December 26, 2019
Picking Investors, Early Employee Equity, and Recruiting the Best – Vinod Khosla and Sam Altman on The Y Combinator Podcast
Check out the Y Combinator Episode Page & Show Notes
Key Takeaways
- “A company becomes the people it hires, not the plan it makes. That’s grossly underappreciated.” – Vinod Khosla
- Most investors are negative value add to a company
- “90% of investors add no value. 70% of investors add negative value to a company.” – Vinod Khosla
- Founder should be much more generous with early employee equity
- “Being super generous with early employee equity, and getting founder-quality people as the first ten employees, I think all the evidence is on the side of doing this, and yet, almost no one does. There’s a huge edge if you’re willing to do it.” – Sam Altman
- “The only recipe I’ve ever seen work for making really impactful companies is both a giant vision and a good step 1, 2, and 3. You have to have both. Neither without the other will work.” – Sam Altman
Books Mentioned
- Vinod recommends two of Nasim Taleb’s books – Skin in the Game and Antifragile
Intro
- Host – Sam Altman (@sama), the former president of Y Combinator and current CEO of OpenAI
- Vinod Khosla (@vkhosla) is the founder of Khosla Ventures and Sun Microsystems
The Difference Between a Zero-million-dollar Company and a Zero-billion-dollar Company
- “When you set out on a journey, your mindset determines who you bring on board, how you approach it, what deals you do, and what investors you take on” – Vinod Khosla
- In a zero-million-dollar company, you’re only thinking short-term
- In a zero-billion-dollar company, you’re thinking long-term from the get-go (this then affects who you hire, etc.)
- “One of the things people seldom realize when they’re starting up: you don’t ever plan what you’re going to do, you build a plan to make a plan” – Vindo Kodla
- “A company becomes the people it hires, not the plan it makes. That’s grossly underappreciated.”
- With a zero-billion-dollar approach, because you’re always thinking long-term, you’re able to be flexible with your tactics and strategies
Most Investors Add Negative Value to a Company
- 🎧 “90% of investors add no value. 70% of investors add negative value to a company.” – Vinod Khosla
- “Just because you got an MBA and joined a venture firm doesn’t mean you’re qualified to advise an entrepreneur”
- Ask your investors: “Have you built a large company yourself? Have you gone through how hard it is?”
- Entrepreneurship is filled with TONS of risk-taking and decision-making under ambiguity. If you, as an investor, have never personally experienced this, you’re probably not qualified to help.
First Principles Thinking & Rate of Change
- How someone approaches a problem they’ve never been exposed to is the best indicator of how fast they’ll learn
- Sam & Vinod agree that, specifically with Y Combinator-participating companies, their rate of change is the best indicator of their success (AKA how fast they evolve/chang their plan)
Great Interview Questions
- If you’re hiring a higher-up:
- “How will you make the CFO or the VP of Engineering better?”
- “If you were CEO and had to make a different set of decisions in X scenario, how would you go about it?”
- “If I gave you $10 MM, what three startups would you consider building, and what are the reasons, as an investor, you wouldn’t want to invest in those?”
- In general, try to get to the root of how a candidate thinks about problems because, in a startup, there’s nothing but problems
- Related: “I often tell entrepreneurs that a business plan is completely irrelevant, other than to judge how somebody’s thought about a problem” – Vinod Khosla
How ambitious should a founder be?
- “I like founders who are very ambitious, mostly because if they’re not ambitious, they’ll hire a team to build a zero-million-dollar company. If they’re ambitious, they’ll hire a team to build a zero-billion-dollar company” – Vinod Khosla
Recruiting the Best
- “I always say, when recruiting, a no is a maybe and a maybe is a yes” – Vinod Khosla
- 🎧 “The very best people I’ve ever recruited have all taken at least months to recruit because they always had something great to walk away from” – Sam Altman
- Vinod adds: “The people who don’t have something great to walk away from are probably the people you don’t want”
Founders Should Be More Generous with Early Employee Equity
- “I see this as a major problem nowadays. People aren’t allocating equity widely enough.” – Vindo Khosla
- “Among the first 3 or 4 founders at Sun Microsystems, we kept less than half of the common, which was 25-27% for the founders, and an equal or slightly larger chunk for everyone else we hired, and then investors had the minority, but a significant minority (~40%)”
- When Vinod’s son started his company, he advised him only to keep 15%, and to offer each of the first few employees 15% as well
- “If you believe a company becomes the people it hires, then your key task becomes attracting the people” – Vinod Khosla
- And what better way to attract people than a nice equity chunk?
- 🎧 “Being super generous with early employee equity, and getting founder-quality people as the first 10 employees, I think all the evidence is on the side of doing this, and yet, almost no one does. There’s a huge edge if you’re willing to do it.” – Sam Altman
- Two related pieces from Vinod for further reading:
Pick Investors That Care About Your Vision
- The money you get from investors matters far less than the advice they give you
- Look for investors that care about your vision, as well as your technological approach (thus, they’re much more likely to tolerate things going wrong)
- How do you know when investors genuinely care about your vision? – Talk to other founders, particularly those who’ve had hiccups along the way
- “When things go wrong along an ambitious path is when you can actually judge an investor” – Vinod Khosla
- “An investor is an employee you can’t fire; that’s how you should think about it” – Vinod Khosla
The Recipe for Success
- “The only recipe I’ve ever seen work for making really impactful companies is both a giant vision and a good step 1, 2, and 3. You have to have both. Neither without the other will work.” – Sam Altman
What does Vinod hope to accomplish over the next 10 years?
- 63 now, Vinod still has huge ambitions
- Read more about his plans here: Reinventing Societal Infrastructure with Technology
- Long story short, there’s still much innovation to be had
- Read more about his plans here: Reinventing Societal Infrastructure with Technology
Additional Notes
- The best board members are people who calm you down and subtract from your stress, not add to it
- “Whose advice to trust on what topic is the single hardest decision an entrepreneur makes” – Vinod Khosla
- (But this is where the right investors can help)
