- This class is about things to think about as your startup scales
- The first topic is management and the importance of having a clear reporting structure
- The founder's main job shifts from building a great product to building a great company as the company grows
- Four common mistakes founders make when transitioning to managers: being afraid to hire senior people, staying in hero mode, bad delegation, and lack of personal organization
- It is important to write down how and why things are done in the company
- HR is often ignored in the early stages of a startup but is important for clear structure, career development, and performance feedback.

- It is important to provide feedback to employees quickly and clearly, with a clear path for improvement or compensation tied to performance.
- Implementing compensation bands and giving out equity to employees is crucial for fairness and long-term success.
- Having a plan for refresher grants and an option management system is important to retain and motivate employees.
- HR rules and training should be implemented when the company reaches 50 employees.
- Monitoring team burnout and implementing a hiring process are key for sustainable growth.
- Diversity should be considered early on in the hiring process to foster a stronger team and culture.
- Proactively planning career paths for early employees as the company grows is important for retention.
- Productivity decreases as the company grows, so alignment and clear goals are crucial for maintaining productivity.
- Values, transparency, and communication rhythm are important for decision-making and company success.
- Regular management meetings, all hands meetings, quarterly plans, and off-sites are effective tools for communication and alignment.

- Successful companies often engage in off-site meetings to discuss their future goals and strategies.
- Building a company that consistently innovates and maintains a culture of excellence is challenging but crucial for long-term success.
- Setting up financial reporting and legal documentation early on is important for organizational order and future growth.
- Founders should consider implementing FF stock, filing provisional patents, and obtaining trademarks to protect their intellectual property.
- Hiring someone for financial planning and analysis (FPNA) and a full-time fundraiser can optimize business operations and fundraising efforts.
- Tax structuring and managing the psychological challenges of being a founder are also important considerations.
- Long-term commitment, taking vacations, maintaining focus, and avoiding distractions from potential acquisitions are key factors for success.

- It is advised not to start acquisition conversations unless you are willing to sell for a low price
- Giving up is what kills startups, so managing your own psychology is important
- Marketing and PR should be ignored in the early stages, but becomes important once the product is successful
- Founders should figure out key messaging themselves and develop relationships with journalists
- Business development becomes important as the company grows
- Building a great product is crucial before attempting any deals
- Developing personal connections, creating competitive dynamics, persistence, and asking for what you want are important in deal-making
- The Y Combinator process involves finding product-market fit and building relationships with users
- Startups should strive to fail gracefully by being upfront with investors and avoiding financial blow-ups.

- The speaker emphasizes the importance of being transparent with employees and shutting down a company in a graceful way.
- Y Combinator has seen a significant number of immigrant founders in their recent batches.
- The Silicon Valley is still considered the best place to start a startup, but other cities like Seattle and LA are also viable options.
- Founders should not rush to hire a professional CEO and should consider if they are passionate about building a great company.
- Common mistakes when transitioning from building a product to building a company are discussed.
- There is no way to get involved with Y Combinator before getting accepted, but working at a YC company can help with recommendations.
- The criteria for selecting startups has not changed, and good founders and a good idea are essential.
- It is recommended to either jump right into a market you're excited about or work in that market for a year or two to gain knowledge.
- The increasing number of YC companies does not deter investors, and more investors are looking to fund YC companies.
- It is advised to wait until you have a solid idea and initial signs of promise before raising seed money.

- This class covers important considerations for startups as they scale
- Topics include management, HR, feedback, compensation, team growth, diversity, productivity, decision-making, innovation, legal documentation, fundraising, marketing, business development, and shutting down a company
- Y Combinator process and criteria for selecting startups are discussed
- The importance of passion, knowledge, and initial signs of promise before raising seed money is emphasized

Lecture Transcript: http://tech.genius.com/Sam-altman-lecture-20-closing-thoughts-and-later-stage-advice-annotated

Sam caps off the How to Start a Startup series with things you should ignore when you start, but become important a year in. Thanks for watching How to Start a Startup. Hope you learned a ton!

See the slides at http://startupclass.samaltman.com/courses/lec20

Discuss this lecture: http://startupclass.co/courses/how-to-start-a-startup/lectures/64049

All right, good afternoon and welcome to the last class of how to start a startup.

So, this is a little bit different than every other class.

Every other class has been things that you should be thinking about in general at the beginning of a startup.

And today, we're going to talk about things that you don't have to think about for a while.

But since I'm not gonna get to talk to most of you, again, before you get to sort of post product market fit stage.

I wanna just give you the list of things that you need to think about as your startup scales.

And the list of the things that usually founders fail to make the transition on.

So these are the topics we're gonna talk about.

But again, all of these things are things that are not writing code or talking to users, which means, with a few exceptions that I'll try to note, You can ignore them until after you have product market fit.

Most of these things for most companies become important between months 12 and 24.

But it's really more about stage than anything else.

These are things that usually hit around 25 people And definitely post product market fit.

So just write these down somewhere and look back at them when you get there.

So the first area we're gonna talk about is management.

At the beginning of a company there is no management.

Before 20 or 25 employees, most companies are structured with everyone reporting to the founder.

And that's really good, and that's what you want.

And at that stage, that is the optimal way for product, that's the optimal structure for productivity.

But the thing that tricks people is that when, when lack of structure fails, it fails all at once.

And so, what works totally fine at 20 employees is, from 0 to 20 employees, is disastrous at 30.

And so you want to be aware that this transition will happen.

And you don't actually need to make the structure complicated.

All you need is for every employee to know who their manager is, and every, and there should be exactly 1.

And, and every manager should know who their direct reports are.

You wanna ideally cluster people on teams that make sense, of course.

But the most important thing is that there's just clear reporting structure and that everyone knows what it is.

And if you want to make changes to it, people understand how to make changes or to hire someone.

Clarity and simplicity are the most important things here.

So, because it works in the early days to have no structure at all, and because it sort of feels cool to have no structure, many companies are like, we're gonna try this crazy new management theory and have no structure.

What you want to do is innovate on your product and your business model.

Management structure is not where I would recommend trying to innovate.

So Don't make the mistake of having nothing.

But don't make the other mistake of having something super complicated.

A lot of people fall into this trap where they think it's like, you know, people feel cool if they're someone's manager and if they're just an employee they don't feel cool.

So people come up with these convoluted circular matrices, management structures where you report to this person for this thing and this person for that thing and this person for that thing.

But, you know, actually this person reports to you for this thing.

This is the first instance of an important shift in companies, or in, in, in the founder's job.

Before product market fit, your only job that matters is to build a great product, or your number 1 job is to build a great product.

As the company grows, And at about this, you know, 25 or so employee size, your main job shifts from building a great product to building a great company.

And it stays there for the rest of your time.

And this is probably the biggest shift in being a founder that ever happens.

There are 4 failure cases we see all the time, as founders become managers.

So I'm gonna talk about the 4 most common ones.

The first 1 is being afraid to hire senior people.

In the early days of a startup, hiring senior people is usually a mistake.

You just want people that get stuff done.

And, and the willingness to work hard and aptitude matters more than experience.

As the company starts to scale, and at about this time when you have to put in place a basic management structure, It is actually valuable to have senior people on the team.

You know, executives that have built companies before.

And almost all founders, after the first time they hire a really great executive, and that executive takes over big pieces of the business and just makes them happen.

The founder says, wow, I wish I had done that earlier.

But everybody makes this mistake and waits too long to do this.

So don't, don't be afraid to hire senior executives.

So I will use the example of, say, someone that runs a customer service team.

It's, it's the extreme of leading by example.

Rather than tell them to work hard, I'm gonna set an example and I'm gonna work 18 hours a day.

And I'm gonna show people how to get a lot of tickets done, but then the company starts growing.

Also, they have the normal discomfort of assigning a lot of work to other people.

So the company starts growing and the ticket volume keeps going up.

And now they have to do like 19 hours a day and then 20 hours a day.

Because they're like, if I stop, even for 1 day, we're going to get behind on tickets.

The only way to get out of hero mode in this case, is to say, you know what?

We're going to get behind on tickets for 2 or 3 weeks, because I'm going to go off.

And I'm going to hire 3 more support team members.

And I've calculated based off of our growth rate that this is gonna last this long.

And next time I'm not gonna make the same mistake, I'll get ahead of it and hire again.

But you actually have to make a trade off.

You actually have to say, you know what, I need to hire more people And we're gonna get behind on their stuff.

The wrong answer is to stay in hero mode until you burn out, which is what most people do.

Most founders have not managed people before, and they certainly haven't managed managers.

And so the way that the bad way you delegate is you say, hey employee we need to do this big thing.

Come back to me with all the data and the trade-offs.

I'll make a decision and tell it to you And then you'll go off and implement it.

And that does not make people feel good, and it certainly doesn't scale.

A subtle difference, but really important, is to say, hey, you're really smart, that's why I hired you.

You go off, Here are the things to think about, here's what I think.

But you make this decision, I totally trust you.

That's the delegation that actually works.

Because, I think, because Steve Jobs was able to get away with the former And make every decision himself and people just put up with it.

And every founder thinks they're the next Steve Jobs.

A lot of people try this, but, but I, for 99.9% of people, the second method here works a lot better.

And then the fourth area is just a personal organization 1.

When you are working on product, you don't actually need to be that organized in terms of how you run the company and how you talk to people about what they're working on.

But if you fail to get your own personal organization system right, where you can keep track in some way of what you need to do and what everybody else is doing and what you need to follow up with them on.

So developing this early as the company begins to scale is really important.

2 other things that we hear again and again from our founders, they wish they had done earlier.

And that is simply writing down how you do things and why you do things.

These 2 things, the how and the why, are really important.

In the early days, you just tell every employee, when you're like sitting around having lunch or dinner, you know, this is how we think about building product, this is how we push to production, you know, this is how we handle customer support, whatever.

As you get bigger, you can't keep doing that.

And if you don't do it, someone else is just gonna say it.

But if you write it down and put it up on a wiki or whatever that every employee reads, you as the founder get to basically write the law.

And, and if you write this down, it will become law in the company.

And if you make everyone read this, as the company hires 100 and then 1,000 employees, people will read this and say, all right, that's how we do things.

If you don't do it, it'll be like random oral tradition of whatever the hiring manager or their best friend that they make their first week in the, at the company tells them.

So writing down how you do things and the why.

Brian Chesky talked about this really well.

Every founder I know wishes that they'd written down both of these, the how and the why earlier.

To just establish it as the company grows.

I think it's 1 of the highest leverage things you can do that, that people don't.

HR is another thing that most people correctly ignore in the first phase of a startup.

Because again, it's not writing code, it's not talking to users.

But it's a huge mistake to continue to ignore it.

And the reason that I think most founders ignore it, is they have in their mind this idea of like TV sitcom HR, you know, awfulness.

Most founders will say out of 1 side of their mouth, people are our most important asset, and on the other side, we don't want any HR.

We don't want like the bad kind of TV HR.

A clear structure, which we already talked about.

You know, a path for people about how they can evolve their careers.

Most important, 1 of the most important things is performance feedback.

Again, this happens organically early on.

As the company gets to 25, 30, 45 people, that gets lost.

It can be super simple, but there should be a way that it happens, and it should be frequent.

You know, people need to hear pretty quickly how they're doing.

And it should tie, you know, if they're doing badly, to a way you get them out of the company.

Or if they're doing well, it should, there should be a clear path to how this ties to compensation.

In the early days of a startup, people's compensation is whatever they negotiate with the founder and it's all over the place.

As you grow, it feels hopelessly corporate, but it really is worth putting in place these compensation bands.

So a mid-level engineer is in this range, a senior engineer is in this range.

Someday everyone will find out everyone else's comp.

If it's all over the place, it will be a complete meltdown disaster.

If you put these bans in place early, it will at least be fair.

It will also save you a lot of crazy negotiation.

1 thing that I think is really important when it comes to HR is equity.

Most people get this right now for the early employees, they give a lot of equity.

But I think you should continue to give a lot of equity all the way through.

And this is 1 place that your investors will always give you bad advice.

I think, not YC, but all other investors give bad advice here.

You should be giving out a lot of equity to your employees.

This dilutes you as the founder and the investors equally.

For some reason, founders usually understand this is good.

Investors are very short-sighted and don't want to dilute themselves.

So they'll like fight you over every equity grant.

But we've seen a lot of data at YC now, and the most successful companies, and the ones where the investors do the best, end up giving a lot of stock out to employees year after year after year.

So I tell founders, like, you should think about, you know, for the next 10 years, you're going to be giving out 3 to 5% of the company every year, cuz you just get bigger and bigger.

So the individual grants get smaller, but in aggregate, it's a lot of stock.

And I think this is really important to do.

If you value your people, you should be doing this.

Specifically, you need to do this with refresher grants.

And you should get a, a plan in place for this early.

You know, I think you never want an employee in a place where they've vested 3 out of their 4 years of stock, and they start thinking about leaving.

So you should always stay in front of people's vesting schedules.

And, you know, have a plan early where you have refresher grants in place.

There are a lot of new structures that people have been using here.

I personally like 6 year, big grants, but 6 years of vesting, cuz I think these companies just take a while to build.

There's pyramid vesting where you back weight someone's grant, So in year 4 they get a lot more of the vesting than year 1.

There's a concept, different names for it, but something like continuous forward investing.

Where people's grants are automatically re-upped every year at the same number of shares.

Whatever you decide, get an option management system in place at about this point.

The normal way people do this is just someone keeps an Excel spreadsheet.

I have seen mistakes that have cost employees or companies tens of millions of dollars because they didn't get this right.

So there's really good option management systems or software and you should get those in place around this point.

There are a bunch of rules that change around 50 employees.

Common examples are that you have to start sexual harassment training and diversity training.

But just put a little pin in your mind that when you cross 50 employees, there's a new set of HR rules that you have to comply with.

At this point, you actually don't want people to work 100 hours a week forever.

You want them to have new challenges and do new things.

And if you let the whole company get burned out all at once, That, that is often a company ending thing.

This is also a good time to put in place a, a hiring process.

Another thing that most founders regret is they don't hire, as soon as everything is working, I think you should hire a full time recruiter.

If you do this too early, that's bad, because you'll hire too fast, and that usually implodes.

But most founders get behind the ball on this.

The, there are a lot of other sort of just hiring process tips.

For example, I think most companies, even until they get up to say, 3 or 400 employees, should announce every offer on some internal mailing list or something before they make it.

Because like half the time you do that, someone in the company will know something good or bad about that employee.

And the companies that I know that have instituted this have been really happy.

Also a good time to have a program in place to ramp up employees.

So when someone starts, you know, what does their first week look like?

How do they get, how do they get spun up?

How do they learn everything they need to learn?

Are they gonna have a buddy that's gonna think through them?

That's gonna help them think through kind of everything about the company.

Here is 1 that you actually do need to think about before the 12 to 24 month mark, which is diversity on the team.

The most common place this comes up, honestly, is people that hire, you know, all guys on their engineering team for the first 15 or 20 people.

And at that point, you get a culture in place that sort of takes on a life of its own.

And most founders that I've spoken to that have made this mistake regret it, and they wished they had hired some diversity of perspective on the team earlier on.

Engineering teams are not the only place where it comes up, but that's where you see it the most often.

And if you get this right early, you'll be able to grow the team much more quickly over, over the long term.

The other thing to think about is what happens to your early employees.

So, a common situation that happens is the company evolves past the early employees.

You know, the company, so like, You hire an engineer who's a really great engineer, but then as the engineering team grows, you need a VP of engineering.

The early engineer wants to be the VP of engineering.

And, but you don't want the early employee to leave.

They're an important, important part of the culture.

And so, I think you want to be very proactive about this.

You know, you wanna like think about what's the path for my first 10 or 15 employees going to be as the company grows.

I want, like sit them down and say, I want to talk about sort of where you want to see your career go inside of this company.

This is something that you don't need to think about in the early days, because small teams are just sort of naturally productive most of the time.

But as you grow, it the productivity, I think, goes down with the square of the number of employees.

If you don't make an effort, because it's sort of 1 of these like connections between nodes, every pair of people has communication overhead.

And so if you don't start thinking about the systems that you're going to put in place when the company is 25 to 50 people to stay productive as you grow, things will grind to a halt faster than you can imagine.

The single word that matters most, I think, to keep the company productive as it grows, is alignment.

The reason companies become unproductive is people are either not on the same page and, you know, don't know what the same priorities are, Or they're actively working against each other, which is obviously worse.

But if you can keep the entire company aligned in the same direction, you'll have won well over half of the battle.

And, and the way to start with this is just a very clear road map and goals.

See all Y Combinator transcripts on Youtube

Later Stage Advice with Sam Altman (How to Start a Startup 2014: Lecture 20)