In Episode 563, Rob Walling answers listener questions about startup operating agreements for co-founders, common cloud hosting solutions, struggling as a young entrepreneur, and selling your startup when you have over $1M in annual recurring revenue.
The topics we cover
[1:40] Operating agreements for startup co-founders
[5:50] How to do startup vesting when not working fulltime on a project
[9:41] Common cloud hosting solutions for startups
[11:04] Struggling as a young entrepreneur
[18:20] Call to action for info product
[20:54] Virtual assistance
[23:05] Selling above $1M ARR
Links from the show
- Rocket Laywer
- Start Small, Stay Small
- Best Jobs
- Virtual Staff Finder
- Rob Walling (@robwalling) | Twitter
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
Welcome back to another episode of Startups For the Rest of Us. I’m Rob Walling, this is episode 563 where I’m going to run through several listener questions. It’s actually been a bit too long since I’ve done one of these episodes. I believe we have north of 20 questions backed up. We won’t be able to get through all of them today.
If you hear a question today that sparks in you to ask your own question, send an email to firstname.lastname@example.org and I’ll get that answered just as soon as I can. Hopefully the next Q&A episode I will have a guest on to answer with me. Of course, voice mails and video questions go to the top of the stack. If you want to record something on your phone and send me a Dropbox link or a Google Drive link to email@example.com, that works.
You can also go to startupsfortherestofus.com, there’s an ask a question link and we have video ask in place so you can just click a button on your phone or from your laptop and just record right there in the browser and upload it.
With that, let’s dive into our first question from Victor Wang. “Hi Rob, it’s Victor here. Thank you very much for your podcast. Can you recommend any resources for drafting operating agreements for the startup co-founders so we know what to do when certain circumstances occur? I.e., one of the co-founders wants to exit the business. Thank you again for your and your guests for producing Startups For the Rest of Us.”
Great question, Victor, and a very common one. First of all, the pat answer and really the right answer if you have the resources is to hire an attorney. Usually, the best attorneys I get are through referrals from someone else who I know who has used himself. If you’re in a mastermind group, I would ask for referrals there. If you’re in MicroConf Connect, I would ask in there. I believe there is a legal channel or an operating channel, one of those.
If you’re not on MicroConf Connect, why not? Because it’s free for founders and aspiring founders. Go to microconfconnect.com, get in there, and ask for advice. Referrals are the way that I found the best folks.
If that’s not a route you can go, in the US, there are some inexpensive services that can work and they work on the short-term. In the long-term, they may cause problems because they are a discount. It’s discount legal. Rocket Lawyer and LegalZoom are those two and later on if and when you hire an attorney for your company, they will often roll their eyes at the operating agreement that you got from there because there are just no specifics to your situation is usually what you end up with.
But it is a discounted option. In my opinion, those are better than writing your own, which I did once. It did not come back to bite me, but frankly, it probably should have. Please don’t write this on your own. If anything, you can draft up the bullets and draft up the understanding between the two of you and then you hand that to a lawyer and allow them to integrate it into an operating agreement.
UpCounsel, they acquired and shut down and now I think they’re back because I’m on upcounsel.com and I can see that they are the modern way to get legal work done. That is another area that I would check out. That’s usually where you actually hire an attorney. That would be a way to go and look. It’s kind of an attorney marketplace.
If you’re in Latin America, lexgo.cl. They’re a TinySeed batch three company. They are ‘legal made simple’ for your business and they are not only a SaaS app, but they have vetted attorneys in all the Latin American countries. They’re great service. We wouldn’t have invested in them if they weren’t. Certainly in Latin America I would do that and then in the US, thinking about the other options I outlined.
I did want to address part of your questions that you were asking directly. It’s the idea of what happens if a founder leaves after a certain amount of time before we’re done with the products, in other words. The way you handle that is with vesting. Usually the most standard vesting is 4 years with a 1 year cliff meaning no one gets any equity for the first 12 months and then the last 3 years, you then vest the last 75% of your equity.
If there are two founders working on, then you have 50-50 each. You would get 0 equity until month 12. Then you get a quarter of your 50%. That will be 12.25% and then you vest monthly on the remaining, you can change that if you want. You can say, hey, maybe it’s four years and every month we get 1/48th of our equity. You can make however you want to. But that’s the safeguard against someone doing just that, which is working on a project for six months and then walking away with all of their equity.
It’s a huge mistake some startups make and to be honest, it can decimate the company. It can mean that you can’t raise future funding, that you can’t take on future co-founder level people. It really messes up your cap table. On that specific issue, I just wanted to call it out because any startup I see forming without founder vesting, that’s a big red flag.
I hope that helps, Victor, and thanks for the question. Victor just recently asked this question. In fact, after a lot of the folks who send in written questions. But since he was a video question, we did move him on the top of the stack.
My next question is a voicemail from Brian Kid. “Hi Rob. This is Brian with haulersoftware.com. This app is in the waste management industry. My co-founder owned a business in waste management and built version 1 in a no-code platform because he just couldn’t find a good solution out there. He’s currently doing about $1000 a month. He reached out through his network, needed a technical co-founder, and he and I connected. Part of my buy-in is just to build version 2 as a standard web application and just get it up to par with version 1 can do now.
We see this as a side project. It will be a 50-50 partnership. I just wanted to ask, is there anything we should be thinking about as partners that’s specific to a SaaS app? Types of things we’ve asked so far are, what if one of us wants to move on to something else? What if one of us doesn’t want to spend as much time on the project? And just wanted to know if there’s anything we should be thinking about co-founding this SaaS product as a 50-50 partnership? Really a big fan and appreciate you answering this question.”
Funny that we had two such highly-related questions. Basically it’s vesting. That’s how you have to think about it. If you’re not working full time on it, you still (I think) would have to put in a minimum amount of hours perhaps each week or each month that folks that should be working. It’s really just a matter of discussing it in concrete terms and getting it in writing to determine what the vesting looks like.
Other than that, in terms of a SaaS company, specifically, there aren’t really any founder operating agreement terms that I think that wouldn’t be applicable to most tech startups, in essence, most startups that are going to be doing any kind of software. Or even I talked to a founder the other day—he’s actually a friend of a friend—and he is starting essentially a company to manufacture guitars and he’s going to do it on his own at first. He has equipment, he’s been doing it, selling the guitars. Then he wants to move into his garage so he needs some capital for equipment there. Even the operating agreement of a company like that should be similar.
There’s a shocking amount of similarity between a company like that and the kinds of mostly bootstrap SaaS that we would be thinking about. Once you get into a venture, if you’re going to raise a lot of money, you’re going to have a board. Things will start looking a lot different there. There are a lot of terms that get put in by investors, et cetera.
My advice would be not to find a small-town local attorney to do this, though, even if they have written operating agreements for the dry cleaner down the street, the car wash, or whatever. I would always look for an attorney whether it is on Lexgo, UpCounsel, or through Rocket Lawyer. An attorney that has experience with tech startups, whether they be venture-funded or not.
I really struggled when I found an attorney in Fresno who had helped form a lot of businesses, but it was a lot of consulting firms and a lot of local mom and pop businesses. While the operating agreement was good and everything turned out well, the biggest issue was just convincing him of the terms that we were thinking about. I felt like an uphill battle educating him really on what we were and what we did. I don’t think he understood the business very well, which is fine. Again, the actual agreement turned out great and it’s the one we use all the way until we were acquired a few years later.
For some reason, I need to find a local attorney in my town. I don’t know why I thought of that because given the whole interwebs these days, and I said earlier, referrals would be the place I would go in MicroConf Connect or whatever mastermind or community you’re in. But beyond that, I would look for someone with high ratings who has a lot of experience working with tech or software companies.
Hope that helps Brian. Thanks for sending in that question. Feel free to follow up if you have any more.
My next question is from Permad Biligiri. He says, “Which cloud and hosting providers do bootstrap SaaS founders generally use? Are there any patterns you’ve noticed in the choice of hosting and cloud solutions among bootstrappers?”
Yeah, there’s really only a handful that I see most people using. If you just want to get started, nice and easy, Heroku is a really nice, multi-language hosting platform. It’s a Platform as a Service, in essence. While it’s more expensive than something like AWS or Google Cloud, it is a lot easier and simpler to get started on. And then when the cost gets too high, I see a lot of folks move from there to AWS or to Google Cloud.
Some people don’t start on Heroku and they do want the control of having their own servers. That’s great, too. You don’t have to use Heroku. It’s all a trade off of the amount of time that you want to put in versus if you have $100 a month or whatever to pay to make that problem go away is the idea. I’ve certainly heard of a lot of folks hosting on DigitalOcean. Microsoft Azure, of course, if you’re in the Microsoft ecosystem.
By far, I’d say the one in two that I’ve seen are AWS (Amazon Web Services) and Google Cloud. There’s Heroku, DigitalOcean and Azure that I see as a second tier. Of course, there are a bazillion offers out there, but you asked for which patterns I’m seeing and that’s what I tend to see. Thanks for the question.
In the subject line of the next question is Struggling. It’s from Julian and he says, “Good evening Mr. Walling. Please excuse the rant. I’m a 20-year-old from Washington trying to build a startup out of my bedroom. I’ve worked on a few things here and there, but never really stuck with one plan and made clear progress. A few months ago, an organic startup idea came to me and I’ve been obsessed ever since. I, for one, feel motivated to work on something and see it through to the end.
I’ve started learning more about startup culture and the overall process. I discovered your podcast, started browsing Crunchbase, following people on Twitter, reading books and watching talks, interviews, et cetera. But I have one major thing holding me back—my job. I work an unfulfilling job in IT for $15 an hour, no benefits, three-hour commute,” holy moly, “and I’m too poor to take a couple of days a month off work. I’d love to get home and grind away and be productive, but I’m so defeated and exhausted at the end of the day. I can’t muster up enough energy to get anything done.
Unfortunately, all my startup work is reserved for the weekend at the moment. I love to work for a startup. I’ve contacted a few. I had to drop out of college for various reasons a few years back, so finding a proper job somewhere is difficult, if not impossible.” I really question that assumption, actually. “I’m willing to relocate anywhere if I receive an offer. There’s just so much talent out there I feel like I can’t compete. Have you known someone who’s been in a situation like this? What tips do you have for someone like me? Thanks for the great content and the motivation.”
This is tough, Julian. I’m sorry to hear this. Have I known people in situations like this? Absolutely. Have I been in a situation like this? Absolutely. When I graduated from college, I went to work as an electrician. It was kind of the family path. My dad had worked it for 42 years, my brother is now our project manager and an electrical contractor, and he was a field electrician for a while. I did it for a couple of years. I had a two-hour commute. It was one hour each way. I was exhausted. I had to wake up at 5:00 AM every morning, which does not work with my body clock. I was tired all the time. I was really unhappy.
I remember thinking, how can I get myself out of this? I did start to think about startup ideas and that kind of stuff. But you know what I did instead is I realized that there was a quicker path out for me. It took years for me to learn, build, and get to the point where I was able to quit my day job and have my own products. The intermediate step I took was to go get a job, as you hinted at, working for companies who were doing interesting product things.
I went to the library. I checked out books on Pearl. This is 21 years ago. It was Pearl, HTML, ASP (Active Server Pages). I didn’t know any of those languages. I had written code as a kid, but I was not up-to-speed on any of the web languages. I learned that at night. I was tired, I was exhausted. I don’t remember what I was making, but it was something like $15 an hour. It was in that realm, $15–20 an hour. I didn’t have enough money.
It was in the Bay Area. That’s where rents at the time for a one-bedroom apartment were worth $2500. I literally could not afford it. I was living with my parents in the bedroom that I grew up in and I was asking myself, what the hell am I doing? What am I doing with my life because I sure am not having fun doing what I’m doing today.
I started teaching myself that and I applied for jobs and I wound up getting a job as a developer. It was in Sacramento. I moved from the Bay Area. Sherry and I had just gotten married. We moved out of town to a place where the rent was less than a third of the Bay Area. I was making more—because I was writing code—than I had as an electrician. That was a major shift for me. It was a major mental shift. It was a major happiness shift going from being tired all the time and working construction, which I didn’t particularly enjoy. It’s hard work and I’m able and willing to do that, but I didn’t feel like I was going anywhere. There was no upward mobility for me. And then once I started writing code, it was a huge shift.
That’s my story. Did I have to work nights and weekends, and make a big mental leap to relocate away from my family, my whole extended family had lived there? I moved away from them, basically, to make the shift. It was hard—I’m not going to lie—but that’s the decision I made.
I’m not trying to project on you and say you need to do everything that I did. I guess I’ll say: (a) there is certainly hope, and (b) there is not so much talent out there. We live in an incredible age, and in fact in an age that I didn’t live in 21 years ago where you can now go onto Codecademy, Coursera, and Udemy. You can go to Lambda school, which is a remote coding school in the Bay Area. You learn the code and you only have to pay them, if you get a job making more than $50,000 a year or $70,000 a year, coding for someone.
There are resources today that we couldn’t have dreamt of having to learn how to become a software developer back then. I’m not saying you have to become a software developer. I’m just saying if you’re already in IT, what are the avenues that you can explore that allow you to potentially work remotely? Because certainly remote work is a thing, that I like to say the bootstrappers found it 10–15 years ago and now the rest of the world is catching up. But remote work is more viable than ever.
There are just so many options. I really hope that you’re able to get around this thought that you don’t have the skills to go out and compete in the job space. It might feel like that but I would take an assessment of you’re in IT. You’re doing something, whether you’re a help desk. What are your skills and how can those be applied to a startup to where you can get out of this three hour commute, where you can get benefits, where you can work for a company and learn the ropes.
Hopefully, over time you’ll learn marketing, you’ll learn a little bit about sales, you’ll learn a little bit about product. Maybe you want to become a developer, maybe you can teach yourself that on the side, maybe you can learn and transition in the same company. There’s just so much opportunity if you’re working in the space.
If you want to build a SaaS app, get a job for a SaaS company. There are a lot of them and they’re hiring. There are entry levels and junior roles, apprenticeship roles, internships. It’s a matter of hustle. As I always say, it’s hard work, luck, and skill to have success as a founder, but it’s hard work, luck, and skill to create your next break for yourself.
I do think you’re going to have to work hard, I do think you’re going to have a little bit of luck. I guess build up your skills over time. As I said, I went to the library. That’s literally because there just weren’t that many resources. I think there was Code Monkey or something like that online. That was the place where I could learn Pearl and ASP. But now, you have so many more options. Whether it’s for free, whether it’s these three-month, six-month code bootcamps.
I know you can’t do those, the ones that happen during the day because obviously you’re working a full time job. You’re not trapped and there are absolutely opportunities out there for you. I appreciate you writing in, Julian. I hate to hear that you’re having a rough go of it, and I really hope you’re able to carve a way forward that provides you with not only some of the freedom you’re looking for, but with the purpose. The purpose that you’re looking for because it sounds like you’re missing out on both of those these days. Thanks again for writing in, Julian. Hope that helps.
My next question is from Nathan Brawn, and the subject is Call to Action for an Info Product Post Launch. “Hey Rob, I recently launched a niche info product, a book on learning Python and data science with baseball stats. The URL is codebaseball.com. Learn to Code with Baseball. Python. Pandas. Web Scraping. Databases. SQL. Machine Learning. APIs. All applied to Baseball Statistics.” Man, this is cool. I would’ve loved this 20 years ago when I was trying to learn how to code for the web.
“Pre-launch, I was collecting emails similar to how you describe in your blogpost, Why You Should Start Marketing the Day You Start Coding.” That’s with a landing page, obviously, that’s touting the value and touting what it’s going to bring. “Now that I’ve launched, I’m wondering whether my main goal should be selling the book right away—what I’ve done so far—or whether I should still be trying to collect people’s emails, perhaps I’m mailing them with a free chapter. Maybe I should be doing both.
I know in Start Small, Stay Small, you recommended not trying to sell customers right away. I turn browsers into prospects, but not sure whether that applies for relatively inexpensive information products like this. Looking at startupbook.net, which is now at startsmall.com,” which is our first Start Small, Stay Small, “I do see you just link to the sales page/offer a free sample of the content without trying to get emails. Perhaps that’s what you’d recommend. Cheers, Nate.”
Yeah, it’s an interesting question. Here is what I would do in your shoes, Nate. I would offer the ability to purchase from the site, of course, and I would do exactly what you’re doing, which is at the top, send me a free sample chapter. Someone enters their email and you’re basically offering them a chance to do both, to do either one. To get the free sample chapter, then you can ping them later, and ask them what they thought of the chapter. Obviously, there should be an offer at the end of that sample chapter to purchase the book and you can get in touch with them.
I would say what I’m doing at startsmall.com is actually sub-optimal. You’re right. I’m not asking for an email address before giving them the sample chapter. I do have a pitch in the end that says, “If you’re interested to read the remaining six chapters, I encourage you to go here and purchase the book.” But really to optimize, I should be asking for an email address, then they get to the download, then I follow up with them a week later, and then a few weeks later.
It’s a sales funnel, in essence. I would probably sell more books if I did that. When we put up this site—it was a couple of years ago—I was already wrapping up with TinySeed and frankly just didn’t carve out the time. Given that this book is 11 years old now—Start Small, Stay Small—it wasn’t a project for that one to take on and focus on at the time. In this instance, Nate, I think you got it dialed in and certainly wish you the best of luck with the book.
Our next question is from Fronz. His question is about virtual assistants. He says, “I’m a long time listener. One of my favorite episodes was The Wives episode.” That was, I believe, episode 200, where my wife, Sherry, came on the show with Mike’s wife, Alli, and they got to talk about us behind our backs. That was great. Anyway, back to the email.
“My friend’s career got hit hard by COVID this year. She’s a dancer and her gigs have been greatly diminished because of that. She now teaches online dance classes as well, but it’s hard. I told her to try to be a virtual assistant to supplement her needs. I remember you used to talk about VAs a lot. Where do you go to get your VAs? I want her to start looking for gigs there. Thanks, Fronz.”
If I were to be looking to get started as a VA, I would use UpWork. That’s the big place. You go there and you have a lower hourly rate to start to get some opportunities. Basically, you have to build out your ratings and your reliability, and to get that social proof, that people can think they can rely on you. There are several agencies that vet VAs. Maybe the struggle there is if she doesn’t have experience. they’re just going to send her away.
It used to be like bestjobs.ph. I found this email address, it’s in the Philippines. I’m assuming his friend is in the Philippines as well. Another one that hires in the Philippines is Virtual Staff Finder. But again, they vet pretty hard and if she had zero experience, she’s going to need to figure out a way to get some.
Here’s what I would do. I’d probably go to Virtual Staff Finder and apply and say, I am entry level, do you have a spot for me? I would also Google ‘entry-level VA staffing firms’ and see if there’s anybody who does. There are folks looking to train new VAs and then offer them as staff. And then on the side, I would definitely be applying to UpWork jobs and have my profile on there just to be […] out, to get the experience, and figure out if it’s actually a path that she wants to take.
It’s tough to be a VA in UpWork or really a VA anywhere because there are a lot of folks doing it and trying to do it. You kind of are a commodity until you prove otherwise. Frankly, proving otherwise usually involves doing really good work for people, surprising and impressing them, and then having them refer you out. Hope that helped, Fronz.
And my last question for the day, I believe came from Twitter. It’s funny. I have a screenshot of a conversation. I don’t remember who asked it and they asked, “Hey Rob. Currently listening to your podcast episode with Colin Gray. At the beginning of the episode, you mentioned getting a revenue multiple valuation rather than a profit multiple, if you were doing over $1 million in annual recurring revenue. We’re currently around $40,000 monthly, so $480,000 annual.
It’s just me and my co-founder, expenses are pretty low. Selling is something on our radar, but probably not for at least another year. Do you think it would make more sense to wait until hitting $83,000 MRR to maximize our valuation? I think we’ll hit that within two years at our current growth rate. Really appreciate all you do for the bootstrap SaaS community.”
Short answer is yes. It’s not like a light switch. It’s not at $83,333, suddenly it’s at revenue multiple. There’s a lot of different factors that come into play. In terms of growth, if you’re $75,000 and you’re growing, you can go to market with that and say we’re going to be at a million in the next month or whatever.
The further you get away from there, these days, if you’re at $2 million, your multiple is going to be even better than if you’re at $1 million. Not just the purchase price, but the actual exit multiple. Yes, in your shoes, I would absolutely be waiting to get north of a million. This is advice that I’ve given to other founders as well. It is just such a different game at that point because of the level of buyers and the number of buyers who have that bottom hand.
The bottom hand used to be no acquisitions below $50 million ARR. Then it was $25 million, and then it was $20 (million). By people, I mean private equity and the strategics really have that thirst to acquire SaaS companies because they’re such great businesses. $15 million, $10 million, $5 million, and it just has come down and down and down.
At a certain point, it’s not worth their time and effort to acquire businesses doing a couple hundred thousand a year. A lot of companies won’t do that. There are some micro private equity folks that will do it, but right around that $1 million mark is what I would be looking to do personally if I were in your shoes at a minimum.
If I were there and I were still growing, the longer you hold off, the higher your purchase price. No doubt. I say no doubt as long as your growth doesn’t plateau. There are things that can cause it not to do that, but as long as your growth is continuing you’re only going to get more. I do not see SaaS valuations and SaaS multiples going down any time soon. The bottom line is the level of the buyers that you’ll be able to talk with and run a process with changes north of a million.
If you read John Warrillow’s book, The Art of Selling Your Business—he came on back in January of this year—one of the big things that he talked about was getting multiple buyers. That is a big piece of advice that I give to founders as well. You’re going to get inbound interest, if you haven’t already, and selling to a single acquirer if you’re north of a million is not the way to go these days given the climate and the appetite for seven figure and higher SaaS apps.
If you’re going to do it, and I talked with John Warrillow about this, too, he and I both were saying, you need to get an advisor. Whether it’s a broker or an M&A advisor to represent you on that side. There are few folks out there, obviously, I’m familiar with Discretion Capital. Einar Vollset, my co-founder with TinySeed, was a founding partner there. They are a sell-side SaaS M&A advisors, where they don’t represent buyers, they only represent sellers of SaaS companies.
It’s a specialization, highly specialized, and it’s a million and up in ARR. They have the big list of all these private equity firms and strategics, depending on where you are. It’s a massive amount of effort. Hundreds and hundreds of person hours to look at your company and figure out who the most likely folks would be to put together the deck to get your financials in order, to get everything due diligence ready.
Basically, it’s like an enterprise sales process. There’s cold or warm outbound outreach of hey, this is happening, this process is happening, here’s the date, we want all the LOIs (letters of intent), which is when someone says hey, I want to try to acquire you and you try to get as many of those as possible and you get a new competitive bidding scenario. That’s the way. You run an auction for your company. That’s the way to maximize your multiple. You’ll hear it from John Warrillow, you’ll hear it from anyone who knows what they’re talking about when they talk about selling a company.
Anyway, that’s the long and short of it. There are certainly other advisors and I’d imagine investment banks. Most investment banks won’t come down below $100 or $50 million ARR. The deals are too small for them. I hope that helps, anonymous question asker. Sorry, I somewhat cut your name off of this conversation and I don’t even know what medium it happened, but I really do appreciate the question.
That wraps us up for this week. Thank you so much for joining me once again. I will be back in your earbuds again next Tuesday morning.