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About Peter Walker

1. Why venture capital became the default path for founders and why the data says that assumption is quietly breaking down
2. The single cap table decision made at incorporation that can make a company effectively unfundable years later
3. Why academic and deep tech founders systematically misjudge equity tradeoffs and the early signal investors notice immediately
4. The uncomfortable truth about advisor equity and how well intentioned generosity quietly hollows out founder ownership
5. What Carta’s data reveals about how much equity actually matters and where founders obsess over the wrong numbers
6. Why SAFEs feel founder friendly early and how they quietly reshape ownership when it is too late to undo
7. The cap table red flags investors rarely say out loud but almost always notice
8. Why most startup employees never make money on their equity even when the company does well
9. The counterintuitive metric that matters more than revenue in the earliest days and how it aligns an entire company
10. Why fundraising treated as a long slow conversation almost always fails and what disciplined founders do instead
11. The myth of founders being pushed out by VCs and what actually determines who stays in control
12. The hardest mindset shift founders must make to survive the journey long before outcomes exits or valuations are known

Links and resources

• Peter’s Substack
• Peter’s Blog
• Peter’s LinkedIn profile
• Carta – A cap table and fund administration platform managing equity data for 60,000 startups and 3,000 venture funds, providing aggregated ecosystem insights.
• Invest Like the Best Podcast – A business and investing podcast featuring in-depth conversations with founders and operators (referenced in the discussion about Base).

Interview Transcript

Shubha K. Chakravarthy: Hello, Peter. We’re so excited to have you here today on Invisible Ink. Welcome.

Peter Walker: Thank you so much for having me. Glad to be here.

Shubha K. Chakravarthy: You’re one of the guests that I’ve been looking forward to the most, so I’m super excited. So, you know, we’ve all seen your posts on LinkedIn. They’re just like the data god of cap tables and startup founders. But just tell us a little bit: how did you get into this line, and what excites you about the work you’re doing with Carta today?

Peter Walker: I mean, it’s been a very serendipitous route into my current role, so I feel very lucky to get to do the work that I’m doing. But I came into Carta about four years ago to start this insights team. I’m sure there are some in your audience who are not familiar with us, but we have 60,000 startups on the platform and 3,000 or so U.S. venture funds.

We have founders on one side, funders on the other, and we have this amazing pool of data from all of those companies and those funds. And it’s my job to aggregate and anonymize that data and then sort of give it back out to the ecosystem as public research. And so I’m a data nerd from the beginning. I’ve been building charts and graphs and data viz for a long, long time. And then this has been a mixture of, you know, intense curiosity about startups and a data set that’s worth exploring in this way. And it’s just kind of really come together in a lovely package so that we can give a little bit of ground truth about what is happening in venture-backed startups to all the founders and investors out there.

Shubha K. Chakravarthy: Fantastic. Love data. So just to be clear, and just so I’m correct about the assumption: so all of this is coming only from the cap tables, or are there other sources of data that you’re also leveraging?

Peter Walker: There’s other sources of data. So the primary one is cap tables from those 60,000 startups. The second one is data from the venture funds themselves. So, again, we manage the back office—so valuations, reporting, tax, audit. We’re the fund admin for 3,000 venture funds. So we have data on how those funds are performing.

Typically, you know, our median fund on Carta is probably more like an $80 to $100 million dollar fund. It’s not the mega mega funds as much, but we do have some of them on the platform. And then the last dataset, which is maybe important to note as well, is in addition to the cap table which tracks equity for a lot of companies on Carta, we also track salaries of their employees. They hook in their HRIS systems, and then we can tell people, “Hey, this is what you should be paying a level five engineer in San Francisco in salary and equity.”

We have about a million private company employees on the platform where we can have that sort of compensation data for them. So we think that’s actually the best private compensation data set anywhere in the world.

Shubha K. Chakravarthy: Data Nirvana.

Peter Walker: It’s a pretty great place. Yes. Again, I’ll repeat: I’m a pretty lucky guy. It’s an amazing place.

Shubha K. Chakravarthy: I can just imagine how happy you are, just tap dancing.

Peter Walker: Just come in and play around in the sandbox of data. Exactly.

Shubha K. Chakravarthy: So when you look across this data set of thousands of companies across these three different data sources, are there things that just right off the top pop at you that maybe contravene or contradict conventional wisdom about startups?

Peter Walker: Hmm. I guess it just depends on what you mean by conventional wisdom. Our dataset is primarily tracking venture-backed companies, or at least companies who would like to become venture-backed companies. That is, of course, only a tiny slice of startups write large and new businesses that are created every year.

I am consistently surprised at how, at least within the circles that I run in, how default the assumption is that you need venture capital. Maybe the first point to all founders: you should try to build your business without venture capital if you can. I don’t know why venture capital, I have some ideas but venture capital should not be the default path towards building these businesses.

There are industries in which it’s far more likely you’re going to need external capital to get started. I understand that. But for even those companies, VC is a very unique set of capital financing instruments that are not purpose-built for all companies. And I really don’t think that founders hold them in great regard if that’s the only way that they’re thinking about their business.

Insights from the Data: Venture Growth vs. Sustainable Startups

Shubha K. Chakravarthy: I’m just curious, I’m sure that this is informed by some insights from the data, right? What is it that causes you to share that? Like, what drove that insight?

Peter Walker: Well, look, if you look at our companies, of those 60,000 startups on the platform today, some 25,000 of them or so are pre-seed startups, meaning they haven’t actually raised any institutional capital from VCs yet. The majority of those companies will never raise institutional capital from VCs.

My question is: would they have built a business if they had spent less time worrying about trying to fundraise from VCs and more time just building the business? Or, put another way, is the Silicon Valley model of dramatically increasing ambition always the right path for these startups? My instinct is that no, it kills a lot of businesses as well as it helps them.

I put it this way: if you are not trying to build a massive company, don’t take venture capital. There’re still incredible companies to be built that just are not venture scale. But I think people get confused by always trying to chase venture growth and venture returns when that’s not the only kind of company you can build. There’s a lot of great businesses out there that aren’t that size.

Shubha K. Chakravarthy: And they’re not necessarily “lifestyle” businesses. It’s not like this.

Peter Walker: Totally. “Lifestyle” is such a bad word.

Shubha K. Chakravarthy: I know.

Peter Walker: You know, we’ve got to have a better word for, like, a wonderful. I don’t even think it’s a small business like a wonderful tech startup that just is not a venture-backed one. Yeah, we need a little bit better language to make the distinction between VC and not-VC feel like you failed or you weren’t trying hard somehow. That’s just silly.

Shubha K. Chakravarthy: It’s so pejorative, right? “Oh, it’s just a lifestyle business.”

Peter Walker: A hundred percent. Yeah. Or “bootstrapped”, even “bootstrapped” doesn’t give off the connotation that you are really ambitious, even though you might be; you just happen to have revenue from day one.

Shubha K. Chakravarthy: Yeah, I love it. So, my favorite role model on that side note is Lynda Weinman, who bootstrapped her company, as you know, to a billion and a half dollars. Of course, she took money at the very last minute, just two years before exit. So I’ll take that “lifestyle business” any day.

Peter Walker: Any day. That’s great.

STEM Founders and the Academic Transition

Shubha K. Chakravarthy:  So in your view, I want to as much as possible from the data that you have that you feel comfortable sharing, I’d like to focus our conversation on STEM slash deep tech or hard tech, however you want to call them, versus like the pure Silicon Valley, B2B SaaS tech companies that typically we hear about a lot.

So, with that lens, in your view, what’s a single biggest misconception that you think these kinds of STEM founders have to the extent you have insight when they go from lab or academia into entrepreneurship? Do you get any insights on that?

Peter Walker: We don’t have a ton of qualitative insights as to what they’re expecting when they come into the venture or business world as academics or prior PhDs, et cetera. I can tell you that I’d say a lot of them, well, I don’t want to get on a soapbox this early about what happens on university tech transfers.

Shubha K. Chakravarthy: You can.

Peter Walker: In the States, it’s one thing. It’s okay. You know, I think that many of the great universities here are encouraging of spinouts; they understand the way the model works. When we talk to founders in Europe and elsewhere about their experiences with university tech transfer offices, it is horrendous.

I mean, these are people who are giving them lab space and demanding 15% of the company for it. They just don’t get how it works to build major, massive-scale companies. If you’re working at Stanford and spinning out, I think they understand the model much better, but that is maybe the first culture shock where you coming from academia like “Oh, 15%—that doesn’t feel like a lot,” when that is actually a massive chunk of a cap table that’s gone and really not going to be helpful to you in the future.

Shubha K. Chakravarthy: That’s interesting. I had not heard that before at all. And anything else in terms of, I don’t know how many founders you talk to, but what I like most about what you do obviously is just how data driven it is, right?

And there’s all this conventional wisdom and LinkedIn wisdom we hear about from people who have like one data point and then talk about like that’s the gospel truth. Before we dive in, I’m just curious if you had any qualitative thoughts on why that is, or maybe how a founder can immunize themselves from falling prey to that kind.

Peter Walker: Well, I think it’s kind of understandable why those things exist in the ecosystem. In a world with very little data, anecdote is going to sort of reign supreme. And if you’re a lawyer or you’re a venture capitalist and you’ve seen 10 deals this year, then you can sort of sum up your view from those 10 deals and speak it out into the world as though it’s truth.

Ours is a little bit at a higher level of abstraction there, where we get to see thousands and thousands of rounds, so we get to say this. The other thing that happens is this is a narrative-based business. So the narratives that go on, if you’re logging into Twitter or X and you’re seeing Thinking Machines raised a $2 billion seed round at a $12 billion valuation, like that is not real life, right?

That is one person who happened to be the CTO of OpenAI before she became a founder. That is predicating like how you are doing versus those kinds of extraordinary outliers is just setting yourself up to feel very bad all the time. And so I really encourage founders to, as much as possible, restrict the media consumption of rounds and valuations, et cetera, because it’s just not going to be that helpful.

Shubha K. Chakravarthy: So go from media to median, I guess.

Peter Walker: Well said. I should put that on my business card.

Shubha K. Chakravarthy: Okay, so let’s get into the, you know, let’s get into the nuts and bolts.

Cap Table Fundamentals and Common Mistakes

Shubha K. Chakravarthy: My favorite topic is cap table fundamentals, right? So, I know you put out the founder ownership report, you give benchmarks for co-founder splits and dilution. Can you just talk a little bit about what the most common mistakes you see teams making at incorporation or at the first raise stage in terms of ownership and splitting equity?

Peter Walker: Yes, mistakes are a little bit in the eye of the beholder, but I think there’s a couple that jump to mind initially. The first one—this is becoming less of a problem, but it still happens—is founders who start the company with a co-founding team and they fail to put vesting schedules on their shares. It can feel very odd.

This is perhaps a good example of something that, coming from academia, you wouldn’t know off the bat. It can feel weird to say, I’m founding a company and yet I have to earn my own equity in that company I’m founding. I understand how that could be a little bit discordant, but it is absolutely imperative that every founder in the company has a vesting schedule, meaning you earn shares over time.

You’re not simply granted the equity outright. And I understand why people recoil from that—but the reason why it’s important is because if a co-founder leaves, that is one of the easiest ways to kill the business. If they walk away with 50% of your company after two years, you’re no longer fundable by venture capitalists. So getting that vesting schedule right and making sure that you’re actually long-term incentivizing the business, even if you’re the ones founding, it is one of the clearest ways to not mess up at the very early stage.

Shubha K. Chakravarthy: Any other big ones that pop up in terms—I don’t want to say mistakes—but anything that maybe comes back to bite the founder in ways they didn’t expect?

Peter Walker: Yeah. I think that there’s maybe a couple other more minor ones than the co-founder vesting schedule, which I think is like there’s not very many times where I’m saying you have to do something or you should never do something, but this is one of them.

Like, have vesting schedules. It will save you so much time and headache. Second is when you’re setting aside option pools and things for the founders, like you’d be shocked how many times founders just don’t converse amongst themselves that deeply about making these decisions.

And then six months later, one of them raises their hand and goes, oh, I actually hated when we did that. Well, you didn’t bring that up early on. Why didn’t you say something when we were having this conversation? Whether that’s option pools, employee hiring plans, advisor equity.

Equity Distribution and Advisor Roles

Peter Walker: Advisor equity I think is one of the biggest ones for STEM founders. They come from a world where it’s very common to have older mentors who are sort of guiding the work in labs and other places. Many of those advisors are not actually very useful in your startup.

Maybe they are on the scientific side. I don’t really have an opinion on that because I’m not a scientist. But for the business, there’s a lot of advisors that just are not worth the equity that people give them. And it feels easy and simple to like, oh, this person’s being very helpful, here’s some equity. And then you look up and you gave 5% of the company to people who are not very helpful. We see that a lot.

Shubha K. Chakravarthy: And one other question on that, since you mentioned guys, you know, I’ve seen a lot of startups that are coming out of universities as spun out of universities. Typically there’s a faculty member who is like the anchor or the foundation, like they, he or she’s like the big wig in the field, right? And having them.

They’re typically listed as co-founders. I don’t know to what extent you’re able to get transparency in the data, but do you have any best practices or not best practices in terms of how you give equity to them? And are those conversations going to be more uncomfortable given that you may have been their PhD students, so to speak?

Peter Walker: It will definitely be more uncomfortable. But this is like, if you’re going to be a founder, get used to having uncomfortable conversations. This is not a good reason to not stand your ground on something that you believe just because you might annoy someone with whom you’re close.

That’s going to happen a lot over the next couple years. The other point is that I would recoil a bit from making someone who’s not actively involved in the business a co-founder. They can be super elite advisor, emeritus, whatever it is. But to make someone a co-founder when they’re not actively day-to-day working on the business is going to raise eyebrows amongst the investor community.

Now, maybe you don’t want investment, so that’s a different thing. But titles are things that can feel easy to give away. As an early stage founder, they can really come back and bite you, not just with this co-founder example, but imagine you’re hiring a chief scientist and you just give that chief scientist title to someone who’s a great scientist, but they’re young and you’ve been friends with them or worked with them in the lab before.

Two years down the road, you need to hire a chief scientist who can run a hundred-person team, but you can’t layer that person you already gave that title out to because they’d be very angry. That is a conversation that you can head off at the pass by making that person the founding scientist instead of the chief scientist. There’s ways to play around with this a little bit more easily.

Shubha K. Chakravarthy: Awesome.

Vesting Schedules and Equity Splits

Shubha K. Chakravarthy: And then one last question on the vesting thing, which you talked about. Are there like best practices or like benchmarks, rules of thumb, in terms of what that should look like to at least get a founder started?

Peter Walker: A hundred percent. So in terms of the equity split, two things. If you have one other co-founder and it’s just the two of you, the most common way that we see founders split equity in that situation is a very minor but unequal split, meaning one founder might have 51% and the other 49%.

Very common, that usually goes the slightly bigger equity package goes to the CEO that kind of eliminates some of the decision-making clarity, right? If you have to end up disagreeing and vote your shares, the person with the higher equity package wins, you move on to the next decision.

You’re going to be making a lot of decisions very quickly. When it comes to the other parts in terms of the vesting schedule, right now we see that as a four-year vest, meaning it takes you four years from the moment that your vesting starts to receive the entirety of your equity package.

We have seen some founders improve that or push that out to five- and six-year vesting just because companies are staying private a lot longer than they used to. But that’s really up to you. I don’t really have too much of an opinion on that. Four years is fine. If you want to discuss something else, it’s great, but just have a vesting schedule of some kind.

Shubha K. Chakravarthy: You mentioned four years. So is it pretty much calendar-driven, or do you have any thoughts on whether they should be tied to milestones?

Peter Walker: I don’t like milestone-driven vesting for founders because the milestones that you’re going to come up with now in year one are not going to be the things that are going to be important to you in year four.

Shubha K. Chakravarthy: Good point.

Peter Walker: So I really don’t like that milestone-driven equity for advisors. I don’t mind. They may be being brought into the business to do one specific thing, and therefore goaling them on that specific thing could make sense. But for employees and founders, it’s very difficult to know what exactly is going to be the most useful thing for them to be doing. So I think it should be time-based rather than milestone-based.

Shubha K. Chakravarthy: Good point. And then did you have any benchmarks on how much equity you give to your advisors and what you pin that percentage to what’s good practice and what’s not so good practice?

Peter Walker: So the median amount of equity given to a startup advisor on Carta for a pre-seed startup, so any advisor where you have yet to raise venture capital, the median we see is 0.25%. So one quarter of a percent is not very much.

About 10% of advisors at that stage will get 1% or more of the company. So I guarantee you when you start talking to advisors, they’re going to ask for 1% at least. Just know that only one out of 10 advisors actually gets 1% or more, meaning this better be an incredible person, right?

They better be giving you advice that you could never get anywhere else or introducing you to commercial contracts if that’s the kind of business you’re in. There’s a lot of blogs out there. There’s a lot of free content to teach you how to do the business side of this, if that’s what you’re paying an advisor for. I question whether or not that’s worth the value.

Shubha K. Chakravarthy: So it’s really the proprietary connections, the actual translate to bottom line or top line impact that you should be giving them equity for, and not necessarily.

Peter Walker: 100%. Or the product. If you are building a scientifically or technically difficult product and they come with knowledge that you couldn’t get anywhere else, that can be totally worthwhile.

Shubha K. Chakravarthy: Okay. Got it. One other thing you mentioned was option pools, right? You talked about that earlier. So how should founders be thinking about setting up these option pools? When should they set them up? How big should they be, and how should they think about kind of future dilution and potentially expansion of the option pool?

Peter Walker: Yeah. I think that you should start the option pool probably on the lower end than you expect. So the typical advice around VC is maybe 15% to 20%. I think that’s too high. I think you can start the option pool at 10%. And by the way, option pool just says the percentage of your total pie of cap table that you set aside for employees.

I think that you can start at 10. You won’t give out all 10% upfront, right? You’ll hire your first couple employees. You’ll use a couple percentages of equity. You’ll probably get into the business that you’re trying to build, and then you’re going to fundraise from VCs. Every time you fundraise, you will expand the option pool a little bit, and that’ll be a discussion between you and your investors.

You’ll come with a hiring plan. You’ll say, I need this person and this person. I think it’s going to cost me this much equity, and then you’ll kind of go back and forth on it a bit. But there’s no need to over dilute yourself upfront. I think 10% is a perfectly reasonable starting point.

Shubha K. Chakravarthy: And on that point, do you have any quick benchmarks or rules of thumb in terms of maybe some key roles outside of co-founder? So I don’t even know what those would be ideally. I would imagine that the CEO and some kind of CSO or CTO is already part of the co-founding or the founding team.

So what are the other roles? So I don’t know, what are the other roles that they should be setting aside meaningful chunks of equity for, and what are some of those benchmarks? And do any come to mind immediately?

Peter Walker: Yeah. I’d say that one of the ones that comes to mind, if you’re, again, it kind of depends on the business that you’re building. Something like 60% to 70% of the first five hires that we see on Carta are engineers. That’s across business types. So there’s a lot of engineering hires. Even if you’re a technical team, it tends to be that the first hires are actually engineers as well.

The other type of person that’s very important there is whoever’s going to run the business side. Head of sales is in the top five hires typically, although not usually hire number one. So again, it kind of depends on your founding team size and where you’re weak or where you think you need complimentary skill sets.

Builders and sellers is always the first 10 hires who can get you in front of clients and close, or who can get you better product quickly. Those are the two things that are most important. In terms of the research based companies, if you are building, you know, found AI Foundation labs are kind of the hottest kind of startup at the moment.

If you really need that AI research talent from straight from academia, you’re probably going to need to go to higher equity packages than you do for other people, just because there’s so much competition for AI ML research talent at the moment. It’s the hottest role across basically all startups.

Shubha K. Chakravarthy: And what are the numbers like? Can you give us some benchmarks in terms of even founding engineers, sales? What are you seeing?

Peter Walker: Founding engineers, if they’re the first hire, it’s something like one and a half, a little bit, maybe slightly higher than that, one and a half percent. And that’s over the full four year vest, not annually. Business hire, you’re talking about maybe 0.5 to 1%, but it falls off very quickly.

You know, if you went on the median of every one of these benchmarks and you said, okay, I’m going to hire someone at this median every time, hire number four, hire number five, et cetera, you would only use up about 3% of your equity by the time you got to the first 10 hires. So it falls off very quickly.

A lot of people at startups who are not in the founding team but are in the initial employee team, they’re taking really significant risk. The business is almost certainly going to fail, sorry to say, but it’s true. That’s the data, and if they succeed, they’re going to get multiples less than the founders and probably multiples less than the initial, call it one to three employees. So it’s a risk. Hiring those early people is hard for good reason.

Shubha K. Chakravarthy: And I would imagine that the actual cash comp is also going to be pretty sub market rates, right? Do you have a sense of how much sub for these kinds of equity packages?

Peter Walker: Depends on what you’d consider market rate. If you’re comparing it to, say, what they’d get paid at Google, then yeah, completely. Like, of course. If you’re comparing it to what you’d get paid at a normal software company, it might be a little bit lower, but it’s not crazy low. It’s maybe 20% off.

I think people actually misunderstand the salary side of this. You’re taking an okay salary. It’s not going to be good, but it’s going to be okay, oftentimes can catch up fairly quickly if the company grows well. The equity side is way, the range on equity is way wider than the range on salary usually.

Shubha K. Chakravarthy: Got it. That makes sense.

Convertible Instruments and Dilution

Shubha K. Chakravarthy: The other thing I want to talk about in terms of cap table is dilution, specifically in terms of the instruments you use in the earliest raises, right? So friends and family, pre-seed less so, but there’s SAFEs, there’s convertible rounds, there’s multiple rounds, there’s multiple SAFEs within a round, you know, different side letters, different conditions.

What would you say in terms of their impact on the real ownership to founders and the impact on future fundability for these startups? Do you see founders getting tripped up on the most based on the instrument that they’re raising on?

Peter Walker: Yeah, I mean, I think here there are three instruments that often come into play when you’re talking about early stage startups. You’ve got traditional priced equity, which is you sell equity to an investor and they receive actual shares in your business, meaning there’s a price per share, super easy to model out, more lawyers involved, but easier on the front end. And then there’s SAFEs and convertible notes. So those are the three different instruments.

SAFEs and notes tend to trip founders up more because they imagine future states. There’s a future state piece to the model, meaning when you’re using a SAFE, for instance, what that is, is a contract that says, I get money from the investor today and I give them equity at some point in the future. We don’t know when.

Could be a year from now, could be five years from now, but it’s whenever I raise a priced round. And so, because it has this time dilation to it, it can trip investors up, but it can definitely trip founders up as well.

And sometimes you see founders using a lot of SAFEs and then not realizing that they’ve actually sold a decent chunk of their business and getting pretty frustrated with how much they own a year down the road when they actually raise a priced round, even though SAFEs today are by far the most common way to get in those initial, call it million or so dollars.

Shubha K. Chakravarthy: Got it. They own less of the company is kind of like the biggest risk. Is there any risk in terms of also being not as fundable, just because they weren’t very thoughtful about how many SAFEs they raised? Are you even seeing that, or is that not as much?

Peter Walker: I mean, it is a risk. You got to really mess up, to be honest. Like, I think the idea of an uninvestible cap table is mostly not true. There’s extremes where, yes, look, if you raised a SAFE, if you raised a million bucks on a 2 million cap SAFE and you sold 50% of the business, that’s going to be a really difficult company to fundraise for.

But in general, if you’re inside the benchmark range, most VCs will be okay. And by the way, when a venture capitalist says, oh, we would’ve invested but it’s just a really difficult cap table for us, what they really usually mean is we’re not that interested.

Shubha K. Chakravarthy: Okay.

Peter Walker: They’d say a lot of different things, but what they mean is like if they had been super interested, they would’ve figured out the cap table stuff, right? That’s not a death knell most of the time. The selling way too much equity upfront or having no equity value for the founders are the two ways where that could get very worrisome.

You know, if the CEO owns 10% of the company at seed or pre-seed, that’s going to be; venture investors will just look at that and say you are not even super committed to this. You don’t have enough stake. It’d be really hard for us to bet that you’re going to be here for 10 years.

Shubha K. Chakravarthy: Got it. And on that subject, what are the top red flags? You know, when you look at pre-seed and seed companies, and to the extent that you’re able to speak about STEM companies, what are the top maybe three or four red flags you see?

One of them you mentioned, obviously, which is a CEO or founding team member without a big enough stake at seed. And pre-seed, it’s only going to get worse from there. That’s number one. Are there some other big red flags that you think maybe are blind spots for founders?

Peter Walker: Yeah. I think having a lot of equity tied up in people that are not contributing to the business. So that might be advisors, that might be university professors, that might be consultants who are just there for a couple months. But if you have 10% of your company and it’s already kind of with people who are not day-to-day active contributors, that’s a bit of a red flag.

The second is if you’ve raised lots of different convertible instruments at different valuation caps or at different terms and you don’t understand why. It’s actually less about what this does to the cap table and more about what it says about your approach, which is you were just kind of like wildly taking money from anywhere you could get it, and you didn’t really care about understanding the terms of it. That’s a red flag on your thinking rather than a red flag on the actual cap many times.

And the last one, and this is again, this ties back to a point that we made earlier, why do you have five co-founders? Are all these people actually doing co-founder worth of work, or were you just pretty generous on titling?

And this happens more in STEM based companies, which tend to have slightly larger founding teams. Why are these people co-founders? Is it because you just really didn’t want to have a difficult conversation with them about being a founding engineer? Like that again raises a yellow flag in the mind of an investor. Like hey, are you willing to have the hard conversations you’re going to need to have? Because this is not going to be easy over the next 10 years.

Shubha K. Chakravarthy: So, to that point, is there like an ideal, I know we’ve seen more solo founders coming up, is there like an ideal size or maybe even cutoffs in terms of less than or more than these are like red flags in terms?

Peter Walker: Solo is a bit again, in the eye of the beholder. More people are investing into solo founders than they used to but it still is something that VCs are sometimes uncomfortable with. I think sometimes for good reasons, like they want complementary skill sets, et cetera. Sometimes, again, I just think it’s a way to screen out companies.

Oddly, when you talk about startups, almost always when they get to the end of the journey, you’re talking about a single founder. We talk about Steve Jobs, not Woz. We talk about Bill Gates, not the other multiple people. Yeah, not even just Paul. At the beginning, we talk about one person. Brian Chesky has two other co-founders that IPO’d with him, but we just don’t even mention Nate and Joe.

Shubha K. Chakravarthy: I don’t even know their names.

Peter Walker: Right, exactly. So it is kind of weird how solo is not cool at the beginning, but we kind of expect it by the end. So I think that’ll be a change over time. I think more people will invest into more solo founders.

Shubha K. Chakravarthy: And last question on cap table. Have you, you know, I’ve heard different anecdotal evidence of women versus men founders and how much of the company they own at the earliest stages. Has there been any pattern that you can factually speak to this?

Peter Walker: There’s not. Honestly, there’s not a massive gap in terms of founder ownership or the way they split equity amongst co-founders. What is the case is there is a differential ability to fundraise oftentimes, which is a shame. I mean we’ve all read the stat like 2% of venture funding goes to women. I think that is a silly stat for two reasons. Yeah, I actually have a lot of problems with it.

One is it’s measuring the entirety of venture capital when so much of VC is massive billion dollar rounds to late stage companies. Of course there were fewer women 10 years ago when many of those companies were founded. It’s odd. If you want to track change in the ecosystem, you have to start at the early stage and then watch it forward. There’s better news than that.

The second is it doesn’t really look at mixed gender teams. How should you think about mixed gender teams? About 25% of venture backed companies will have a woman and a man in the co-founding team. Who is the CEO? How does that impact fundraising? All those kinds of things matter.

So I think that’s a little bit odd. In general, though, I think that women split equity amongst themselves the same way that mostly men, all-male teams do as well. There’s not a giant difference there.

Shubha K. Chakravarthy: And is there a difference between, in mixed gender teams, in terms of how equity split between the men and the women?

Peter Walker: There is, but it’s super highly dependent on who is the CEO.

Shubha K. Chakravarthy: So the CEO gets the bigger.

Peter Walker: Hundred percent. Almost.

Shubha K. Chakravarthy: So it’s more title driven than gender driven. It sounds like you’re not seeing big enough differences to warrant any comments on that?

Peter Walker: A hundred percent.

Shubha K. Chakravarthy: Awesome. So I want to talk a little bit about compensation and hiring and employee equity. So, are there some high level patterns in terms of how early stage companies grant equity and how often employees benefit from it?

So the main takeaways I had from earlier were that like there’s a huge cliff after really the ones who get the bulk of it are, you know, employee number maybe one to three, and then there’s this sharp drop off. Are there other themes or subtext issues that you’ve teased out from the data that you haven’t talked about yet?

Peter Walker: You raised a really interesting point, which is how many employees actually benefit from it. I mean these are sad stats. It’s like we got to look at the data as it is. Not a lot, right? So. Not just because not very many startups make it. That’s obvious.

Like if your startup shuts down, nobody benefits from the equity. We get that. But even within the journey along the way, even if your company is doing quite well and growing and scaling, and it’s becoming more and more mature, a lot of employees will simply not exercise their options when they have the option to. And that is happening for a lot of different reasons. One of it is that there’s no real impetus to exercise along the way. So if you have options, you have to pay an exercise cost in order to turn those options into real.

Shubha K. Chakravarthy: Correct.

Peter Walker: But if you’re just at a company and you’re going along in your day-to-day life, you don’t have to do that at any point. So there’s no real trigger to do it. Why would I spend money on something I don’t need to today? But then you come to the point where you leave the company or you get fired.

At that point, you have 90 days to make the choice, generally speaking, whether or not you’re going to exercise these options, and it might cost you a couple hundred bucks, it might cost you thousands of dollars. I mean, at the bigger end, if you did really well, it might cost you hundreds of thousands of dollars. That choice, in a 90 day period, is very acute for many employees.

And sometimes they wish they could exercise, but they just do not have the financial capital to do so. The other side of it, when you’re talking about somebody who’s coming to the end of their journey at a company, a lot of times they look at this equity and they go, it’s going to cost me $8,000 to exercise today.

What is my confidence level that this equity will ever be worth more than $8,000? And it better be worth a lot more, because I’m paying today for the uncertain future. If it’s not, they just give the equity back, and it’s as though they never, equity was never part of their compensation package in the first place. Wrap that all up, how many startup employees will actually make money on their startup equity? Less than 10%.

Shubha K. Chakravarthy: And how much, is there a number of how much they will make, either relative to like an absolute.

Peter Walker:  I can’t give a number,  how much they will make. Even if you say the notional value of the equity is kind of a silly thing that people try to pin down, but it’s a Schrodinger’s cat kind of situation. Either the equity’s worth a ton or it’s worth nothing, but notional value at a single moment of time is not really true.

Shubha K. Chakravarthy: Okay, so not a lot of insight to be gained there. And in that, also, is there any difference in terms of employees, you mentioned the bigger engineering teams in deep tech startups. Are there any other differences between, like, pure software type startups versus deep tech or STEM startups in terms of how much equity is given to employees?

Peter Walker: Yes, the employee option pool at your standard B2B SaaS company will grow a little bit more quickly than at a hard tech company. I actually don’t have great data on this, but I’d love to figure out whether or not, at a deep tech company, what percentage of the employee base at scale actually receives any equity at all versus the B2B SaaS.

Over the last, call it 10 years or so, it has become more and more common to give everyone equity even as you get to be in the hundreds of employees. That’s not always true though and if you have manufacturing as a part of your process et cetera I’d imagine that perhaps there’s a set of employees who actually don’t receive equity so it might be a bit of a change there.

Shubha K. Chakravarthy: Got it. And then one other thing you mentioned is many of these people never see a dime from this equity that they give. We hear a little bit about secondaries and are there ways to allow liquidity? Can you just talk about, you know, for those of our founders who are not familiar, what is secondary liquidity? What are secondaries and when does that come into play? And what should a founder know about these things?

Peter Walker: Yeah. A founder should understand them at a broad level but you don’t have to be an expert in this upfront. What secondary equity is, and secondary comes from obviously there was first a primary issuance of stock.

Primary interest in stock is when you created shares to give to people, to sell to people oftentimes, meaning literally the company charter creates more shares and then I sell those to an investor, to an employee, et cetera. Secondary is I already own shares in this company. I would like to trade them to someone else. So it’s not a creation of shares, it’s simply a changing hands of shares that already exist.

When does that happen? Well typically in a new IPO then everybody gets to trade as much of their stock as they want. You get to be like Google. You can trade it every single day. When you’re private there’s not a lot of liquidity. There’s not a lot of changing hands of those shares.

So secondary markets are a way for early employees, founders, and early investors to trade shares in companies that have not yet IPO’d. It’s still pretty rare. Most startups will not have the opportunity to do secondary simply because nobody wants the shares.

Literally the demand is too low, right? I make this joke to founders all the time. If we tomorrow all woke up and every single startup in the world now had publicly traded shares on the New York Stock Exchange, most of those startups would see zero trades that day. No one would buy, no one would sell. There’s no float, there’s no demand.

That’s not true for some startups. Let’s take SpaceX as an example. SpaceX is not public and yet it feels like we’re always reading about SpaceX share price changing hands because they’re doing secondary liquidity options where they allow new investors to buy from employees or buy from the founder or buy from whoever. It’s an exciting thing.

If you’re an employee and you’re involved in a secondary liquidity transaction they’re still very rare. Most founders are not also getting the opportunity to sell their shares, more than used to but still not a lot. But if you are a super hot in demand startup and you’ve got investors tearing down your door trying to get into your business, sure, you can sell some of your own equity and make money right now.

Shubha K. Chakravarthy: So basically this is applicable to Mira Murati and to other people. So I’m taking away that for the most.

Peter Walker: It’s like you know how many companies ran secondary programs this year? It’s in the low hundreds on Carta out of 60,000. Right, so it’s not a lot.

Shubha K. Chakravarthy: Not even a rounding error basically.

Peter Walker: Correct.

Shubha K. Chakravarthy: Okay. Let’s talk about how to structure employee incentives, right? So we talked about all this other stuff but then are there other guidelines in terms of how founders should structure employee incentives especially when timelines are very long. Specialist talent is needed that is not easily available on the outside market, and also they don’t have a lot of cash. Do you have any other guidelines that we haven’t talked about or is there anything different for these guys?

Peter Walker: I think you just outlined a couple of the real challenges you have to bringing the right people into your business. It is not easy hiring for a startup which means the number one thing, this applies if you’re STEM, if you’re not STEM, if you’re building scientists, if you’re building SaaS, you have to get people who are mission driven.

You must find people who would be working on this kind of problem even if your company didn’t exist. And then you need to convince them that their best chance to make an impact on the world is through your company. But if they’re at all mathematically inclined they will understand that they could make more money elsewhere at a higher rate of return and less risk to themselves.

But they don’t want to do that because they want to be part of the mission that you’re building. So I think that’s sometimes founders underestimate how hard it’s going to be to get the right people in the door and how much of that getting them in is about storytelling and grabbing them on the mission driven principles of what they believe in and convincing them that they will have agency to do that here. That’s the hard part.

You are not going to win on comp, you’re not going to win on office amenities. You’re going to win on mission. So you better really believe it and you better get good at communicating that mission to other people.

Shubha K. Chakravarthy: So basically what I’m taking away big picture is hey make sure you stay within roughly the broad parameters of what the market is at.

You cannot lead with it and you’re not going to be in a position where that’s going to make or break, but really what you need to be focusing on is that it doesn’t kill the deal but at the same time that you’re really focusing on selling the mission for you to have any shot at getting these people on board.

Peter Walker: 100% and like look if you need to tip over to the generous side of the equity, do it, right? No I don’t think any founder who IPO’d looks back and says oh I wish I’d given that early employee less equity. Like if you make it long term it’s going to be okay. It’s not going to come out, it’s going to come out in the wash a little bit. But if you’re too stingy with it upfront you know you can really shoot yourself in the foot.

Shubha K. Chakravarthy: Got it. Okay.

Key Metrics for Founders

Shubha K. Chakravarthy: I want to switch gears a little bit and talk about sort of metrics and milestones to the extent that you have insight on these things. So from your viewpoint if a founder could track just three metrics from day one, some kind of a shortcut founder dashboard, what would you pick and why?

Peter Walker: So highly dependent on the business that you are building. I’ll take an example from Carta that Henry, our CEO loves to talk about which is a little bit off the beaten path.

So I think the easy answer would be something around revenue retention blah blah blah, right? And you should be tracking those like 100%. If you’re not, what are you doing?

But you need to find the atomic unit of your business and track the growth in that unit. So Carta began life as a cap table management platform only meaning what we did was we digitized stock certificates. What is the best atomic unit of measure that we can organize the company around at the very beginning?

Shubha K. Chakravarthy: Number of stock certificates?

Peter Walker: Exactly, right. Number of issuances of new stock certificates. So what does that do? It comprises a couple things. One it means the employee base on Carta is growing because you know those. Second it means the employees that are already receiving equity on Carta are receiving more equity on Carta or accepting those grants et cetera.

Third it means that the admins who are managing both profiles of offline equity and online equity are moving more of their offline to the online. So it’s not just a story of new customer growth, it’s a story of increased usage from current customers. That was the metric for the first three years at Carta was how can we get new accepted stock issuances up into the right every quarter, every month, every week. You want to find a measure of your business that aligns everyone around it to a single point if you can.

It’s pretty hard to do candidly. Like I don’t know how we would do that on our current business. We’ve got so many other businesses happening. But ideally you have like a clear thing that’s a statement of intent. This is the thing that we’re going to judge ourselves on and it’s going to be plastered in every part of the office and every employee should know it by heart.

Shubha K. Chakravarthy: So I like about that digital issuance of these certificates is it covered so many different growth drivers with just one metric.

Peter Walker: Yeah.

Shubha K. Chakravarthy: Obviously it was the earlier stages.

Peter Walker: Yeah. And it’s to your point like it covers new growth, it covers retention, it covers employee satisfaction in some ways. It covers up market. Bigger startups have more stock issuances than smaller startups do. Like it covers all sorts of different things and you can attack that number in different ways, right?

And everybody in the business can feel as though my work can in some way impact that number. Spending time to figure out clarity on how everyone in the business’s work impacts a single thing can be very helpful.

Shubha K. Chakravarthy: So have you seen other examples outside of Carta of people who have figured that out in non intuitive?

Peter Walker: When I wasI listening to, Invest like the best podcast with Zach Dell from Base. And so they are effectively building a new power company and he was talking about how they were super interested in units of transmitted power to various homes. And he explained this incredibly in depth that I’m mangling it now but I think if you’re building a scientifically difficult business or like a technical one that requires hardware et cetera.

You can oftentimes spend those first year or so worried about things that are all about investment like we’re building up into the point where we actually have customers. And then we can start building the customer side of the business. And that’s really tricky.

I mean there’s a reason why a lot of VCs have been historically reticent to invest into hardware businesses because they lag on that metric that matters. It’s really difficult to know what it is upfront. I’m happy to say that when you look at our data at least more VCs are interested in funding hardware businesses than we’ve seen in a long time. So maybe this is the right moment if you’re building something that touches the real world.

Communicating with Investors

Shubha K. Chakravarthy: So we talked about one metric but there’s other milestone related metrics. There’s all kinds of things that founders need to communicate well especially when they’re talking to investors, right?

Do you have any insights or counsel to offer in terms of how for example specifically how they use their cap table, employee equity, or things that have to do with the cap table in framing and communicating a narrative to investors that would make them more attractive all else equal?

Peter Walker: All else equal I think that cap table dynamics are actually not going to usually be the make-or-break point in an investment decision. That’s going to come on the business financials which is related but separate from the cap table itself.

Where you can have impact on the way that you’re using equity or the way that the cap table is modeled is one you can show up with an understanding of what the scenarios are. So you don’t need to have the lawyers walk you through what this level of dilution is going to mean for them and for you. You know it upfront.

You can talk about hey we’re going to need this much pool for this many hires and I already have a beat on these places and here’s why I think the equity will work. Just showing up and having thought through the various ways you’re going to use equity in the future.

Also this comes into a really big point with a lot of venture-backed businesses these days. How much money are you going to need total over time? Really hard question to answer but you should have a perspective.

There’s two kinds of VC-backed founders one that says I’m going to raise 5 million today and then I’m going to raise 10 and then I’m going to raise 50 and I don’t know when the upper bound is and the other that says I think I need $300 million total to make this into the business I want to build and here’s how I’m going to chunk it out. You want to be the latter founder if you can.

There’s a lot of people who just kind of get on the venture hamster wheel and they’re just like hey another round sounds great. But if you can be really clear about where the tip-over comes so you fund externally until you fund through revenue and profit it’s nice to have that thoughtfulness upfront.

Shubha K. Chakravarthy: What percentage of companies you guess would actually fall into the latter bucket?

Peter Walker: Like 5%.

Shubha K. Chakravarthy: That’s it right?

Peter Walker: It’s super hard yeah. I think the question of how much to raise is kind of like that unit economics question we were just talking about.

It is such a difficult question to answer because it involves so many things. What are my competitors doing? What does compute look like in the AI world? A thousand things on how much you need to raise and why.

But what you want the investor to take away from it is that you have a plan and these plans can change. Plans are models but you have thought through what the business economics look like as you grow and you know where to use external capital. Maybe things will change but it’s nice to have a plan.

Shubha K. Chakravarthy: Since we’re talking about communicating with investors one issue I’ve seen with first-time founders especially early on raising their first institutional round is they don’t have a very clear understanding of what an outsize impact certain aspects of the deal structures have. Liquidation preference participation whatever the case might be vesting dilution.

What’s your experience what you’ve seen with founders and what are some practical ways that you think founders can use to get smart and avoid making those mistakes?

Understanding Venture Deal Structures

Peter Walker: The nice part double-edged sword here the nice part about early-stage venture is it has kind of come to a consensus on what a good deal looks like a clean venture deal.

Those include things like 1x liquidation preference meaning I’m an investor I give you 10 million bucks. If you ever exit I get my $10 million back before you get any money. That is now standard across all of venture-backed deals.

Participation, if you have participation on the investor equity it means they get to double dip. They get to participate on the initial and then the profit or the profit exit of the business. Those are rare. Participating preferred stock is not common in venture.

Cumulative dividends, again only a small percentage of deals that we see on Carta have cumulative dividends. So we’ve kind of taken all this stuff that made venture deals complicated and we’ve turned it into a pretty standard good-looking document set. That’s a clean deal.

At Seed and Series A your early-stage rounds we see 2% of seed and series A deals that have a high liquidation preference for instance. So if you’re being offered one that’s a predatory investor and you should not take that deal. I have total confidence saying that.

However if it’s a later-stage deal or if this is a bridge financing you’re going to encounter a lot of different terms that are going to favor the investors. Why? Because if you’re raising a bridge, something didn’t go right you don’t have very much leverage if you need their capital because hey we missed our targets and we’re going to close down in six months.

They’re going to demand terms that they would not give you or they would not start with if you were doing really well. It seems unfair. It’s not unfair. This is finance.

Shubha K. Chakravarthy: The market. You pay for the risk that you are.

Peter Walker: Supply and demand. If you are incredibly in demand you get to dictate the terms. If you have one supplier they get to dictate the terms. That’s how it works.

So you should familiarize yourself with these deal terms and what they mean. You should also just get a good lawyer. Good lawyers will pay for themselves honestly. We work with thousands of great lawyers here at Carta. Every venture-backed company should have a good lawyer.

Shubha K. Chakravarthy: Awesome. And on that I’ve been dying to ask you this. I’ve read this other little number that’s been floating around and I’m curious to see if that’s true or not.

The Reality of Startup Success

Shubha K. Chakravarthy: I’ve heard that 70% of the time in a venture-backed deal the founder walks away with nothing 70% to 75%. Is that true? Meaning that if you’re going to take venture money and you’re a founder 75% of the time you’re going to walk away from that startup with no money with nothing in your pocket for whatever number of years you put in.

Peter Walker: That’s not our stat but that rings true to me yes.

Shubha K. Chakravarthy: Do you have a stat that you’d care to share?

Peter Walker: I don’t have a stat in terms of what percent of venture-backed founders make money. We’re actually doing some work on this.

The really tricky part is okay if nine out of 10 so you raise a seed round from venture capital from that starting point eight to nine companies out of 10 will fail.

Shubha K. Chakravarthy: So obviously the founder’s not going to make anything.

Peter Walker: Not going to make your money in a failed business right. You might get acquired but that acquisition will still not be capital for the founder. You may pay for some investors but you might not clear the liquidation preference to the point where the founder’s actually making money on that acquisition. So yeah 70 to 80% sounds right to me.

Shubha K. Chakravarthy: So you should be probably having that very clear in your mind before you go in. This is just one of my pet peeves so I’ll get on my soapbox for a second.

Peter Walker: Please. Yeah it’s if you are trying to make money and that is the number one thing that you want do not be a startup founder. This is a terrible way to make money.

There’s so much better more rational, more reliable ways to make a lot of money than being a startup. Go work at Google as a software engineer you will almost always out earn the person in your similar profile who started a company and sometimes in that narrow case you will earn many times more as the startup founder. But that’s the narrow case.

Shubha K. Chakravarthy: That’s like the your expected values.

Peter Walker: I mean this is maybe a little bit off kilter but it’s a question of what is high status for you. It used to be that you know we kind of lionized these startup founders because it was not cool to be a startup founder. It still is not that cool in some places. In San Francisco it’s getting much cooler right. It’s like high status to be a startup founder.

Shubha K. Chakravarthy: What do you mean it’s becoming I thought it was always high status to be a founder in San Francisco?

Peter Walker: No. Well I mean in SF maybe it has been for longer than it’s been elsewhere. But you know if you take the old example in the nineties if you said hey I’m starting a tech business they would’ve been like your mom and dad would’ve been like when are you going to get a real job?

That is not the case anymore. But along with that change there seems to be this expectation that oh it’s a good way to make money. It’s not a good way to make money. It’s a terrible way to make money most of the time.

Shubha K. Chakravarthy: And that has not changed?

Peter Walker: That has not changed.

Shubha K. Chakravarthy: Regardless of all the hype.

Peter Walker: 100% not. We’re just better at telling stories about the successful ones.

Shubha K. Chakravarthy: Ah I can buy that. And on that do you have a stat on what is the median tenure of a startup owner? So if you think about how much I’m going to make like how many years of my peak productive years in many cases am I giving to this thing in return for basically that big egg.

Peter Walker: You have to plan on this taking a decade. The median amount of time that you’ll spend as a startup founder though and let’s say let’s ignore the ones who never fundraise because they might have done it on a lark or not been trying whatever. But if you’re taking the venture capital path you raise at least one venture round those founders are founders for I think on the median is six six and a half years.

Even if it fails it’s six and a half years of your life. And a lot of times it’ll be eight years of your life and it’ll still fail. There’s not some guarantee that it’s like oh you made it to year eight now you’re going to get a good acquisition. No.

I mean just look at the companies that were three years old when 2021 happened. That’s eight years ago. They experienced a boom they probably got high valuations and then underneath them were AI native companies.

They were already six years old when AI came out. Are they going to be bought for a ton of money? No they’re not. They may slowly die. Then that was nine years of your life and you made your salary.

Shubha K. Chakravarthy: Which was not what you would’ve meant.

Peter Walker: Right which was not market rate and no equity in a Google or whatever if you were a technical person.

Shubha K. Chakravarthy: And you probably lost a lot of weekends and missed your kids. I don’t know.

Peter Walker: Yeah, you worked harder than you ever would on that company for sure.

Shubha K. Chakravarthy: Thanks. I think we all need that little bit of dose.

Peter Walker: It’s true. There is a lot of like rah rah everyone should be a founder. No. Everyone should not be a founder.

Shubha K. Chakravarthy: No we want your voice of reason right? So I’m so glad you talk about that.

Peter Walker: I mean I literally work at the company that is closest to startup founders of basically anything in the US. I love them so much. Most people should not be startup founders.

Shubha K. Chakravarthy: And do you have any corroborating or corresponding stat when it comes to first time versus repeat founders either in terms of success in terms of anything that is a meaningful number for someone to make that decision? Or do I want to do this again?

Peter Walker: In terms of?

Shubha K. Chakravarthy: Outcomes either the puts or the takes right? So are you putting in less or years and are you making more at the other end? If you’re a repeat founder versus a first time founder do you have any data on that?

Peter Walker: I don’t have any data on the ultimate outcomes of repeat versus first time. I can tell you that if you are fundraising from VCs and you are a repeat founder in this case what repeat means is you are a founder of a company that was backed by venture capitalists before. No I don’t look at whether or not you exited for a ton of money. Just have you ever raised from VCs at your prior venture? Counts you as a repeat.

The likelihood that you’ll be able to fundraise for your second company is much higher. VCs love repeat founders is basically what it comes down to for I think good mental models. They’ve done it before. You don’t have to teach them how to build a business alongside the idea. All those things depends on who you ask whether or not the ultimate returns are better for VCs from first time or not first time founders.

The other thing to note is there’s just a lot more founders around today. The pool of people who’ve started a company before is getting much bigger. So I think that is part of the reason why VCs are tending towards supporting them more often.

Shubha K. Chakravarthy: And I mean part of that is purely a maturation of a vintage right? I mean as this has become cool for longer then you’re going to have a lot more of them who are now taking their second shot at a company. Do you think also there’s also a broadening of the pool though right? Of more people coming into the picture and therefore having a second shot. Is that an accurate statement?

Peter Walker: Yes. Both of those factors are in play there.

Shubha K. Chakravarthy: Okay. So a couple last questions before I want to move to a closing section which is when you’re talking about a STEM founder they come from a let’s say an academic background. They’ve lived in the equation world for a very long time approaching their first fundraise.

Is there a sequence of things that they need to do in the right order? So for example do they need to set up their ownership first? Like what’s a good way to do it so that you minimize the chances that they do something that would come back to bite them?

Peter Walker: Yeah so I mean you need to do all the company setup stuff first. So that is incorporation company charter et cetera. Get your equity split with your co-founders. You don’t need an option pool if you don’t have employees at that point but setting one up at that point is also totally fine. Just the nuts and bolts of the business. Get on Carta totally free till you raise your million bucks if you want to look good to VCs.

Fundraising Strategies for Founders

Peter Walker: I think the more important point though is a lot of first time founders whether they’re STEM or otherwise approach fundraising incorrectly. And they view it as a series of conversations that somehow they should try to just kind of schedule haphazardly. They’re not treating it as a product in itself.

Shubha K. Chakravarthy: Huh? Tell me more. Yeah.

Peter Walker: You need to fundraise you need to have a very clear well thought out strategy to your fundraise and you need to as much as possible condense it. So I cannot tell you the number of founders that I know who have been fundraising quote unquote for seven or eight months.

And what that means really is I’m cold emailing VCs and I get like one email one call a week with a VC and then it didn’t go well and then I’m back to cold email and I’m doing everything I can to get in front of these people. That’s a terrible way to fundraise because you’re spending so much of your mental effort thinking about the fundraise and not about the business which you also have to be building at the same time.

The best founders are going to stack a fundraise. So they’re going to get everything in a row. They’re going to have their deck ready to go they’re going to be showing moment and then they’re going to map out their pathway.

Warm intros into the VCs that they want to talk to. They’re going to get hopefully 50 but more like 80 meetings if they can scheduled in a three week period and they’re going to rip through them. That is a better way to fundraise.

It’s not possible for everyone but in so far as it is you do your thinking work upfront to get those warm intros to understand who your target VC is to have a reason why they should talk to you. Those spray and pray oh I hope this cold outreach really finds you well, good luck. That’s just like really hard to do these things.

Shubha K. Chakravarthy: Not find them well!

Peter Walker: It almost never finds them well somehow. Yeah. Like you some VCs will shout about how yes I invest into cold email. No they don’t. Not really. What percentage of their deals come from cold inbound? Like none of them almost.

Shubha K. Chakravarthy: That is good to know because I keep seeing these posts on LinkedIn all the time. It’s like, Hey you know it’s December. You may have heard that you know nobody. I love those posts. Like good.

Peter Walker: December is not a great if that’s right ,we’re talking on December 15th. If you are trying to fundraise this month work on your business. If you’re starting if you’re like starting to reach out to people you got to those that’s a January thing at this.

Shubha K. Chakravarthy: Well this is going to probably go out in January so but that’s good.

Peter Walker: Well then then we’re hitting it right now. We’re everyone’s back in the office. We’re ready to go.

Shubha K. Chakravarthy: We’re ready to go. So one other thing I want to talk about before we close is there’s this tension in terms of fundraising and this do I want to give out dilution? Do I want to this?

So I know it’s a qualitative question but just from all the either the data that you’ve seen or the founders that you’ve spoken to is there a mindset that works better as a first time founder when you’re going to go out and fundraise in terms of understanding ownership versus dilution and having that conversation on a strategic basis versus oh you know you can pry my ownership out of my cold dead hands which.

Peter Walker: Yeah hopefully not the latter right? That’s a difficult one. I think you need to have some strong discussions with yourself upfront. And to be clear when you’re talking about how much of your company you’re going to sell to these people if you’re building a deep tech business it is probably the case that you’re going to have to sell a little bit more of your company upfront than your software peers and your SaaS company peers.

So our data shows standard seed and series A dilution. You’re going to sell 20% of your company in a series seed round and 20% of Series A. That’s very common for SaaS businesses. For hardware that’s more like 22% worth 23% or even 24% at seed and kind of the same-ish at A. So you’re going to suffer more dilution. Why is that? Because you’re building things in the real world and it’s more likely to fail. That’s at least that’s what VCs tell themselves right?

You need the capital upfront. It is more dilutive upfront to you as the founder. You need to already like have gotten over that like prying equity out of your call of hands. No. You’re here to sell parts of your company right? This is a shark tank right? You’re here to sell some equity for some capital.

But the other maybe mindset that you should take into these meetings maybe especially for STEM founders two things. One, do not take all of the reasons that VCs are passing as though they’re actually important to you. It’s okay to just be like look we weren’t a fit.

I don’t need to take any learnings from that meeting. They didn’t give me any feedback that’s useful for my business right? Not every VC is going to give you useful feedback. In fact most of them won’t. So just be like okay no problem. Wasn’t a fit. Move on to the next VC. That’s okay.

The second is that if you are hearing something again and again. Right? If you’ve been to four meetings and then some VC is picking up on we don’t get your economic strategy or like we think that this part of your cost structure is too high. At that point if it’s a repeated piece of feedback you don’t necessarily need to change what you’re doing but you should have a clear answer to that feedback.

So maybe it’s a slide in the appendix of your deck that answers that question because you expect that question this time. Like you don’t need to take their feedback and change what you’re doing but you should know how to respond to it if you’ve gotten it more than once.

Shubha K. Chakravarthy: That’s great. Great points. And then from your data can you tell what percentage of founding technical founders get replaced as CEOs?

Peter Walker: That’s a good question. I haven’t looked into this. I think there’s a bit of a myth out there that it happens all the time. I don’t think it happens all the time certainly not today. I think a lot of VCs actually want technical founders.

So I don’t think you’re at any disadvantage raising as a technical founder versus some sort of business person. I think that is a bit of a old theory. It does happen. I’m sure it happens but most VCs are not looking to replace their CEOs.

Shubha K. Chakravarthy: Even at series C?

Peter Walker: at Series C Series D it’s a you know if you’re later stage maybe there’s more of that. But at seed and A.

Shubha K. Chakravarthy: Not at seed and A. Yeah I’m sorry I wasn’t talking about seed A. That’s obvious. You need their technical expertise. But I’m looking at this as a lifetime bet right? Like I’m this is my baby.

Peter Walker: Yep.

Shubha K. Chakravarthy: So should I be prepared?

Peter Walker: Well then that comes back to the board. How are you controlling the board right? So the board is the people who are going to make that decision about who gets to be CEO. That’s eventually they’ll be your boss. Who’s on the board?

Shubha K. Chakravarthy: But you’ve already given up. Yeah, but after series A, you’ve already given up, let’s say 45% to 48% based on the numbers you just gave me, which means that as I go into series B, the VC is the boss. Like whatever combination,

Peter Walker: Not quite. So yes in terms of the equity that’s true in that you will own as a founding team less than 50% of your own company right? So the investors as a group will own more.

However that doesn’t account for who is on the board. So the board seats really matter. Usually but not always the lead investor in a round receives one board seat. So if you have three lead investors they might all have a board seat.

Now if there’s three founders that’s three to three, you’re not getting fired in that case right? There’s also independent board members which you add in consultation with those VCs and they also have a vote oftentimes on compensation CEO et cetera.

So equity holdings is divorced from board dynamics and the board dynamics is really what says here’s the CEO or he or she’s going to get fired. So controlling your board is very important. I understand that’s hard to do because maybe you only have one deal and they demand a board seat and that would give them control. Okay that’s up to you. You know is that money worth the board seat or not?

In general I’d say that the getting kicked out of your own company by VCs because they want to bring in a new CEO definitely happens. It happens a little bit less than like all the stories make it seem like.

Shubha K. Chakravarthy: Ah so another case of median over media.

Peter Walker: Well I mean if you’re a founder and you get kicked out of your own company you’re sure as hell going to go talk about it on Twitter and be really mad and all that kind of stuff right? Yeah it’s a small world really when you get right down to it.

Shubha K. Chakravarthy: Awesome. So we’ve talked a lot of about a lot of things and you’ve shared a lot of insights. I just want to close out a couple of quick questions if that’s okay.

Peter Walker: Please. Yeah.

Geographic Trends and Future of Startups

Shubha K. Chakravarthy: So looking ahead how do you see ownership and equity trends evolving let’s say over the next three to five years? Are there patterns especially for STEM and deep tech startups? You know for example are there geographic trends? You know what are you seeing or what do you expect to see?

Peter Walker: Yeah. I think that we’re going to start seeing geographic trends. I think it’s pretty easy in startups to say the home of startups is Silicon Valley. That’s true especially when you’re talking about SaaS and AI but that’s not always true.

There are really strong ecosystems for STEM businesses and deep tech businesses that are not the valley. So outside of Los Angeles El Segundo in terms of hardware and defense tech is a really major hub. There’s energy startups in Denver and Boulder that are fantastic. There’s like hardware manufacturing pockets in Texas that are growing really fast.

I don’t think that all STEM founders necessarily need to be as focused on San Francisco as the SaaS founders are. So that’s one point of advice.

The second one is I think that there’s going to be a wave of investors who are more interested in building things in the real world over the next three to five years. I don’t think that there’s ever been a better time to start a company if what you’re doing with that company is building real things. It’s probably easier. It’s not going to be easy but it’s easier now to get funding for many of those ideas than it has been in a long time especially if you have some mix of hardware and software as sort of the package play there.

So if you’re thinking about oh is it going to be better in three years? No. Like now is the time. Now is the time. People are pretty excited about it.

Shubha K. Chakravarthy: Do you know what’s driving that sudden interest?

Peter Walker: I’d say there’s two main things. One is actually nothing to do with the hardware. It has to do with software which is if everyone’s using AI and all these moats go away really quickly well tougher to invest into a business in software if it’s going to just be in a super crowded category. Maybe I choose hardware businesses because they have real moats. So that’s one on the investor side.

The other is I think it’s pretty clear and when you look across what’s happening in the globe, restoring a manufacturing base to the west and to the US in particular is a massive deal. And people are whether you call that American dynamism on the defense side or just simple manufacturing prowess I think there’s more excitement about building things here than there has been in quite a while.

Shubha K. Chakravarthy: Fabulous. Love that. And then to our first time STEM founders listening, let’s say what are three concrete actions that you think they should take in the next 30 days or in the first 30 days of the new year you know in the new year to strengthen their equity structure, outcomes and investor readiness?

Peter Walker: The first one has nothing to do with your business. You need to go and find every possible investor who can invest into your company and then you need to sit down and there’s lots of different lists and places you can list VC funds and whatever. You need to sit down and you need to be very intentional about who actually matters to us.

Stop wasting time pitching people in the consumer space who’ve never invested into hardware if you’re doing hardware. Like don’t. There’s so many people who just waste their time pitching VCs who are not in their thesis and never going to invest into them. It’s such a simple thing to spend a week find those investors.

The second point on that map your network. Map your network into these investors not into the funds into the specific general partners that you want to talk to. That’s through LinkedIn second degree connections. That’s through all different like ways of how can I get someone that they trust to introduce me to them?

Failing that, how can I get on their radar now and then raise money from them in two years or three years? So I love founders who are thinking ahead going if Peter has a series A fund but I’m raising a seed round I might reach out to Peter and say I don’t want money from you now but I’d love to send you updates along the way so that when I am ready for your round you’re already going to be loving my company. Like you need to think strategically.

You cannot introduce yourself to investors and expect them to invest into you most of the time. You have to have done that a couple years ago. The last point on like equity structure or company and business things I don’t think that people spend enough time mapping out their initial hiring plan both in terms of who you’re going to need more about why you’re going to need them and then lastly how are you going to get them on board?

So it matters a lot to a VC. So say you’re in a meeting with a VC and they kind of they like your business. They’re interested in the idea but they’re worried about how are you going to do this? It matters a lot if you go there’s a big difference between saying we’re going to hire three engineers next year and then stop versus hey I actually know this engineer.

He works at GitLab. I’m excited to bring him on because he has these three key experiences that are going to help us build X. Like you should know who these people are probably who you want to hire. That’s a much better pitch than we’re going to get out there and hire some great people. VCs love specificity when you can give it to them even if it’s wrong you know.

Shubha K. Chakravarthy: I love that. So you’ve just talked, you’ve given us a tremendous wealth of information both quantitative qualitative all of that stuff’s been amazing.

Final Advice for Founders

Shubha K. Chakravarthy: Is there anything that you wish I’d asked you but I didn’t that you’d want founders to know?

Peter Walker: This is an emotional thing. If at all possible separate the valuation of your company from your self value or your self worth. I know a lot of founders who just look at the number from their last round and that’s like who they are right? That’s somehow a reflection of who they are as a person in the world. And then if that number goes down or if they shut down it like really severely impacts you mentally.

I know it’s really hard to do because your company is some combination of you and a baby. Like it’s such an emotional thing for you. But if at all possible don’t take your valuation as your self-worth because it can get really tricky if you’re too close.

Shubha K. Chakravarthy: And I love that. I’ve never heard that before. How have you seen founders effectively do that?

Peter Walker: I think one of the ways is to understand that even if you’re a solo founder for a bit this is probably going to be a team endeavor right? It is you and a group of people. You are a missionary leading a group of rebels or activists who want to change the world.

But that doesn’t mean that it’s that whether you succeed or fail is a reflection of you right? It is in some ways because you have to put your blood sweat and tears into it but it doesn’t mean that what you tried was wrong or that you didn’t like you somehow didn’t measure up. It is difficult you know? I’m struggling even in this answer to separate the emotions here. But I think it gets easier if you like have that group sense of responsibility as a team.

Shubha K. Chakravarthy: I love it. So this has been a fabulous conversation. Thank you for sharing your insights so generously Peter. I really appreciate it and I have no doubt whatsoever that this is going to be super valuable to all the founders who listen to us. So thank you very much.

Peter Walker: Oh thank you so much. This was really fun.