What are the most effective ways to incentivize founders to achieve their goals?

Very simple: require "skin in the game" where a significant part of Founder comp is in the form of Restricted Stock Units that vest upon agreed upon goals and metrics. CalPers requires partner co-investment or founder equity incentives in all their strategic partner deals.

Para incentivar eficazmente a los fundadores a alcanzar sus objetivos, es crucial alinear sus intereses personales con el éxito de la empresa. La participación en el capital, como ofrecer acciones, vincula directamente su éxito personal con el de la empresa, motivándolos a maximizar su valor a largo plazo. Complementariamente, establecer planes de incentivos basados en objetivos claros y alcanzables, con recompensas tangibles, proporciona metas específicas y motivación adicional para alcanzar logros concretos, fomentando un enfoque dirigido y estratégico hacia el crecimiento y éxito empresarial.

An emerging rule of thumb for best in class startups (those most likely to be funded by tier-1 VCs) is that founders retain at least 70% after the Seed round and at least 50% after Series A. Founding a company is a marathon, and founders need to be extremely persistent to succeed. Having a significant equity stake is one factor enhancing the motivation of the founder. Standard vesting is either none (i.e. founder directly owns shares), or over 4 years with a 1-year cliff. And change of control vesting for key employees might be subject to single-trigger or double-trigger vesting. Single trigger is better for the founders.

Equity Ownership: Grant founders equity in the company to ensure their interests are tied to its long-term success. Utilize vesting schedules to encourage ongoing commitment and achievement of milestones. Performance-Based Bonuses: Offer bonuses tied to specific goals or achievements. These incentives can take various forms, such as additional equity grants or tangible rewards, to motivate founders.

To maintain founder motivation, consider the following strategies: (1) Ensure founders retain clear decision-making autonomy, emphasizing their control and influence over the business. This should be explicitly outlined in shareholder agreements. (2) Implement Phantom Equity/ECOP plans, defining triggering events accurately for vesting cases. (3) Delay dilution of founder shares until later funding rounds to sustain their motivation and commitment. (4) Offer financial incentives such as regular or performance-based bonuses tied to reaching specific revenue or market share milestones.

Tranched financing makes it very difficult for founders to execute. This should be avoided within rounds, if possible. Milestones are built into the funding rounds: Seed, Series A, Series B, etc. When the founder is raising for the Seed round, VCs can help by asking what will be derisked with this round of funding. These are the milestones that will make the next round of funding more likely.

Recognition and Appreciation: Publicly and privately acknowledge founders' contributions to the company. Regular recognition boosts morale and reinforces their dedication to achieving the company's objectives. Career Development Opportunities: Provide avenues for professional growth, such as mentorship programs or access to industry networks. Investing in founders' skills enhances their value to the company and fosters motivation.

Instead of requiring vesting, another way to keep a founder incentivized is to offer her options. This keeps her motivated over a long period of time and makes it less likely she will walk away.

Flexible Work Environment: Create flexibility in work arrangements to accommodate founders' preferences and maintain work-life balance. Empowering founders with autonomy promotes a sense of ownership and accountability. Clear Goal Setting: Establish transparent, attainable goals aligned with the company's strategy. Regularly assess progress and offer feedback to help founders stay focused and driven.

In my experience, I see many founders, who are striving every day, dealing with demands from investors, stress from managing a new team, and disputes with their fellow cofounders. The founders need a “safe space”, someone (sometimes external) trustworthy and experienced in their field, to turn to, to ask questions, and not be stressed over how they perform. It is often appreciated by the founders if an experienced mentor would provide honest and professional feedback regarding what they’re doing, how they can do even better, and how they could communicate with other stakeholders.

Founding a company is hard. The more the VC understands this (ideally as a former operator), the better support she can give the founder. And mentoring of portfolio companies tends to have a +5% alpha for fund performance.

Profit or Revenue Sharing: Implement profit-sharing or revenue-sharing models to directly connect founders' efforts to financial outcomes. This approach incentivizes revenue growth and profitability. Employee Stock Option Plans (ESOPs): Include founders and key employees in ESOPs to provide them with stock options linked to the company's success. Stock options serve as valuable incentives for achieving milestones.

This is my two cents. If your founder is not attached to solving a problem with a deeper connection and meaning, and you have to actually motivate them...then you invested in the wrong founder. Founders should want to achieve their goals for both the problem they are solving, to help people overcome their problem, self interest to be a successful founder, and to make an impact on people's lives. If they need any other reason, you're doing this wrong.

I've been interested in Anna Wintour recently. Watching her describe her habits, and observing her mannerisms shows me that some brilliant or talented people are simply very independent in their worldviews. 'Incentives' may mean something different to a board, owner, or investor than to such a person. Freedom to act might be more important. That freedom might not be a priority for everyone. So it may be that the incentivizers assumptions require attention. Based, on this very chat (right here) I will be keeping watch that I am taking my own cautionary advice.

Founders may be motivated by both equity and decisional power. As a VC you may link the founder's goals with his/her future decisional power too. If the founder does not achieve certain milestones within time or else parameters, some of his/her power may be delegated contractually. Independently by equity and options considerations.

Performance Reviews and Feedback: Conduct regular performance evaluations and provide constructive feedback to founders. Recognize accomplishments and offer guidance for improvement to support their progress. Transparent Communication: Maintain open communication channels to keep founders informed about the company's status, challenges, and strategic direction. Informed founders are better equipped to contribute effectively to shared goals.