Every startup begins with an idea, which is the most interesting part of the journey because, well, there are few things that are as exciting as good ideas — especially when they are one’s own and especially when you believe that their time has come.
But once the initial euphoria of being struck by a great idea has worn off, you must ask yourself the challenging questions: Is my vision realistic or am I slowly succumbing to wishful thinking? What kind of expertise and relationships will it take to make this work in a sustainable way? Who is prepared to pay for it? How much are they ready to pay?
Yin Wu is someone who was ready to confront all of these questions.
After successfully exiting her first two startups (one of them acquired by Microsoft), Yin set her sights on a pressing concern that all founders face: cap tables and 409A valuations. Yin realized during her early days as a founder that no one starts a company because they want to pair this spreadsheet. The real reason why people build startups is that they’ve been itching to address a problem they care about, in the form of a product or service that they'd like to work hard on before introducing it to the world.
It was against this backdrop that Yin started Pulley in 2019. Her motivation? It should be easy for anyone to start a company — and Pulley would help folks do just that.
We decided to sit down and chat with Yin, who is a Stanford graduate, to learn how entrepreneurs should approach fundraising, cap table management, and equity allocation. Yin has gained a plethora of insights, and knowledge along the way as she built three great companies and we were blown away by the lessons she learned and how she applied them during our conversation.
What problem were you aiming to address when you started Pulley? And what’s the mission now?
Yin Wu: While I’ve founded a few companies in the past, Pulley came about because I've always felt that it should be easier for anyone to start a company.
Our mission at Pulley is: how do we allow — and make it easier for — anyone to start a company? Because I think a world where everyone is only working at a large tech organization is not a world where you actually get a diversity of ideas. We started probably about a year ago and since then, we've grown to over 1500 companies using our platform. And what Pulley does is make it easier for these companies to handle online cap table management tools and equity management. The insight I think we had while jumping in is that the equity management cap table — for a lot of our competitors in the space — is very much taken from the perspective of how to manage numbers on a spreadsheet.
But at Pulley, we think that equity is actually all about people. Equity is how you attract, hire, and retain really good talent. When you're fundraising, how do you find a good partner and a good investor to work with? As we thought about equity from a “people perspective” and also as a kind of a meaningful parcel of one's net worth, there emerged a host of other features that we felt were missing in the market today.
And that's what we're looking to tackle with Pulley.
How is that philosophical difference baked into the product? What are some things that you've prioritized, that perhaps other people didn't, because you believe strongly in equity being all about people?
Yin Wu: I would say that things ultimately come back down to the user. And for Pulley, it is the same. When we talk to users, they're not asking, “What is cap table management?” or “How do I record an incentive stock option grant on my cap table?” or “How do I record federal exemptions?” They often don’t even know what that means.
The questions that founders and employees actually ask are: “If I'm the founder of a company, how much equity do I give my first engineer?”, “If this company does really well from an employee perspective, what does this even mean for my options?” or “(for founders) I'm going to raise another round of funding. How much dilution is that actually going to take?”
What people mostly want is to not make a mistake when it comes to equity. In fact, people are primarily interested in what the bare minimum is that they need to know to not screw equity up. [laughs]
I think that’s actually the right question that most people ask, and we want to make it easier for them so that they don’t end up screwing it up.
What we’ve seen is that — especially when we talk to companies in the seed stage when there are pre-money SAFEs, post-money SAFEs, convertible notes, and pro-ratas — even asking the most basic question ended up being a question that people couldn’t answer. And that question is, “How much of the company do you actually own?” And I think everyone concerned should ask themselves this question: “How much of the company do you actually own?” As it turns out, a lot of people can't answer that. So, equity is that unit that actually grows if your company is really successful, but if you don't even know how much of it who owns, it's going to get really hard to plan for the future of your business.
So when we see it from that perspective of going back to the first principles and thinking about what the user is needing, they're not thinking about this as a number on a spreadsheet. What that means for Pulley is that we build out amazing tools (e.g., how do you issue an offer letter to an employee and explain how options work? How do we build our really great modeling tool so that you can understand how much dilution you're going to take?)
We are very much building is for founders and employees — in other words — for people who are actually holding the equity.
What’s your approach toward the ecosystem of other providers out there? Which ones do you think are better served on Pulley and which ones do you think are integration opportunities?
Yin Wu: We think that we can't build everything for a startup, so we want to focus on building an amazing cap table management experience and we want to integrate it with all the other providers possible so that we can give a holistic experience to our users.
Why I mentioned offer letters is because if you really think about it, the equity experience comes actually even before the offer letter. When you’re mulling over making an offer to someone who's joining the team, you're thinking, “If I give them X-number of shares, how does this compare to what the market is expecting?” or ”how much do I have left in my option pool?”.
The same applies when you're fundraising as well before you actually add something to the cap table. Adding something to the cap table is the last step in the process. The first steps of planning are: “Who do I want to raise from?”, “How much money do I want to raise?”, “How much dilution does this mean?”, etc.
For Pulley to serve our users really well, the question is ... how we can start from the beginning, which is usually a scenario where you’re thinking about giving equity to somebody. If you’re doing that, you have to find out what you need in order to actually give it. That’s why the onus is on us to partner with providers of compensation tools. Sometimes, we tell folks that they can go to Option Impact which has a host of data. So, when you're about to extend the offer letter to someone you want to join your team, how do you explain now how much these options could be worth?
This is important because we know that today, the market is so hot that if you're going to Google or Facebook, the cash compensation that you're getting in just the first year is tremendous. It's insane. So the only real way for people to bet on the stars and the longshots is if you can help them understand how your startup could actually be the next Facebook and how they’d want to be Employee #10 at the next Facebook.
When you think about your product roadmap, what are the things that you've prioritized and will prioritize that aren't being done yet by other cap table providers like Carta?
Yin Wu: I think your product roadmap is determined by who you go for.
A great analogy is Amazon versus eBay 2005. I think what's shocking to most people, when you look at Amazon versus eBay now, is that they had the same market cap. If not, then eBay actually had a higher market cap.
And Amazon was quite scared of eBay because Amazon is a really capital-intensive business and eBay, on the other hand, is really low-cost. Every seller is taking care of their own business. But what eBay has always done, I think from the beginning (in some ways to their detriment) is that they focused on the sellers as kind of the user. And what this means is that they built tools for inventory management.
Amazon, from the very beginning, has always said that its user is the customer. So what that means is that they prioritized features like better search, Amazon Prime, and shipping future products to you even faster, among other things.
I think if you pick the right user in the long term, you win. This is how I say that we're not building Pulley for experts in cap table management. It’s not just for the lawyers and not just for the paralegals. We want to make sure that it’s the best cap table management software for you as well.
But we're building for people who actually hold the equity. So what this means in terms of product prioritization is addressing how we explain how options work for someone, which is actually not a question for managing your cap table. But the very reason that you give equity to somebody and the reason that you need to manage a cap table is that you have employees with equity and you need to figure out how to explain it to them.
When it comes to cap tables, what should founders know? And what should early employees know?
Yin Wu: So what I think founders should know, especially if you're raising the seed round, is to understand what pro-rata is. Pro-rata means that investors have the right to invest in your future rounds and maintain their ownership percentage by putting in more funding. The investors often pitch pro-rata along these lines: “Pro-rata means that when you raise your next round, 10 percent is already taken because I will put money in."
I’ve actually seen a lot of founders have a difficult time raising in the next round because of pro-rata. There’s a reason for that. There are different stages of investors in the same way that there are different stages of employees for the company that they're at. What you want to align are incentives. You want the investors who were really helping you to have a shot at putting in more money in the future. But if you have pro-rata, then everyone already has a guaranteed ticket in the door. So if you can, we always recommend trying to remove the right to pro-rata for your investors tactically.
There is another thing that I would say. A common piece of advice that we have heard is that you should always set aside about 10 percent of your shares in the employee option pool. It’s important to realize that whether it’s 10 percent or 5 percent or 15 percent or 20 percent really depends on your industry. Work backward. Figure out how many people you need to hire in order to hit your next round. Because the point that I think people miss is that you actually get diluted a bit if you have unused shares in your option pool. So if you only needed seven to hit your next round but you set aside 10, then you, the founder, are taking the dilution. [laughs] So you should actually figure out how much you need. And we have tooling at Pulley that can help you understand that.
I think the other key pointer is to keep it simple. There's no need for really complex cap tables. We've seen some vesting schedules that are, say, 1.28 percent vest every month. Sometimes the standards are there for us for a reason. Take, for example, the four-year vesting with a one-year cliff. So, some of the standards are certainly useful.
Whether or not you optimize your equity in some ways does not make or break you. Focus on finding product-market fit. Take the convention, just get the cap table in place, and understand your cap table enough so you can make decisions on it, but don’t spend all your time optimizing it. This is what we would suggest as tactical advice for founders.
When it comes to advice for employees, I would urge them to understand what their ownership percentage means. I think that's often important because just getting the number of shares that you have doesn't give you an understanding of the whole company's lifecycle either.
Do I need to keep my cap table up to date? What are your beliefs on what founders should do, what lawyers should do, and how do you involve different people?
Yin Wu: So there are a couple of things there.
There's the cap table that's up-to-date with all the investors you have and all the employees who have equity. We do think that it's actually pretty important for you to keep that up-to-date so that you actually have an understanding of how much equity you have left to give out in the pool. Think about this as planning for your hiring plan or, in fact, planning for your runway. Whether you have 5 percent equity left or 10 percent, is there actually a tangible difference for who the folks are that you can bring onto the team? It’s important to know that, but it’s hard to do that before your cap table is actually up-to-date. If you’re an employee at the company and you have an X-number of shares, I would hope that the company that you’re working at also understands that you have those shares.
What we see as the problem is that for a lot of the tools on the market, it’s hard for you to keep your cap table up-to-date because they’re just so difficult to use. So, with Pulley, we actually approach that as our problem to solve. How can we make it easier so that anyone can more easily keep their cap table up to date?
An analogy could be drawn here with payroll. Keeping your payroll “up-to-date” essentially means that everyone is getting paid correctly. This is how it plays out when it comes to equity, too. And maybe this is not selling Pulley as much but if the easiest way for you to do that is to maintain a spreadsheet because you're super-early-stage, then go and do that. We think that Pulley is the better tool for it, but if a spreadsheet is the easiest way for you to do that, then that’s fantastic. What’s more important is that you do have a record somewhere. Because when you do go ahead for fundraising, investors are going to look at what your cap table looks like today and you need to be able to have a good sense of how it looks like today and what your plans for the future are as well.
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