VC’s best advice for building a founding team

One of the most important decisions early-stage founders have to make is who their founding team will be. The top five to ten employees will have a tremendous impact on the company culture, and the precedents set with them will be difficult to change in the future. That’s why this season in Build Mode we’re diving into what it takes to build a world-class founding team.

To kick off Season 2, Isabelle Johanssen is joined by Yuri Sagalov, Managing Director at General Catalyst and former founder, YC Partner and lead investor at Wayfinder Ventures. Sagalov has worked with hundreds of pre-seed and seed stage companies and has seen first-hand the best (and worst) methods of hiring in the early days.

In this episode, Sagalov offers his best advice for founders hiring their first team, strategically building a cap schedule, and shaping compensation structures that can scale with the company.

The 3 Types of Investors (and Which Type to Avoid)

Sagalov categorizes investors into three main groups: those that are highly involved and act as an extension of your team, those that will give you a check and then disappear, and micromanagers.

The first type of investors is the most valuable according to Sagalov: “They will help you get hired and go to market. And the most interesting thing for these investors is often completely separate from the size of the check.”

Although it may seem counterintuitive to turn down investments, working with venture capitalists who will be overly involved in the process may cause more harm than good in the long run. “The one bucket I avoid is the third bucket of investors who give you money and they kind of step into your kitchen. They have an opinion on everything. They get nervous when things don’t go well,” Sagalov said.

In fundraising, everyone is putting their best foot forward, so Sagalov suggests reaching out to existing portfolio companies before committing to an investor. “The best thing you can do as a founder is actually talk to portfolio companies, talk to other founders who have worked with them, ask for concrete examples of how helpful they were, if they were helpful, and then actually ask them what they were like when things didn’t go well.”

How to split shares with one of the founders

As an investor, Sagalov looks for co-founders who have created a fair stock split but also to hedge against future imbalances. He suggests creating a slight differentiation of plus or minus one arrow, so that there is a clear way to break the deadlock.

Sagalov also reminds early-stage founders that these early decisions have staying power: “Founders often over-reference, ‘I came up with the idea, so I deserve the lion’s share.’” Most of the company’s journey is ahead of them. You don’t want someone to wake up five years from now feeling like they put in the same amount of blood, sweat, and tears but own a fifth of the shares.

Talk to early employees about risks and compensation

Your first few employees should all be engaged in the startup’s mission. Often times, joining an early-stage startup may be viewed as risky. Sagalov stressed the importance of discussing potential risks and benefits: “Basically, what you’re looking for when you’re hiring your first few people is missionaries who want to join you on mission work, plus compensation.” “You want to be honest with them that there are a lot of risks on the trip.”

Next week on Build Mode, we’ll talk with Sarah Lucena, founder and CEO of Mappa, who discusses how founders can take fit into account and hire the right person for the team the first time, using their AI tool.

Isabel Johansson is our host. Build Mode was produced and edited by Maggie Nye. Audience development is led by Morgan Little. And special thanks to the Foundry and Cheddar video teams.