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Chief Mom, Carly Fauth talks thredUP and thredUP kids with Jordan Rich.

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Earn outs have always made intellectual sense to me. If you’re the newly acquired company (especially in a high growth market) you get paid based on meeting and exceeding projections in your plan. So company A (big player) buys company B (smaller player) and agrees to a price somewhere between 50%-75% of the estimated long-term value of B with the remaining value being “earned” by the management of B as they meet agreed upon milestones.

Earn outs are all about evaluating potential output, discounting and measuring. While not necessarily straightforward (in fact, they are often complex), most people can get behind the concept.  It’s what we’re used to in other contexts – it’s performance based pay.

But “earn ins” is the problem. How do you apply the same type of logic to new non-founder employees? Or to be exact: how do you evaluate the potential output, discount appropriately, and then measure the results for a new non-founder employee in an early stage company? This is especially true if you're having this conversation with someone for whom this is their first start-up. Just because you "work at a start-up" doesn't mean you own it!

Is this a problem?  Yes, it is. There are conventions out there for allocations, but the applications of these conventions are all over the map. A random walk down Google and the VC Blogosphere yields a smorgasboard of ways to approach this challenge.

Venture Hacks provides some benchmarking for companies after their first institutional fundraising. They identify these ‘options grants in Silicon Valley’ as ranges in the context of a hiring plan.

So with that being said, I’m proposing the start of an earn in calculator as a guide for thinking about quantifying this aspect of building your start-up. Here are the criteria I’ve started with:

• Outstanding Shares of the Company (a debate on shares vs. % ownership is a contentious one - see Chris Dixon's post and comments here)
• What # employee this
• Market Rate for Position – what would this person be worth (in your location) if they had no ownership in the company and were simply a hired gun
• Salary You Are Paying – what’s the effective rate your paying this employee
• Post-Institutional Round Option Grant – if this person were joining your company once you’re flush with cash and you were paying them market rate, what type of option grant would you give them?
• Scarcity Value of Employee – is this person hard to find in your area? On a scale of 1-3 with 3 being very hard to find and 1 being not hard, where would this person rate?
• Anticipated Months to Market Rate Salary – the “beans and rice” premium – how long do you expect this person to work at cut wages? 

So what?

The major challenge is that this type of grant is based on inputs - a real leap of faith. Most founders want to deal with hard numbers, real data, and act on reliable indicators of whether something is working or not. When granting early stage options it’s a lot of gut work since the only thing you can go on is what that person has done before and how you see the fitting in at the company.

Hopefully the beginning of this framework will help jump start some conventions for early stage hires. It would be good for everyone involved.

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So you’ve got this idea for a product. You pull a few friends in and you start working at the local coffee shops. You plug in your Mac and camp out all day drinking the free refills and bumming the wifi.

You’re nimble. Not tied down to a space, free to enjoy the flexibility that comes with being an entrepreneur. Cool! You and your team check-in regularly on Skype and you use Basecamp and you get together a couple times a week on a video conference or in-person. You’re saving so much money NOT having an office.  You’re doing everything right to bootstrap…

Having been through this and now being on the other side, I have to say that this is one of the great fallacies of start-up life. Here’s why:

1)   You’re functioning at about 75% productivity in a coffee shop or at home. The distractions are everywhere. At the coffee shop it’s the annoying person on the phone; at home it’s the cat, the dog, the neighbor, the internet is down, the TV is on…The fact is you’re not at “the office” so your time is more malleable.  You can “meet for lunch.” Or you can “wait for the package” or whatever. No one is holding you accountable (sure, you say your partners are – but Starbucks office time is not the same as real office time).  

2)   If you’re serious about building a company – like a real company not an iPhone app - than you’re going to need space.  You’re going to need whiteboards and desks and printers and fast internet and phone booths and meeting space.  I’m sure there are virtual tools for all of this, but the reality is that these tools are largely poor substitutes for real-life problem solving and company building.  The virtual tools are designed as supplements, not as replacements.  One of the reasons why incubators (Techstars, YC, etc.) exist is for the energy and the space.

3)   Your boundaries between work and play dissolve to the point that you don’t know how to work and how to play.  When you live in coffee shops you tend to go at one speed, whether you’re crushed for time or not. When you have an office with a product deadline looming, you stay there until it’s done. When you miss deadlines at Starbucks you write them off because you’re working remotely and “these things take time” and “hey, look how much money you’re saving by NOT having an office.” And if you’re the kind of person who used to have the coffee shop as a place to go and clear your head while pounding out some element of the business, that is now officially gone.

4)   Lastly, office space is cheap and plentiful assuming you don’t need super nice digs. It’s also surprisingly cheaper than you think when you do a fully loaded cost analysis. When you’re not at the office the chances of you bringing your lunch are probably lower and the coffee is definitely more expensive.

20 coffee shop days = 40 coffees X 6 lunches out X 10 occasional snacks = $200 X 3 co-founders = $600.

Small office space for three in Cambridge right now is running about $800 all in.  I can’t believe it is so much more elsewhere. If you really think you have a company – a real company remember – put up the $2,500 and start building.

I am a stickler for keeping the burn rate low, but I also know that you need to know where to turn the dials. Time IS money.  Opportunity costs matter.  Lean, bootstrapped offices in my mind help you discover real quick whether you have another good idea OR the capacity to deliver something people really want (and will pay for).

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"You cannot do it yourself." 

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This is Part 1 of X of a series loosely related to social atomization and my being an entrepreneur

No I’m not a “coder” but I do play one on TV.

That’s sometimes what it feels like to be an entrepreneur out talking to investors about a product that I’ve not actually built (ya know with my hands). Mark Suster's blog repeatedly covers why CEOs/Founders need to be able to talk intelligently about all aspects of the business. It made me feel all fuzzy inside when I read that because I could say “I do that!”

But it also made me feel a bit like a charlatan, a bit disconnected from the team and the work being done here at HQ.  So to fight off this growing distance between the “code” and the “site”, I asked our Lead Engineer Chris Homer to help me get my feet wet.

He spent some time setting up “my environment” and then showing me how to put together basic content for pages without any real styling. So I got the short version of h tags and p tags and linking structures, routing, and even a table with some basic formatting. I know that this was the equivalent of learning to write my name (like 1st grade stuff) but it still felt good to learn something new and get a bit deeper into the product.

To be honest, it felt good to “work with my hands” again. “A monkey!” …”with tools!”, I thought to myself.   Coding/software development/ design/engineering really are fields “done by hand”. That’s not to say there isn’t technology involved – of course there is – but web pages, software applications, movie, etc. do get built by hand, by people.  Someone actually does make all the whizzbang happen by writing the elegant code. 

This post was partly inspired by Karen Fein (@thredUP_kids) here at thredUP. She said in passing this morning, “you know I’ve never really gone to a webpage and said ‘how did this thing get built?’ but now that I’m at a start-up building a site it’s always on my mind.”

I think that’s probably true for most employees at a start-up that are not totally involved in the codebase. All of the sudden there’s this “damn! people – real people – make this magic happen” moment.

It’s a moment I think non-technical company founders (and really every early employee) should try to have early and often.

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This post is by Chris Homer, CTO of thredUP. You can read more from Chris on his blog at www.chrishomer.com.

Mark Pincus's interview in the NY Times, Are you the CEO of Something?, started out a string of blog posts and discussion around empowering your team, delegation and employee productivity. Specifically, Fred Wilson and Brad Feld chimed in with their takes on it.  But here's my two cents:

The idea of empowerment and getting more productivity out of your workers is nothing new.  Every new manager faces the same battle as they transition from contributing individually to managing a group of individuals and then on to managing a group of managers.  How do you let go of the need to control and touch everything you are "responsible" for?  I would argue it starts with the tone you set with those who manage - not just how you respond to their questions or ideas.

The example that Mark recounted, about the receptionist taking on the project of procuring a better phone system, is a great example of delegation but I think it is actually the result of a mistake.  The overall idea behind "Are you the CEO of Something" is that everyone feels like they can an should take ownership of their ideas and everyone knows who has stepped up to lead each par of the ship.  The problem with this receptionist example is that she went to Mark first to tell him about the problem.  Instead she should have felt "empowered" enough to do some preliminary research and present her idea/plan and how she was going to move forward.  The "official" CEO in that case just has to give the thumbs up and would be much more confident in the project.

If the people that work for you approach their job with an "I own what I do" attitude they are much more likely to go to their managers with the preliminary solution in hand rather than the complaint/problem first.

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King Pyrrhus of Epirus suffered intense casualties in defeat of the Romans at Heraclea in 280BC. It was Pyrrhus’s defeat in victory that the term “Pyrrhic Victory” comes from. Plutarch recounts:

The armies separated; and, it is said, Pyrrhus replied to one that gave him joy of his victory that one more such victory would utterly undo him. For he had lost a great part of the forces he brought with him…on the other hand, as from a fountain continually flowing out of the city, the Roman camp was quickly and plentifully filled up with fresh men, not at all abating in courage for the loss they sustained, but even from their very anger gaining new force and resolution to go on with the war.

Start-ups should pay attention. Victory is important but only to the extent that it helps you win the war.  One of the things we consistently wrestle with here at thredUP is which battles to fight and thus what victory really looks like.

On the product side:

Is the launch of a new feature a real victory? Or it just a bigger customer service headache with increased touchpoints? “Fresh men” at the gate.

Is the creation of a new promotional discount a way to grab new customers or a way to signal to existing customers that they shouldn’t pay full price ever.  “Gaining new force and resolution” to wait our your high prices.

Do you pay to partner with an existing industry player who gives you “instant credibility”? Or does this partnership burn cash faster without answering the customer fit question any better?  Will they be a great partner when you’re out of cash and don’t have any better answer to the “who’s your best customer?” question? “One more such victory” and you’ll be out of cash.

On the team side:

Front end guys want contextual hover states and lots of smart reveals and they convince the engineers that it’s critical.  Once the engineer has a moment to himself he thinks “does this fuckin’ guy know this shit doesn’t really matter.”  

...or the reverse, when the engineer says that we really need to “lock down the UI” a month before launch so there’s enough time to get it working and gets the designer to finally part with a “finished” version of the homepage. What’s going through the designer’s head? You bet: “what does this guy think design is magic? You just drop a few buttons and headers onto a page and customers just get it? Idiots.”

On the HR side:

You remind an employee that the workday starts at 9. And then they remind you that most normal people take Sunday off.  And up until now they haven’t. You'll here crickets Sunday. For sure.

Of course there are countless examples where start-up victories cause you to lose the war.  Release too late. Too early. Raise too little. Too much. Hire too many. Not enough.

Winning the war is simple. Build a kick-ass, profitable company where employees love to come to work everyday. Build a product customers love and one they'd be really mad about losing.  

Stop thinking it’s something else.  I have.

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