Using Equity to Build an Awesome Team

Vinod Khosla on How to Build and Manage Teams

We’ve been watching a bunch of the Y Combinator Startup School videos. First of all, they’re great. Second, how is it possible that only 7,000 people on the entire Internet have watched Vinod Khosla talk about “How to Build and Manage Teams?”

Do yourself a favor and watch the entire thing. It’s pure entrepreneur gold!

But if you only have five minutes…here’s a short clip of our favorite part:

Here are the main takeaways:

  1. A company becomes the people it hires
  2. Hire some magnets
  3. Low % equity ownership self-selects for mediocrity

Let’s unpack these and see how to apply them to our own startups.

1. A Company Becomes the People it Hires

“The single biggest reason people stick with a company is because they have people around them who are really awesome that they can learn from, who are better than them. Everyone should feel that way.”

Khosla makes some excellent points, including that “a company becomes the people it hires.”

This means that every founder’s #1 goal is to attract and retain great talent.

Great people are attracted to great people. Khosla says he still spends a big chunk of his time on hiring, so he’s always looking for ways to increase the flow of inbound applications—and he’s always trying to keep the talented people he finds.

So if you build a community of rockstars that everyone can learn from, it helps you attract more rockstars. The résumés come pouring in.

2. Hire Some Magnets

“Think about who you can get who everybody wants to work with. That’s how you’ll hire employees 10 through 50.”

Awesome people are also an effective fundraising tool. Khosla loves to invest in great teams. If he’s talking to a startup he’ll ask himself if he’s impressed enough with at least two of the founders that he would invest in their next companies.

If the answer’s yes then he’ll pretty much always put money into their current company, even if he doesn’t love the business plan. He’ll always pick people over plan.

3. Low % Ownership Self-Selects for Mediocrity

“Anybody you hire who’s exceptional, will a year later figure out they want to start their own company if they’re not a founder. So you self-select for okay people…not awesome people.”

He’s playing the long game, and sacrificing equity in order to get the magnets to stick around.

Once a company grows to 50 people, “the founders should have 1/3 of the common, their 5 or 6 direct reports should have 1/3 of the common stock, and everyone else should have the remaining 1/3 of the common. If you do that, people don’t leave”

Be Generous with Ownership

What’s Khosla’s recommended recipe?

  • 15% equity for each of 3 founders = 45%
  • 5% equity for each of 3 “junior-founders” = 15%
  • 20% option pool

You’ll still want to use a vesting schedule—or Mike Moyer’s Slicing Pie formula—to ensure that team members are actually contributing.

Attracting and Retaining the Best Talent

Most entrepreneurs focus on maximizing their ownership percentage—which is the opposite of what Khosla recommends. His point is that by hiring awesome people you’re more likely to generate enough value that it doesn’t matter if you own less of the company.

Khosla wraps up by pointing out that you also need a big vision to attract superstars. It’s called a massive transformative purpose (MTP) and it’s the key to achieving exponential growth.

It’s the combination of MTP and generous equity that allows you to attract and retain the rockstars—who in turn help you attract more great team members.

Written by Mike Lingle — Find more practical suggestions and free webinars for entrepreneurs at 10xU or connect with me on LinkedIn.