One of the most consequential decisions early-stage founders have to make is who they will bring on as their founding team. The first five to 10 employees will have a massive impact on the company culture, and the precedents set with them are difficult to change down the road. That’s why this season on Build Mode, we’re diving into what it takes to build a world-class founding team.
To kick off season two, Isabelle Johannessen is joined by Yuri Sagalov, managing director at General Catalyst and former founder, YC partner, and seed investor at Wayfinder Ventures. Sagalov has worked with hundreds of pre-seed and seed-stage companies and has seen firsthand the best (and worst) ways to hire in the early days.
In this episode, Sagalov offers his best pieces of advice for founders who are hiring their first team, strategically building their cap table, and forming compensation structures that can scale with the company.
The three types of investors (and which one to avoid)
Sagalov categorizes investors into three main buckets: the ones that are heavily involved and function as an extension of your team, the ones that will give you a check and then vanish, and the micromanagers.
The first type of investor is the most valuable according to Sagalov: “They’re going to help you with recruiting, hiring, go to market. And the most interesting thing with those investors is often it’s completely disconnected from the check size.”
Although it may feel counterintuitive to turn down investments, working with VCs who will become overly involved in the process may cause more harm than good in the long run. Sagalov said, “The only bucket that I avoid is this third bucket of investors who give you money and they’re kind of in your kitchen, meddling. They have an opinion on everything. They get stressed out when things don’t go right.”
In a fundraise, everyone is putting their best foot forward, so Sagalov suggests reaching out to current portfolio companies before committing to an investor. “The best thing you can do as a founder is actually talk to portfolio companies, talk to other founders that they’ve worked with, ask for concrete examples of how they’ve been helpful, if they’ve been helpful, and then actually ask how they were when things didn’t go right.”
How to split equity with a co-founder
As an investor, Sagalov looks for co-founders who have created an equity split that is fair but also hedges for future misalignments. He suggests creating a slight differentiation by plus or minus one share so there is a clear way to break deadlocks.
Sagalov also reminds early-stage founders that these early decisions have staying power: “Oftentimes founders over-index on ‘I came up with the idea, so I deserve the lion’s share.’ Most of the journey of the company is ahead of them. You don’t want someone waking up five years from now feeling like they put in equal blood, sweat, and tears but own one-fifth of the equity.”
Talk to early employees about risk and compensation
The first few hires should be all in on the startup’s mission. Oftentimes, joining an early-stage startup can be perceived as risky. Sagalov emphasized the importance of discussing the risks and potential benefits: “Fundamentally, what you’re looking for when you’re hiring the first few people are missionaries who, beyond even the compensation, want to join you for the mission of the business,” he said. “You want to be honest with them that there is a lot of risk on the journey.”
Next week on Build Mode, we’re talking with Sarah Lucena, the founder and CEO of Mappa, who discusses how founders can take compatibility into account and hire the right fit for the team the first time, using their AI tool.
Isabelle Johannessen is our host. Build Mode is produced and edited by Maggie Nye. Audience Development is led by Morgan Little. And a special thanks to the Foundry and Cheddar video teams.