If you’re joining as a cofounder or early-stage employee, you need to think like an investor.
How do investors think?
- Does the vision have merit?
- What’s the total addressable market, and how much could you take from it?
- What stake can you get in it?
- How strong is the team?
Does the Vision Have Merit?
Maybe you get along really well with the other potential cofounders. They could be brilliant and charming people.
But does the vision have merit?
Not just “is it a good idea”, but does the actual problem behind their envisioned solution speak to you?
If the answer is no, you’re probably not a good fit for a cofounder. Maybe consider contracting, since vision won’t motivate you as much as just getting paid a fee for contracting—or getting a tiny amount of equity as an advisor.
How Big is the Market?
In startup + venture world, this is discussed with the terms TAM, SAM, and SOM.
Let’s say you’re making a drone delivery startup and want to find the market potential.
TAM – Total Addressable Market. That’s the value of every delivery service—FedEx, USPS, UPS, and maybe carriers in other countries. Maybe it also includes other kinds of courier type of services like food delivery (e.g. GrubHub, DoorDash).
SAM – Serviceable Addressable Market. AKA what your actual target is. Maybe drone delivery startup just wants to start out delivering food, not papers or packages. And maybe just in the LA area. So they’re focusing on a tighter niche to start.
SOM – Serviceable Obtainable Market. This number is the real one. It’s how much you think you can actually get. Maybe all the restaurants want to use GrubHub, but some (like pizza delivery) still use their own drivers. So you go to the ones with too much demand that their drivers can’t compete. Maybe that’s only 15% of delivery restaurants in your area.
Turn all of those calculations into real numbers. In this example,
- TAM would be a market worth billions
- SAM would be a market worth a low couple million, and
- SOM would probably be worth some hundreds of thousands a year.
Your idea might be the perfect solution, but if it doesn’t have strong market potential, you’ll end up with equity in a very small project.
Speaking of which…
Think About Your Equity
Equity is your percent ownership in the business when all is said in done. Unless you’re in at the very beginning, you’ll probably vest equity. Even if you founding the company, if you have multiple cofounders then you all should definitely be vesting over time, that way someone doesn’t quit in week 2 with half the company’s equity.
You also need to keep in mind what will happen if you dilute your shares.
Avoid any clauses or investments that come with “non-dilutionary shares”. The way it typically works is a company will raise a round of funding, and you issue more shares for each round. That dilutes the share percentage of previous founders and investors, but it prevents anyone from getting screwed, too.
The whole drama in the movie The Social Network was because all the founders but one guy had non-dilutionary shares and they essentially screwed him.
So, you want to make sure that when all is said and done and you’ve raised all your funding, your share percentage hasn’t been diluted away to nothing. You do this by clarifying share terms, how much investment you plan to raise, and what the exit looks like (e.g. acquisition, IPO, etc.).
Assess Team Strength
Lastly, but most importantly, who is on the team?
Ideas change. You will probably pivot, add a new product, change up the old product, change target industries, etc.
The team is the greatest constant. If you all are smart, capable, and work well together, that’s a team that inspires confidence in investors. If you already don’t get along before the unexpected and challenging shows up one after another, you’re going to have a rough go of it.
Inversely, if everyone gets along great but isn’t capable enough to lead themselves, that’s not a team that will end up scaling dramatically.
Last Word
Startup can either mean a bunch of guys throwing sh*t at the wall and seeing what sticks, all the way up to $50 million “pre-seed” rounds (lmao). If you want to be taken seriously, you treat your work and yourself seriously.
Serious people value their time and don’t always do something just because it sounds fun. Ask some smart questions, do your own math, and commit only to projects with the right kind of upside.
