion: This sh** is hard. Really hard. Way more complicated, if you want to scale sustainably, than putting together a few half-decent lawyers, having them put on jeans, and buying them MacBooks; which is pretty much the extent of what many boutique firms do.

With respect to serious emerging tech legal services, including strategic counsel, you’re talking about building something at scale that addresses all of the following:

(i) extremely small details can have extremely large and often irreversible consequences that are undiscovered until years later;
(ii) because every client’s needs are widely different, you are squarely in highly customized services, not automatable product, territory;
(iii) your ability to attract (and pay for) highly-educated human talent with very subtle behavioral differences dramatically influences the quality of your highest level service;
(iv) you have to be able to filter out the prospective clients who simply won’t pay the real cost of your service, regardless of their budget or how efficient you are, while being flexible/patient on budgets with (hopefully) good clients in their very early days;
(v) there is a part of your industry that is hell-bent on proving that some magical piece of technology is suddenly going to render you irrelevant; and
(vi) aggressive, influential players are sometimes trying to undermine your ability to provide your clients honest advisory.

Though you will endlessly hear opinions to the contrary, there simply is no “move fast and break things,” “mvp and iterate,” “just throw lots of money at it” formula that gets the job done in complex legal services; not if you take quality seriously. And this is why “disrupting” the status quo has proven so difficult despite the fact that it’s a large industry totally exposed to people whose entire MO is to disrupt things.

And yet here we are, patiently putting together the intricate pieces of this unique puzzle, and continuing to grow. Lawyers have popped up claiming to be cheaper, and yet we’ve kept growing. Software tools have popped up pretending that the primary challenge of our industry is a technological one (it’s not), and yet we’ve kept growing. Influential market players have tried to convince our clients to switch to “captive” firms, and yet we’ve kept growing. This is not some “scale fast at all costs” game we’re playing; not when the cost would be exposing good, hard-working people to extremely costly errors.

While we’ve definitely broken more than a few rules of conventional wisdom for how law firms are usually run, we are still here to do our job, correctly, honestly, and efficiently; and to win the trust and loyalty of people who truly value what we are built to deliver.

And for the many people out there who might find all of this a bit passé, no worries. There are plenty of alternatives out there to suit you.

Ask the Users

TL;DR: Blogs, social media, and public endorsements are all noisy, and often false, signals about a person’s real reputation in the market. The only way to get the truth is to “ask the users,” and in a way that allows them to speak the truth without negative repercussions.

I’m going to keep this post as simple as possible, because the message, though extremely important and often lost on people, is quite simple.

Should you join a particular accelerator?

Ask the users – the companies that have already gone through it.

Should you accept money from a particular fund or investor?

Ask the users – the portfolio companies that have already taken money from them and gone through ups and downs.

Should you work with a particular mentor / advisor?

Ask the users – the companies they’ve already advised.

Should you use a particular law firm, accountant, or other service provider?

Ask the users – their existing clients, particularly the ones who’ve gone through a major transaction.

One of the most dramatic, impactful things that the internet (and services like LinkedIn, AngelList, FB, Twitter) has done is made it 10x easier to connect with other people to get direct, unfiltered, off the record feedback on their experiences in working with others. It has made BS a whole lot harder, and ultimately improved behavior across the board. But that brings up some important points worth keeping in mind as you “ask the users”:

A. As much as the web has made finding direct feedback easier, it’s also magnified the opportunities for untruthful marketing.

Blogging and social media are great ways to get a feel for a person’s persona – or at a minimum the persona they want to display publicly, which itself is a valuable, albeit noisy, signal. However, never underestimate the capacity for sophisticated players to whitewash their online reputations. What you see on a blog, on Medium, or on Twitter is marketing, and it’s only with due diligence that you verify it’s accuracy.

And yes, that speaks for this blog and my own social media presence as well.

B. Do not assume that a public-facing endorsement is reflective of that person’s true opinion.

Reality check: people use public endorsements as currency. A VC will make their investment, or assistance on some project, contingent on the expectation that founders say a few glowing things about them on Twitter. A lawyer will agree to discount a fee if they can get a great LinkedIn recommendation. An accelerator will make an intro if the founders will write a great Medium post.

Public endorsements, though valuable as a signal, are fraught with ulterior motives. In short, they can be, and often are, bought.  I know plenty of people who, for some quid-pro-quo arrangement, have given public endorsements for market players whom they would NEVER recommend privately. Do not take a favorable public comment as reason to avoid doing private, off the record diligence.

C. Ignore the opinions of sycophants.

Every ecosystem is full of people who will sing the praises of anyone influential simply because that influential person could get them business. It may be too far to call some of them spineless, but ultimately they lack the personal brand independence to speak accurately about other peoples’ behavior. No one is perfect, and if someone’s review of a particular player feels totally over-polished, it’s probably because they’re not telling you the truth.

You want feedback from serious, honest people who are willing to speak their mind (but see below).  Not a bunch of random cheerleaders.

D. Talk privately, and don’t reveal whom you’ve spoken to. 

No one who has an active, ongoing relationship with someone wants to damage that relationship, even if they’re not entirely happy with it. Doing so is irrational. If I’m in an accelerator, I still depend on that accelerator’s support, so don’t expect me to go on the record for badmouthing them. The same goes if I’m in a particular VC’s portfolio, or working with a particular law or accounting firm.

This is why it’s extremely important to do “blind” diligence; meaning if you are diligencing X by asking Y, you absolutely do not want X knowing that you asked Y. If a VC tells you to ask a specific company about their experience in working with them, then they know exactly whom to punish if you end up walking. If you go through their portfolio and personally decide whom to ask, you remove that ability, and therefore dramatically increase the likelihood that you’ll get honest answers.

And it should go without saying: phone calls or in-person meetings. Don’t expect honesty in a forward-able e-mail.

E. Focus on patterns, not a single review.

Even the best restaurants have the occasional negative review because they either were having a bad day, they simply weren’t a good fit for the particular patron, or – and let’s be honest here – sometimes the user is a pain in the ass. The customer is always right? Nope, sometimes the customer is a moron.

Don’t assume that you’ve got the full picture from simply asking one person. Ask a few, and the line drawn from the dots will matter much more than the individual data points.

F. If you can’t diligence, you need a right of exit. 

The stakes are highest for relationships that you really can’t extricate yourself from. A serious investor is the clearest example. Never take money from a VC without performing diligence.

However, for other service providers – take an advisor/mentor for example – there are other mechanisms to de-risk things. If they’re getting equity (which they often are), a “cliff” on their vesting schedule is the best one; typically 3 or 6 months. That should be enough time to understand the reality of working with them, and make corrections if it’s a terrible experience. Solid contracts help here, with clear, painless rights of termination.

However, a word of caution – all the contracts and lawyers in the world will not protect you from the enormous cost and time suck of working with sociopaths. Even if you don’t have the time or ability to diligence their “users,” you should at a bare minimum vet them personally with interviews, questions, and other ways to get a general feel for their personality and values. If you have good instincts for judging people – and if you’re a CEO I hope you do – you will be able to filter out most assholes.

Promising Equity v. Issuing Equity

Background Reading:

An underlying theme of a number of SHL posts has been the common misunderstanding among young, first-time founders around what startup/vc lawyers in fact do. As I wrote in Legal Technical Debt, a mindset has emerged from certain startup circles suggesting that virtually anything legal that startups do at early-stage, from forming their company to raising seed financing, can be automated with software.

That confused mindset leads founders to (i) assume that all lawyers are just luddites over-charging startups for effectively filling in forms, and (ii) results in founders accruing an enormous amount of compounding ‘legal technical debt’ from badly drafted documents, mis-matched contracts, missed legal steps, etc. For companies that fail fast, the debt never comes due. And yes, there is a clear correlation, from my experience, between founders who arrogantly think lawyers are worthless and those that never build anything of significance.  Dumb people believe and do dumb things.

For those founders that do end up building a real business, however, the 10x cleanup cost of legal technical debt (relative to what it would’ve cost to do it correctly from the start) is often brutally painful. There are a lot of very interesting new tools out there being built to streamline and optimize how tech/vc lawyers work, and you should certainly look for lawyers who are using them. But if you think for a second that you’re going to build a real tech company without needing serious lawyers who can safely manage significant legal complexity, you are, without question, deluding yourself.  

A significant source of “automation confusion” arises from founders not understanding the difference between promising equity and actually issuing equity. I’ve noticed this from how many of our own (very early stage) clients will randomly e-mail us a set of contracts executed over a period of several months with a short message like: “we went ahead and *issued* some equity on our own.  just FYI.”  This blog post will save me from having to write the same e-mail 30 times in the future.

Promising Equity 

I can promise someone equity in 5 seconds, and 1 sentence.

“I promise to issue you 10,000 shares.”

See, it’s not hard. Promising equity is exactly as easy, and as automatable, as it sounds.  Anyone who automates a contract for promising equity, which usually means filling in numbers into a static template, doesn’t deserve the slightest bit of praise for innovation. It’s been do-able for decades.

Sure, people still make mistakes in promising equity all the time. They calculate the number of shares incorrectly, or they get the vesting schedule wrong (or don’t offer one at all), or they simply grabbed the wrong form to begin with.  But the point is that, perhaps with a little guidance from educational materials and a boilerplate form, promising someone equity is do-able as a DIY project.

Reality Check

The problem, of course, is that promising equity is 2% of the much more complicated process needed to actually issue equity. To correctly accomplish the issuance of equity from your company and into the hands of the intended recipient, a web of highly contextual legal analysis needs to occur. Just a short (non-exhaustive) example:

  • What kind of entity are you? That influences the type of equity you can issue.
  • Stock? Option?
    • If Stock, at what price?
    • If Option, at what price? To an employee, or a contractor?
  • Vesting schedule? 83(b)? Acceleration?
  • Was the price set correctly to avoid tax consequences?
  • Enough authorized shares?
  • Correct class of equity?
  • Is it being issued under an equity plan?
  • Was the plan adopted correctly?
  • Are there enough shares in the plan?
  • Is the recipient eligible to receive the equity under securities laws and tax rules?
  • Any state-specific rules/filings to comply with?
  • Any contractual approvals needed?
  • Any cap table adjustments needed, like anti-dilution?
  • Approved by Board?
  • Anyone else that needs to be notified about the Board action?
  • Any spouses we need to worry about for community property purposes?

I could go on, but you get the idea.

Want to try automating that? Good luck to you. Medical care will be fully automated before complex legal work is. Why? Because there’s far less variability in biology than there is between the legal structures of companies. You simply cannot automate (not in a commercially viable way, at least) in an environment where every use case has a totally different starting point, context, and history, in an infinite number of combinations. Even less so where high-stakes errors are cemented in ways (via contract execution and enforceability) that do not allow for quick and easy bug fixes. That is precisely the world in which serious VC lawyers operate.

Believe me, I empathize deeply with the disdain for lawyers held by many entrepreneurs, and share some of it myself. As someone who manages recruiting for our firm, I constantly find myself fighting a sense that the legal field is a magnet for people who think that perfecting their punctuation matters more than learning to actually advise clients on the what, why, and how of startup law.

But there are lawyers in the market who know how to get things done efficiently and correctly. I hire those lawyers. You can either (i) pay them now, (ii) pay them 10x later, or (iii) assume your company will fail before the debt comes due.

Startup Advisors: Best Practices

Background Reading:

Advisors. The best startups have great ones. They save you lots of headaches, time, and money. In fact, I’m not sure I’ve come across any successful client that didn’t have a strong set of advisors. Here’s some advice on how to not screw it up:

Advisory ‘Boards’ Rarely Exist.

A set of advisors is sometimes referred to as an advisory ‘board,’ but 99% of the time that’s just a term to make it sound cool. The advisory ‘board’ never meets as a group, and often doesn’t even know each other. They’re just a loose set of advisors that a company works with 1:1, or occasionally in smaller groups. Nothing like a Board of Directors, which actually does have to coordinate schedules.

Don’t Stay Local.

As the first linked post above explains in depth, 20 minutes on the phone with someone who has the right expertise is 1000x more valuable than days spent with someone who is more accessible, but can’t provide real insight that isn’t available already via blog posts or books. This means that if you’re relying solely on the very limited pool of people available via your local business ecosystem, you’re doing it wrong.

LinkedIn, Twitter, Angellist, E-mail, Phone. Work ’em. Connect with the key people in your local ecosystem who can make things happen, but don’t fish only in your little pond.

Don’t Confuse Mentors with Advisors.

Mentors can be really valuable to new founders. They can provide emotional support, friendship, coaching, and all kinds of other things. But are those the kinds of things that deserve an equity grant?

It’s ultimately the team’s call. But just realize that those are not the kinds of things that real advisors are meant for. Advisors provide real strategic insight, connections, recruiting, investor introductions, things that go beyond moral support for the founders and actually move the ball forward for the company in an obvious way. That’s the kind of value-add that typically merits equity.

Get Independent Viewpoints

For high-stakes, complex questions for which the answer isn’t clear, advice needs to be triangulated. You don’t treat any particular person’s perspective as gospel; instead you speak with multiple people and combine all of their viewpoints to make your judgment call.

That sort of triangulation is not possible when all of your advisors have the same background, are part of the same circles, etc. Especially when the questions involve big decisions for which various stakeholders have incentives to favor one option over another, you want advisors who are detached from those incentives, so their advice is objective. This, btw, is also the case with lawyers.

Favor Intellectual Honesty over Politeness

The whole point of getting outside advice is to help you see things you can’t see on your own. If your strategy for choosing advisors is to work only with the people who are agreeable to your own opinions, you’re wasting your time. People who are blunt with their advice, but deliver real insight when they give it, can be game changers for a company. 

Use an Advisor Agreement.

It’s not magical; templates abound. The Founder Institute’s FAST Agreement is perfectly acceptable, and even simplifies equity calculations. The most important thing is that an Advisor Agreement removes any ambiguity as to (i) compensation owed for advisory services, (ii) who owns the contributions, IP, etc. that result from the advisory (the company), and (iii) confidentiality of any info shared. Yes, any vc lawyer has seen founders get in trouble with these issues for not taking the time to document it properly.

Equity; %, Vesting Schedule, Cliff, Acceleration.

If an advisor expects cash from an early-stage startup, that’s usually a red flag, short of a really unusual circumstance.

The FAST Agreement has pretty solid guidelines for what’s appropriate in terms of equity %, depending on the Company stage. Pre-equity round, 0.25%-0.5% is a typical advisor. 1% is someone extremely strategic whose name you absolutely want behind your company. After an equity round, the %s naturally shift down a bit because the company is more valuable.

1 or 2-year vesting schedule and a 3-month cliff, and full single-trigger acceleration on a change of control.  Advisors get full acceleration because acquirers never expect them to stick around after a sale, unlike founders or executives.

Use that cliff.

We regularly see founders engage an advisor expecting tons of value to be provided, and then crickets once the equity is granted. But the founders don’t do anything about it. 3-months should be more than enough time to know whether a new advisor will really deliver the goods, and if not cut the cord and get that equity back for re-use.

 The hard part, of course, is finding the right advisors and selling them on your vision, so they’ll give you the time. If no one on your team knows how to hustle and sell, either start learning yesterday, find someone who can, or (honestly) just give up now. Selling, in a dozen different ways (including to advisors), is 75% of what a competent founder CEO does.

Fatal Errors in Early Startup Hiring

I don’t pretend to be an expert in HR or tech recruiting, at all. However, being a VC lawyer gives you a deep inside view into a lot of what goes right and what goes wrong in early-stage hiring for startups; particularly what goes wrong, because that’s usually when lawyers get called in. Lots of data points to notice patterns. While there are a whole lot more issues that I’m not covering, below are a few key recruiting errors (tactical, not legal) that I’ve regularly seen Founder CEOs make as they start trying to expand their roster.

Hiring Sociopaths

Well that escalated quickly, didn’t it. Very very very^2 few people are so talented that they can make up for having a toxic personality. What is toxic? Someone who either (i) can’t control their own emotions, or (ii) seems to somehow regularly trigger other peoples’ emotions, in a bad way.

The early days of a startup are chaotic. You need personalities that will absorb some of that chaos, and make it easier to manage, not harder. Character and values are at least as important as the person’s skillset. When I hire lawyers, I pay at least as much attention to subtle cues in a person’s behavior as I do to their analytical skills; their facial expressions, manner of speaking, how they react to others, how they describe other people and themselves. I’ve seen what it’s like to work in places where there is even just 1 super toxic personality. It ruins everything, and can sink a company.

That doesn’t mean emotions in general are bad. Emotion often means you care about something. It’s OK for people to get emotional about stuff; better than people who are disengaged and stoic all the time. But there’s a world of difference between getting emotional because you care about something v. just because you can’t control yourself, or don’t want to. Blind reference checks help a lot.

Hiring “Big Company” People

Jeff Bussgang’s “jungle, then dirt road, then highway” metaphor is valuable for understanding how you can go wrong in hiring people who aren’t the right fit for a startup environment. A Series C or later company operates extremely differently from how a seed or Series A company does. Later-stage companies have higher salaries, more narrowly defined roles, more predictability, more formality, more perks. Earlier stage means lower salaries (but more equity), more flexible and broad roles designed to ‘just get it done’ (whatever ‘it’ happens to be that day), more unpredictability, and closer-knit/more casual culture. “Highway” people usually can’t handle the jungle, or even the dirt road.

Problems arise when a company has raised a seed or Series A and suddenly wants to present themselves as one of the big dogs by hiring someone with a very impressive resume and title. That person will very often want a compensation package that strains the company’s budget, and a level of resources and order that simply isn’t appropriate for early stage. Talent can come in the form of a lot of different cultures and personalities. Make sure you’re hiring talent with realistic expectations for your company’s stage. Salary v. equity expectations are often a valuable signal here, and can select for the right or wrong people.

And a big thing to watch out for: I’ve known of VCs who subtly push founder CEOs to hire “big company” people sooner than they are really needed, to create a greater sense of urgency in needing to raise a new round, that they lead. If an investor has put some seed or Series A money in your company and wants to lead your Series A or B, they have an incentive to shrink your runway by filling your payroll with high-salary people earlier than is appropriate.  More payroll means you’re forced to close your Series A (or Series B) sooner, and at a lower valuation, than you otherwise would’ve wanted; increasing their ownership. Be mindful of this dynamic, and ensure you have a total grasp of what your talent needs are and aren’t. 

Hiring Too Fast

You see far more companies that die because they hired too fast, and eventually couldn’t keep up with payroll, than the converse. Successful entrepreneurs know how to be scrappy and resourceful; seemingly magically figuring out a way to achieve results with far fewer resources than other people could. That should apply to hiring as well, and it’s often achieved by ensuring that you aren’t hiring “big company” people (see above) with (i) unrealistic salary expectations, and (ii) such specialized skillsets that they leave needs unfilled that require hiring more people.

Hiring extremely talented, flexible generalists appropriately suited (and compensated) for early-stage is often how resourceful CEOs keep their early-stage company “default alive” instead of “default dead,” to use Paul Graham’s language.  As a general matter, at early stage someone who is really good at X, Y, and Z is more valuable, and a much safer hire, than someone who is world class at just X.

Hiring Friends or Family

If you build anything that starts getting traction, there will come a time when people start suggesting their friends and family to fill job positions. In some sense, this is not a bad thing. Recruiting from your existing roster’s network is actually a very smart and common way to find quality candidates without needing to pay recruiters. The danger, of course, lies in the psychological tendency for immature founders to hire people simply because they like them, rather than because those people actually have the talent and skills the company needs. 

Only go down this path if you are 100% comfortable saying ‘no’ over and over again, because you’ll need to. Frankly, if you’re CEO and don’t know how to say “no” when you need to (often), you’re going to face much bigger problems than hiring. 

Friends and family are easy to hire, but they’re much harder to fire because of the emotional and political dynamics surrounding the personal relationship. And hiring people because of existing relationships, instead of because of merit, is also a fast way to create an insular, mediocre mono-culture of people who are all buddies with each other, as opposed to a performance driven one. As a resource-strapped early-stage company trying to navigate chaos, you can’t afford to have a low performance culture. Hire for merit from Day 1.

As I said, there are dozens of big mistakes companies make in hiring, and I’m sure there are fantastic blog posts out there from experts on the subject. The above is just a few really core tactical blunders VC lawyers see founder teams make, because we’re usually called in to help the team clean up the mess from a legal perspective.

In the early days, hire extremely talented, flexible and mature team-players with realistic expectations about startup life, not too early, and not just because you like them or they are someone’s friend. It’ll save you an enormous amount of headaches… and legal fees.