Introducing the Founder Friendly Standard
We’re excited to have #FounderFriendlyStandard as a partner of IndieConf. We sat down with Eisaiah Engel of Founder Friendly Standard to chat about his concept to help entrepreneurs strike a better startup deal.
How does Founder Friendly Standard help entrepreneurs succeed?
Founder Friendly Standard is a framework for helping entrepreneurs determine if a startup investment deal is founder-friendly. What I mean by that is our standard helps entrepreneurs prepare for the process of negotiating with investors to ensure the deals they agree to will work well for them in the long-term. Founder Friendly Standard helps uncover issues that many entrepreneurs typically discover too late, so it’s less likely their investors will “get one over” on them.
What does the Founder Friendly Standard framework help entrepreneurs do?
It can help them know what questions to ask their attorneys when evaluating offers. Working with Founder Friendly Standard not only helps entrepreneurs strike better investment deals; it can help them keep their companies on course and reduce the odds they’ll be fired from their own companies (which happens, unfortunately).
“The types of people who like to invest in startups are also the types of people who like to take over startups.”
What drove you to create Founder Friendly Standard?
The concept grew out of my own experience as an entrepreneur and the pitfalls I encountered. I started a company that really didn’t need investment. I raised investment anyway because that’s what I was conditioned to do. I ended up losing control to my investors, who didn’t know how to run the business or how to grow it. What I discovered is that I wasn’t alone. This type of situation happens often because the types of people who like to invest in startups are also the types of people who like to take over startups. I developed Founder Friendly Standard to help other entrepreneurs avoid that experience.
How did the idea form?
I read The Customer Funded Business by Professor John Mullins, and I realized there’s a compelling case for an investor to look for companies that can be profitable as founder-run companies, standing on their own two feet. As an investor, if I found companies like that, I’d be willing to give them what I call “Founder Friendly Standard terms” in exchange for equity.
Founder Friendly Standard was started in the US. Can entrepreneurs in other countries, such as Australia, use this service?
Absolutely! We designed Founder Friendly Standard to serve as a checklist of issues that are common across many jurisdictions. It is important to note that the checklist is NOT a contract. Entrepreneurs should work with an attorney to develop a contract that’s tailored to their businesses and any country-specific legal requirements.
You mention ideas like super-voting equity and founders giving each other performance reviews, which I can understand. What about some of the other terms? Like, why isn’t arbitration allowed in Founder Friendly Standard 3.2 and 3.3?
Many entrepreneurs focus on the financial aspects of securing funding – how much equity they’re willing to give up – and in the process they ignore important aspects of the negotiations, like how to handle arbitration. When you agree to binding arbitration, you allow an experienced attorney or investor to find loopholes that allow them to take control. Arbitration proceedings highly favor the party with the most money and they cannot be dismissed easily. It’s easy for an investor to bring a frivolous arbitration and abuse the process so that the founder loses. Remember: The only thing investors are focused on is maximizing their returns.
Are there any advantages to an investor agreeing to use Founder Friendly Standard?
By agreeing to terms like Founder Friendly Standard, investors may find the investment game changes. It goes from finding companies that need active management, to finding companies that are solid investment cases and can grow steadily over time. For investors with patience, the latter approach pays off better in the public markets. Why wouldn’t the same principles apply for startups? I wrote about this hypothesis in my book, Gray Sports Almanac for Venture Capital, and then I quantified the hypothesis in my follow-up book which is coming in 2020. Founder Friendly Standard principles also can help an investor develop a more diversified portfolio, which is useful for mitigating risk.
Has Founder Friendly Standard gotten any traction yet?
Yes. The nature of setting legal standards is slow moving. Our grassroots standard launched in November 2017 and has already been downloaded by entrepreneurs in 100+ countries. I’ve heard from a couple of entrepreneurs in India and Ghana who are using it. You’ll find pieces of this approach in play in large public companies like Google and Facebook, where their founders have super-voting equity. The idea is definitely gaining traction.