Man has a large capacity for effort. In fact it is so much greater than we think it is that few ever reach this capacity. We should value the faculty of knowing what we ought to do and having the will to do it. Knowing is easy; it is the doing that is difficult. The critical issue is not what we know but what we do with what we know. The great end of life is not knowledge, but action. I believe that it is the duty of each of us to act as if the fate of the world depended on him ... we must live for the future, not for our own comfort or success.

--Admiral Rickover

A founder-friendly term sheet

When I invest (outside of YC) I make offers with the following term sheet.  I’ve tried to make the terms reflect what I wanted when I was a founder.  A few people have asked me if I’d share it, so here it is.  I think it’s pretty founder-friendly.

If you believe the upside risk theory, then it makes sense to offer compelling terms and forgo some downside protection to get the best companies to want to work with you.

What’s most important is what’s not in it:

*No option pool.  Taking the option pool out of the pre-money valuation (ie, diluting only founders and not investors for future hires) is just a way to artificially manipulate valuation.  New hires benefit everyone and should dilute everyone.

*The company doesn’t have to pay any of my legal fees.  Requiring the company to pay investors’ legal fees always struck me as particularly egregious—the company can probably make better use of the money than investors can, so I’ll pay my own legal fees for the round (in a simple deal with no back and forth they always end up super low anyway).

*No expiration.  I got burned once by an exploding offer and haven’t forgotten it; the founders can take as much time as they want to think about it.  In practice, people usually decide pretty quickly.

*No confidentiality.  Founder/investor relationships are long and important.  The founders should talk to whomever they want, and if they want to tell people what I offered them, I don’t really care.  Investors certainly tell each other what they offer companies. (Once we shake hands on a deal, of course, I expect the founders to honor it.)

*No participating preferred, non-standard liquidation preference, etc.  There is a 1x liquidation preference, but I’m willing to forgo even that and buy common shares (and sometimes do, although it has implications on the strike price for employee options so most founders don’t want it).  In early-stage investing, you should not focus on downside protection.

I have an allergic reaction to complex deal structures, as they invariably end up with all sorts of unintended consequences.  Also, getting this right in early rounds is important—future rounds tend to do whatever the previous rounds did.

(What I do care about is ownership percentage and pro rata rights to maintain that ownership percentage in future rounds.  Most of the rest I don’t care about, but it’s never contentious anyway.)

Startup Advice

In honor of the new YC batch starting tomorrow, here is some of the best startup advice I’ve heard or given (mostly heard):

1.     Make something people want.

2.     A great team and a great market are both critically important—you have to have both.  The debate about which is more important is silly.

3.     Write code, talk to users, and build the company (hire the best people you can find, get the culture right, fundraise, close sales, etc.)  Most other things that founders do are a waste of time.

4.     Set a clear, easy-to-understand vision for your company, and make it be a mission people believe in.

5.     Stay focused and don’t try to do too many things at once.  Care about execution quality.

6.     You have to have an almost crazy level of dedication to your company to succeed.

7.     In general, don’t start a startup you’re not willing to work on for ten years.

8.     Be relentlessly resourceful.

9.     In the current pivot-happy world, good ideas are underweight.  It’s worth the time to think through a good one.

10.  Growth solves (nearly) all problems.

11.  While growth is critical and you should focus on it, occasionally consider where you’re going—you need both growth and to be growing towards something valuable.

12.  Obsess about the quality of the product.

13.  Overcommunicate with your team.  For some reason most founders are really bad at this one.  Transparency is your friend.

14.  Move fast.  Speed is one of your main advantages over large companies.

15.  Hire slow; fire fast.  Hiring is the most important thing you do; spend at least a third of your time on it.

16.  Occasionally think about why the 20th person will join your company.

17.  Hire smart and effective people that are committed to what you’re doing.  The last five words there are important.

18.  Hire friends and friends of friends.  Go after these people like crazy to get them to join.  Some other candidate sources are ok, but I always got bad results from technical recruiters.

19.  Generally, value aptitude over experience.

20.  Hire people that you could describe as animals.

21.  Eliminate distractions.

22.  Don’t die.

23.  Be frugal.

24.  You’ll often hear conflicting advice about everything but “build a great product”.  This means you can go either way on much of the rest of it and it doesn’t really matter.  Just make a decision and get back to work.  Product/market fit is what matters.  You can—and will—make a lot of mistakes.

25.  You make what you measure.

26.  Startups are very hard no matter what you do; you may as well go after a big opportunity.

27.  Momentum is critical.  Don’t lose it.

28.  Keep salaries low and equity high.

29.  Keep the organization as flat as you can.

30.  When working on a deal—raising money, trying to get a partnership, etc.—it’s important to create a competitive situation.

31.  Schleps are good.

32.  Don’t forget to make money.

33.  Journalists like hearing directly from founders.  If you hire PR people, resist their desire to control all the contact.

34.  It’s standard for founders to keep board control in the first round.

35.  Listen to everyone.  Then make your own decision.

36.  Remember that you are more likely to die because you execute badly than get crushed by a competitor.

37.  Get lucky.

38.  Have a direct relationship with your customers.

39.  Be formidable—do not be easy to push around.

40.  Don’t let your company be run by a sales guy.  But do learn how to sell your product.

41.  Have a culture that rewards output.

42.  Don’t hire professional managers too early.

43.  Simple is good.  Be suspicious of complexity.

44.  Get on planes in marginal situations.  In-person is still better than tele-anything.

45.  Most things are not as risky as they seem.

46.  Be suspect of anyone who says the word process too often.

47.  Raise a bit more money than you think you need.

48.  Ignore the fact that “the press loves [you]”.

49.  Have great customer service.

50.  You can create value with breakthrough innovation, incremental refinement, or complex coordination.  Great companies often do two of these.  The very best companies do all three.

51.  The role of the board is advice and consent.  If the CEO does not lay out a clear strategy and tries to get the board to set one, it will usually end in disaster.

52.  Board observers are usually a headache.

53.  If you pivot, do it fully and with conviction.  The worst thing is to try to do a bit of the old and the new—it’s hard to kill your babies.

54.  It’s better to make a decision and be wrong than to equivocate.

55.  Set goals for the company and motivate people to get there.

56.  Always praise good work.

57.  Celebrate your wins as a company.  Get t-shirts for big milestones.

58.  Have a good operational cadence where projects are short and you’re releasing something new on a regular basis.

59.  You can win with the best product, the best price, or the best experience.

60.  Meetups and conferences are generally a waste of time.

61.  If the founders of your company seem to care more about being founders than they care about your specific company, go join another company.

62.  It’s easier to sell painkillers than vitamins.

63.  Be suspicious of any work that is not building product or getting customers.  It’s easy to get sucked into an infrastructure rewrite death spiral.

64.  It’s better to have a few users love your product than for a lot of users to sort of like it.

65.  Learn how to stay extermally optimistic when your world is melting down.

66.  Startups should require as few miracles as possible, but at least one.

67.  You have to have great execution—far more people have good ideas than are willing to roll up their sleeves and get shit done.

68.  Don’t have a diverse culture in the early days.

69.  Keep a to-do list every day.  At the top of it, put the one or two big things you want to work on.

70.  Being the CEO is miserable more often than it’s good.  But when it’s good, it’s really good.

71.  On the really bad days, remember that tomorrow will be better—it’s hard to see it being much worse!

72.  Sleep and exercise.

73.  Success in a startup is usually pass/fail.  Worry more about making sure you pass than an extra point of dilution.

74.  Good investors are worth a reasonable premium.

75.  Give your investors something to do.

76.  Go for a few highly involved investors over a lot of lightly engaged ones.

77.  Raise money on promise.  Raise money on clean terms.

78.  Do reference checks on your potential investors.  Ask other founders how they are when everything goes wrong.

79.  Investors love companies other investors love.

80.  A lot of the best ideas seem silly or bad initially—you want an idea at the intersection of “seems like bad idea” and “is good idea”. (It’s important to note you need to be contrarian and right, not simply contrarian.)

81.  Surf someone else’s wave.

82.  Sometimes you can succeed through sheer force of will.

83.  All startups are fucked in at least one major way.  Keep going.

84.  Keep an eye on cash in the bank and don’t run out of it.

85.  Pay a lot of attention to the relationship between cofounders, especially if both/all of you want to be CEO.

86.  Stay small and nimble.

87.  Have a staff meeting at least once a week.

88.  Find a mentor that will teach you how to manage.

89.  Keep burn low until you’re sure everything is working.

90.  Be suspect about buying users.

91.  Lead by example.

92.  Have the right kind of office.  The proper office for a very small company is an apartment or house.

93.  Share results (financial and key metrics) with the company every month.

94.  Have a table in your offer letters that shows how much the stock you’re granting a new hire could be worth in various scenarios.

95.  The best startups are defined by exceptions; all of these rules are probably breakable, but probably not all at the same time.

By endurance we conquer

I'm reading The Endurance and "by endurance we conquer" (Ernest Shackleton's family motto) struck me as a great piece of startup wisdom.

Everyone knows that you need a great team, great execution, and a great idea.  Less obvious is that you have to have great endurance.  It's very tough to keep going when everyone tells you your idea sucks and it will never work (especially when things are plainly not working).  It's tough to keep going when everything goes wrong, which it almost certainly will. And it's tough to keep working when you're really tired, but very often that extra 5% at a critical point is how you beat out a competitor for a critical deal and then they disappear in the rearview mirror.

Most startups don't die at the hands of a competitor.  It's more often something like an internal implosion, the founders giving up, or not building something people want (and failing to remedy that situation). You can win by endurance.

Upside risk

Everyone claims that they understand the power law in angel investing, but very few people practice it.  I think this is because it’s hard to conceptualize the difference between a 3x and a 300x (or 3000x) return. 

It’s common to make more money from your single best angel investment than all the rest put together.  The consequence of this is that the real risk is missing out on that outstanding investment, and not failing to get your money back (or, as some people ask for, a guaranteed 2x) on all of your other companies.

And yet angel investors continue to ask for onerous terms to mitigate their “downside risk”.  All this does is piss founders off, misalign incentives, and harm the investors’ chance of getting to invest in the best deals, because those are usually hotly pursued and good founders check references.  An angel investor is much better off focusing on investing at a reasonable price [1] and not trying to “win” on any other terms.

Instead of downside risk [2], more investors should think about upside risk—not getting to invest in the company that will provide the return everyone is looking for. 

[1] Speaking of price, the mistake that founders make (corresponding to investors focusing too much on downside terms) is focusing too much on getting a high price.  I have seen many founders price out good investors and put the company in a bad situation facing a down round a year later, all because they were obsessed with getting a high sticker price for their company.  I think it’s because it gives founders something quantitative to compete on. 

[2] As a side note, I think most people have terrible intuition about investment risk/reward tradeoffs in general—this is not limited to private companies.  It feels like every time I turn on CNBC (which is thankfully very infrequently) they’re talking about an impending total collapse.  The end of the world only happens once; it’s very unlikely to be Monday morning.  But we seem hardwired to focus on downside risk.  The CNBC watchers would be better off keeping a cushion in cash and not selling their stocks after every panic. 

Software to avoid the software people

A few years ago, many of the Y Combinator B2B startups wrote tools for the developers in other companies--metrics software, deployment software, monitoring software, build software, development frameworks, etc.  The startups would want to meet with the technology people at companies to sell their service.

There's been a significant shift--lots of the YC B2B startups are now building software to help non-technical people in companies (usually large ones with a primary business that is not writing software) avoid their internal IT department when they need software to help them get something done.  It's faster and easier.  So now the startups are trying to avoid the developers at the other company (so they don't get blocked) and sell to the person who is waiting in the internal development queue. 

It will be interesting to see how far this trend goes, and something to keep in mind if you’re starting a new company.

More interesting dinner conversations

When seated at a table with people you don't know, ask "what are you interested in?" or "what have you been thinking about lately?" instead of "what do you do?".

(Surprisingly often you get a look of utter confusion, followed by fifteen seconds of hemming and hawing, and then a version of "man, i really need to take some time off".)


I don't believe that any of the blurry UFO photos are real, for a very simple reason--they all resemble a slightly more advanced version of the the then-current technology and style.  It seem very unlikely a spacecraft would fit the gestalt of the decade during which it crashed into earth.

There is a version of this to keep in mind when listening to startups make certain types of extraordinary claims.

(As a random aside, I went back and looked at some old photos of purported UFOs and real aircraft.  A hat-tip to the designers of the SR-71 for creating the only aircraft that still manages to look super-futuristic 50 years later.)

Successful people

"Successful people create companies.  More successful people create countries.  The most successful people create religions."

I heard this from Qi Lu; I'm not sure what the source is.  It got me thinking, though--the most successful founders do not set out to create companies.  They are on a mission to create something closer to a religion, and at some point it turns out that forming a company is the easiest way to do so.

In general, the big companies don't come from pivots, and I think this is most of the reason why.

Growth and Government

TL;DR Without economic growth, democracy doesn’t work because voters occupy a zero-sum system.

The first piece of startup wisdom I heard was “increasing your sales will fix all problems”.   This turns out to be another way of phrasing Paul Graham’s point that growth is critical, which is true for all sorts of reasons—for example, justifying high valuations to raise large amounts of capital in the early days, attracting the best people and paying them with equity, providing a buffer to allow for some mistakes, and smoothing over internal tensions.

I believe that growth is not only critical for startups, but for most systems.   Either you’re growing, or you’re slowly dying.  Perfect equilibrium is rare.

One system that seems to be in early death throes is the United States government.  There’s a lot of political rancor, which is particularly puzzling when one considers that in the 2012 presidential election, Obama and Romney said roughly the same thing.  Dysfunction is high—the sequester, which was supposed to be so unpalatable it would never take effect, actually (and likely temporarily) happened last Friday because the parties couldn’t agree on an alternative. There’s a lot of arguing over insignificant issues—enough, in fact, to distract us from the fact that no one has new ideas on the big issues.  We have trillion dollar deficits and no plan to reduce them, and yet the media focus on the sideshows.

A good metric for government dysfunction is inability to pass a budget, either leading to a government shutdown or a continuing resolution, which lets agencies continue to operate on the previous budget, for a theoretically short time period until we can agree on a new one.  Passing a budget is a fundamental job of Congress and the President.

As far as I can tell, the US government managed to make it about 200 years without any shutdowns.  We had one in 1976, and then a bunch more in the 70s and 80s, plus 3 in the 90s, including one that lasted 21 days.  Shutdowns have fallen out of fashion, and now we just operate with continuing resolutions, and lots of them—for example, 21 for the 2001 budget alone.  The real issue with shutdowns and continuing resolutions is the same—inability to agree on a federal budget.

Every few months, there’s brief discussion of some sort of grand bargain, but it always ends in deferral—even the deferrals get deferred!  Everyone feels screwed, and almost no one feels like the government is doing a great job.   We can’t agree on anything, and anyone that proposes doing something radically different doesn’t get elected.

But democracy (I’m using democracy to include republics and other forms of government where the people get an effectively direct say in who the leaders are) worked in the US for a long time—we were able to make real progress, pass budgets, be the world superpower, evolve as a country, etc.  Something has changed. 

The US has been blessed with economic growth for a very long time, first due to natural resources and massive amounts of land in which to expand, and then due to a period of technological progress rarely matched in human history that lasted approximately until we realized just how dangerous nuclear bombs really were and got scared of new technology.  But the frontier is long over, and although technological innovation has continued at a blistering rate for computers and the Internet, it seems to have slowed down in most other industries.

Growth may be the root cause of American exceptionalism—things consistently got better every decade largely because we were growing.  People from other countries wanted to live here, we led the world in technological innovation, social mobility was high because everyone was getting richer, and we had the resources to get involved around the world.  This is still at least partially true.

But growth has slowed quite a bit.  Here is a graph of real GDP percentage growth in the United States from 1950 until now, with a trendline.  The trendline goes from just under 5% to just under 2%.  This is a much more significant drop than it appears, because it compounds exponentially.

A shocking data point about how things are going is that the median real net worth for households headed by someone under 35 dropped 68% from 1984 to 2009, to $3,662.  For those over 65, it increased 42% to $170,494 (largely due to a gain in property values).  This disparity is good evidence of a lack of real growth (and also a very unstable situation where an older generation benefits at the expense of a younger).

Here are two more graphs, the first showing the US unemployment rate (the real numbers are perhaps worse, as people drop out of the work force) and the second showing the US interest rate, both of which make a case for slowing growth:


All of that said, in absolute sense I’d much rather live in the world of today than 1950—it’s tough for me to imagine living in a world without the Internet.  However, in the same way that one can feel acceleration but not velocity, people seem more sensitive to the annual rate of improvement than the absolute quality of life.  So even though people should be happier in an absolutely better world, no one wants to stand still on the hedonic treadmill.

Most of us want our lives to get better every year—the hedonic treadmill is a pain that way.  In a democracy, we theoretically vote for what we believe will improve our lives the most.  In a system with economic growth, things can improve for everyone.  In a system without growth, or even one with very little growth, that’s not the case—if things improve for me, it has to come at the expense of things getting worse for you.  Without growth, we’re voting against someone else’s interest as much as we’re voting for our own.  This ends with lots of fighting and everyone feeling screwed, broken into factions, and unmotivated.  Democracy does not work well in a zero-sum world.  Autocratic political systems probably work better with growth too, but the effect of a lack of growth is likely less pronounced right up until the revolution.

So we need to get growth back, unless we want to see this grand experiment end.  Our politicians don’t seem to have any good ideas about how to do this.  Saying “I believe in America” and hoping that proof by vigorous assertion starts working is not a strategy.

I believe democracy only works in a non-zero-sum world.  We are losing jobs that we will never get back, we are borrowing money and spending it on anything but real investment, and it feels like we are managing a slow decline.  Without growth, we will head towards a special case of Malthusian dystopia where we have plenty of junk food but not enough of anything else.

Growth is what we should be focusing on.  Growth is great—it lets us run deficits, it means the country is not zero-sum, it lets us invest in innovation and continual improvement in infrastructure, it provides a buffer for a little mismanagement, and it means tomorrow will be better than today.  Contrary to what one might expect, growth provides long-term stability.

We must return to real growth, growth where we do more with less.  Borrowing money to get ninety growth cents on the dollar does not count, although that may work for a while.  We have to figure out how to fix the real problems with technological innovation—cheaper and cleaner energy, better healthcare (15.2% of GDP in 2008 and 18.2% of GDP in 2011), better transportation, food production, and defense.  GDP growth is probably the only way to fix our national debt and entitlement problems, and it’d be better to have real growth than inflationary growth.

How to best drive economic growth is a difficult question.  It’s easy to say we should just invest in science and technology, and although that’s probably right it’s easier said than done.  The government is historically bad at picking winners to invest in, but our leaders can perhaps help reverse the cultural shift from pro-science to anti-science.  Our current culture has shifted to be anti-science; the fear of things like genetically modified food and robots is obviously in the way of growth.

We should strive to make jobs in science and technology more appealing than jobs in finance (incidentally, it should be a big red flag for growth when the brightest young people start going into finance, since they aren’t actually creating any more wealth, just redistributing it).  Startups are probably the best way to do this—startups let people that develop a new technology get rich, instead of just making GE slightly richer.  So we should encourage startups in whatever way we can.

Another issue is the structure of our national budget.  We have, in startup parlance, a high burn, and most of it can’t be considered ‘investment’ but is instead ‘expense’.  Spending money on things like infrastructure improvement or new technology that are likely to generate more money in the future helps growth; spending money on the so-called entitlement programs, and parts of the military, does not.  Of course medical care and defense are important, and we have to have them—this is a tough balancing act.  In some cases, the competitive nature of the private sector may provide a better path.  Sooner or later, we are going to have an ugly conversation about our national budget—we can delay it for a long time but not forever.  The government, when it needs to spend money at all, should aim to invest.  Considering what will drive growth is a useful framework for thinking about the best use of resources.

We should not fear innovation or globalization.  Robots are going to replace human workers in lots of factories; jobs that do require human labor are going to continue to move to the lowest-cost place.  But that’s ok, and these sorts of jobs are not what will generate economic growth for us anyway.  We should strive to be a net exporter of ideas and technologies.  For example, the US makes the best software in the world today.  It’d be disastrous for us if that stopped happening.  We should also design the best supersonic jet engines, the best nuclear power plants, and the best agricultural technology.

We should understand that as a consequence of technology and an economy of ideas, the gap between the rich and the poor will likely increase from its already high-seeming levels.  There is good and bad to this, but we should be careful not to legislate against it, which will hurt growth.   Technology magnifies differences in innate ability; startups provide a framework to get compensated for it.  But GDP growth ought to improve the quality of life for everyone, and no growth will reduce quality of life for everyone except the very rich.  A safety net for legitimately poor people is a good thing, and probably becomes more necessary in a world with this sort of divergence.  Quality of life should improve for everyone; the bigger issue will likely be that people are very sensitive to relative fairness.

Pro-growth tax and legal changes are a good idea.  As a consequence of a high burn rate, we have to have high taxes.  But other countries don’t have this structural challenge, and so some other countries have lower tax rates than we do.  That makes them an appealing place to start a business or live.  By reducing our burn rate, we can reduce taxes. We don’t need to go crazy here—there are a lot of other factors that make the US a very attractive place to start a new company.  But it would certainly help.  And tax policy should reward activity that drives growth.

There are some easy legal changes we can make to increase growth.  Immigration for entrepreneurs and skilled technology workers is an obvious one; we should want the best people creating value here, not elsewhere in the world.  Tort reform is another—legal protection is of course important, but it’s gotten so silly that it discourages innovation.

There is a lot more we can do.  Most of it is difficult, but growth it is the critical issue.

As a closing thought, the Airbnb founders used to draw a forward-looking growth graph that they wanted to hit.  It was their number one priority; they put it up on their desks, on their refrigerator, and on the mirror in their bathroom.  You build what you measure, and they built growth.  That seemed to work pretty well for them.

It’s not as easy if you’re the US government.  But probably not impossible, either, and it would at least point us in the right direction.


Thanks to Paul Graham, Nick Sivo, and Peter Thiel for contributing ideas that led to this blog post.