The Case for Four

May 27, 2010   

Yesterday, my friend, mentor and colleague, Jeff Bussgang wrote a post questioning the validity of a 4 year vesting cycle for startup founders. On behalf of all the founders out there, I’m going to disagree. His argument: startup exits how happen at a slower pace than in the 90s. Then, 4 year vesting made sense, because that often coincided with an exit. Today, Jeff argues, the average exit happens in 6 - 8 years, so he argues for our industry to change its ways and move up from 4 to 6 or 8 years?

My argument: all founders need to kick ass in the first 4 year. The best ones you need for longer, so you’re going to have to step up and make it more interesting.

Zero to 60

First of all, founders universally serve only one purpose: the take the company from Zero to 60. While some founders end up being great long-term managers (I’ll talk about these folks below) the skill that all founders have to have in common is taking a company from idea to operating and scaling.

With that as a baseline, a four year vesting cycle makes sense, because four years is about the time needed between inception and knowing whether or not you have a win, lose, or draw of a company.

Beyond that, most (web/tech) companies are executing on a vision which could never be longer than four years away. If you’re Shai Agassi and a founder of Better Place, maybe your visionary horizon has to be longer than four years, but any web/tech entrepreneur worth funding has better be executing on a max-four year visionary horizon (even if he or she has views about how the looks 6 or 10 years out). The consumer landscape they see before them is shifting rapidly, and the best entrepreneurs see and execute on what’s 1, 2 – maybe 4 – years ahead. But not 6 or 8.

Keeping Us Around

So, let’s say you’ve stumbled upon a Steve Jobs or a Jeff Bezos. You’ve just funded a company with both a pioneering visionary for the first 4 years, and he or she also turns out to be an an innovative manager for the next 4, or more years. Lucky you, Mr. & Mrs. VC. :-)

So, you want to keep your visionary AND expert-manager founder around for the long-haul? You’re now going to have to make things more interesting than that stock we just accrued after 4 brutally tiresome years.

In this case, all companies turn to increasing the founder’s (now quite diluted) equity pool with stock options, many start to pay the founder more market-rate salaries, and increasingly more Boards now allow the founders to sell-off part of their equity pool, so they can pay back loans, buy a house, maybe take a vacation – all while still plowing ahead, giving the company their incredible and continuing vision and managerial skills.

When you, the investors, handed us a term sheet 4 years ago and asked to invest in our company, you signed up for us taking our company from Zero to 60. I think that if the VC community wants to change that initial vesting cycle, we should also rethink how much of the company founders will actually end up with after locking up their lives for 6 or 8 years, and perhaps readdress startup valuations and options programs.

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