Transcript

00:00:00 - Speaker 1: There’s so many zillions of startups trying to try every single angle and opportunity in that area. And so the marginal return to investing your personal time in terms of the impact on the world might be relatively smaller there. Whereas there’s this whole space that I feel like is really under explored. And if you just make it about 80%, making a profit and 20% making a statement, that opens up all kinds of incredible opportunities.

00:00:29 - Speaker 2: Hello and welcome to Meta Muse.

Muse is a tool for thought on iPad. This podcast isn’t about Muse the product, it’s about Muse the company and the small team behind it.

I’m Adam Wiggins, joined by Mark McGramigan. Hey, Adam. And Mark, since we last spoke, I am a father.

Congrats. Yeah, it’s great, or at least the non-sleep deprived parts are great. I’m actually on parental leave right now, but I enjoy doing this podcast enough. I thought I could sneak back for just an hour here, but if my brain is not at full capacity, let’s just say you’ll have to carry things for us. OK. Now, way back in episode 4, we talked about our partnership model. And the context there was we were hiring the 5th member of our team, our engineering partner, and I’m happy to say we have through that process, we added Adam Wulf to the team, really great engineer with a particular specialty in inking, which is quite important for us, and he’s been doing great on the team, so we’re now 5. And in the course of that, of course, we talked about kind of the nature of the company and how it’s different from other models, particularly the startup model, but I thought it would be good to both first take an episode to talk more explicitly about what this somewhat unusual business structure we chose was, and then also it’s been a year and a half actually coming up on 2 years now since we started this thing and so being able to essentially say how’s it going? Is this working out the way that we expected. And just to frame things up a little bit, a starting place and a point of inspiration for both of us is a book called Small Giants, and I read this many, many years ago, I think when I was in my startup lifestyle, I would say, but it it had a big impact on me, and the book basically profiles a bunch of, let’s call them, businesses that are maybe have an outsized impact. But they’re less about huge size or making it to the S&P 500 or something like that. So for example, they have Clif Bars in there or Whole Foods, which I think at the time the book was wrote was really kind of an up and comer, independent up and comer, or Union Square Cafe, which is quite kind of unique restaurant in the New York area, since expanded to other locations. And the process of profiling these businesses, they showed kind of a maybe an alternate to, I think they’re thinking more an alternate to the standard kind of public company path, but I at least for me, I read it as an alternate to the startup world, which at the time I was just completely immersed in. I was kind of the only way to do things with the startup way, and this book suggested another path.

00:03:03 - Speaker 1: Yeah, that book was quite influential on me as well. So Adam, I’m curious, what from the book did you find yourself taking away the most and applying to your future adventures?

00:03:13 - Speaker 2: Yeah, well, in prep for this episode, I went and pulled out my Kindle highlights as a PDF and scanned through those a bit, and I have to say I’m not sure it’s actually a great book in terms of how it’s written, but there’s just a couple of core ideas that really hit home.

One of those is they talk about businesses with soul or another term they use quite a bit is mojo, which is kind of a funny one. They talk about optimizing for mojo overgrowth and growth, of course, a business exists to Earn money, that’s it’s kind of practical function in the economy, and growth typically goes with that, it’s almost a requirement.

So if you’re not growing, you’re stagnating.

And that is taken to a real extreme in the startup world. I mean, Paul Graham even has an essay, Startup equals Growth, which just says, that is your sole purpose for being, grow, grow, grow fast as you can, and the counterpoint this book presents is mojo and expressing something kind of artistically and Having the soul is something you can choose.

Of course, you still need to pay attention to the business fundamentals. You do still need to grow, but you can choose to have maybe a different balance where you say, you know what, this mojo thing we want to optimize for that and have enough growth to be successful but not have it be growth at the cost of absolutely every other thing.

00:04:35 - Speaker 1: Yeah, exactly. For me, there are a few layers here. There’s that first layer of, OK, you don’t necessarily need to be a huge business or to grow really fast.

It’s a sort of mechanical matter, there are existence proofs of businesses that haven’t gotten huge or growing that fast, they’re doing just fine. OK, that’s great. That’s kind of the first layer.

Then there’s this mojo idea of you can use the business as a vehicle to accomplish something non-monetary to make a statement. To do an artistic expression, and that’s something that was really important to me in starting this venture. I’m gonna spend the next 25, 10 years of my moral life working on this. I want it to be about something more than making money. And then there’s kind of a third layer, and I don’t know how much they get into this in the book and if you would even agree, but I think there’s a sort of arbitrage here where there are so few businesses that are operating with mojo, as it were, that you can have a sort of outsized impact if you choose to do so and do it well. This is where I think the small giants can punch above their weight class. It’s because so few people are actually operating with this mojo, this sense of artistic expression, that when you do, you really stand out, even if you’re smaller.

00:05:38 - Speaker 2: There’s some examples of companies that come to mind for you that are high mojo.

00:05:43 - Speaker 1: The one that’s top of mind for me these days is Signal. I’m not sure if that’s the company name or the app name, but, you know, I’m referring to the company that makes the Signal app, and I would expect they’re quite small. I’m not actually sure about the size of the firm, but it can’t be that big, but the impact that they’re having on the global discussion around the right of citizens to communicate privately is huge, and they could choose to have a huge impact going forward. So that’s one that’s kind of mindfully these days.

00:06:08 - Speaker 2: One that comes to mind for me is Panic. So they make kind of a variety of weird things, including, I don’t know, FTP clients, but also games. And now I think they’re working on a handheld game console and probably an example of a company that does have both mojo and a lot of growth, but maybe they took their time with that. The growth happened over a relatively speaking a pretty long time period and can build up slowly over time. Another one I remember you speaking about, we talked about this before, is Vanguard. Tell me more about the unusual structure there because I wasn’t familiar with it.

00:06:44 - Speaker 1: Yeah, so Vanguard is like one of the greatest business hacks of all time, and I feel like it’s an understudied story.

So my understanding of Vanguard is the founder, I believe his last name is Boggle, wanted to make investing more accessible and more successful for individual retail investors, and he had this insight around indexing, whereby if you index into the market and operate those index funds at a very low cost way, it would be very beneficial to the people who are investing.

Now he could have taken this insight and developed a huge and hugely profitable firm with it, but my understanding of what he did instead was he did this move where the firm is effectively owned by the people who invest in the funds.

So essentially all the profits that would get plowed back into the funds in the form of lower fees. So he basically forgoes a huge personal fortune to help bring low cost. Indexing investing to the masses.

And then it got to the point where it was so successful that it becomes quite hard to compete as a for-profit indexing firm because you can’t plow all your profits back into lower fees, right? Or at least your investors wouldn’t approve necessarily. And that’s kind of the sense of almost art that he’s shared with the world in the form of this somewhat unassailable venture to bring low cost investing to the masses.

00:08:01 - Speaker 2: index funds, you know, S&P 500, ETFs, guess what they’re called nowadays, is this huge technology, or maybe you call it a social technology or just a financial tool or something, but it had this huge democratizing effect for individual investors compared to the managed mutual funds that came before and yeah, the art.

Start, as you say, you know, for me that is the reason I am in business is it is a vehicle for expressing something that matters to me about how I think the world should be or how it could be better and the business and the mechanics of all that, how it’s incorporated, how it’s funded, how it earns money, all that stuff is really a means to an end.

Right, so optimizing for mojo, businesses with soul, expressing something artistically, that all sounds nice. What does this mean practically in terms of the business that you’re building? And here you start to think about these mechanics, which is, OK, you’ve got a group of people and you’ve got a thing they want to express.

Product they want to bring into the world or a piece of art they want to create depending on how you want to think about it. That needs time, it needs money, it needs organization, and that leads you into what I usually think of as kind of a container or a vehicle, which is typically a legal entity, could be a corporation or a nonprofit.

Um, and then there are certain models that fit with different kinds of businesses.

So, for example, if you’re gonna open a restaurant, and for a lot of people creating a certain kind of food and a certain kind of environment, that is very much an artistic activity for them. You certainly see that if you watch something like the Netflix series Chef’s Table on kind of the high end, but I think even more for your local corner restaurant, many times those businesses are not very lucrative. They’re open because people are really passionate about food and sharing a certain kind of experience with their customers.

But there’s probably a certain kind of legal entity you’re form and you’ll probably get funding as a small bank loan or some other things like that.

And that’s extremely different from, let me start a startup, move to Silicon Valley, join Y Combinator, get venture funding, and ultimately you still have the legal entity, a source of funding, you know, way to hire people or bring team members on board and the sort of mission they’re signing up to, but the mechanics of them are very, very different.

And there’s, you know, there’s a list of other things as well, including nonprofits, or even pure artistic activities, art projects, Burning Man art installations, or you’re starting a band or some, you know, writing a book or something like that.

All of these need capital and ways to organize people. And there’s legal mechanisms for that. And so knowing both the mechanisms, but also what you want to express, and therefore, what is the right vehicle for that, I think that’s worth thinking through rather than reaching for a default, which is, I don’t know, everyone starts startups, so I’ll start a startup, for example.

00:10:45 - Speaker 1: Yep. Well, now you got me thinking about the Wall Street that stuff that’s going on on Reddit and in that case, I guess the optimal vehicle was a series of memes.

00:10:55 - Speaker 2: That’s right, I do think it’s ever evolving, and you mostly mean that as a joke, but honestly, the internet has brought us some new structures, right? We have Kickstarter, for example, Patreon. There’s new ways potentially to, in the end, it is really about organizing groups of people.

Probably if you’re a solo artist, you’re painting, you’re painting, you’re doing something.

Individual, maybe this stuff matters less, but as soon as you have a group of people over time they are investing their energy, their effort, their emotion, and certainly their money, then you need mechanisms, governance and understanding for both what we’re going to put into this and what we expect to get out of it and what our goals are and all that sort of thing. So that brings us to the vehicle we created for Muse, which I think borrows elements from some of the different types of containers we’ve mentioned, but we think also has its own special blend. Can you explain a little bit what that container looks like?

00:11:47 - Speaker 1: Yeah, so first of all, we did believe that Muse needed to be a commercial entity, and the main reason was, well, maybe two main reasons. One is you need a significant amount of investment to develop a novel product like Muse and bring it to market. We’re talking about 3 to 5 engineers or 3 to 5 staff members for 123 years. So it’s not something you could do as a pure art project, you know, say.

Furthermore, if you have this vision of impacting the world in a particular way, it helps to have ongoing self-sustaining funding for it. So that’s another reason to make this a business versus a nonprofit or an art project.

The meat of what makes Muse unique is how we treat the staff and the other participants around the business. And the top level thing there was we wanted Muse to be the place that we wanted to work and the place that we wanted our collaborators to work. And that meant a few things. One is we wanted to be a relatively team, which has a bunch of implications that we can talk about. We wanted everyone to feel like peers who were at the top of their craft and operating at the top of their game. And we wanted everyone to be treated as well and as fairly as possible. And in particular, we didn’t want to sort of founder class versus an employee class where they’re very different, as in typical startups. And lastly, we wanted a sense of dynamism in the staff and the team, where people come in, they go, and that’s a very natural thing to happen, and you’re less kind of bound and handcuffed to the company. And furthermore, you’re also not constrained in how far you can rise in terms of your impact and your influence and your ownership, just by virtue of when you joined. It’s more a function of your contributions and commitments to the company. So those were kind of our goals that inform the structure and then in terms of where we ended up, well, first of all, we did end up with the Delaware Corp, which is the standard vehicle for startups, among other things, mostly because that’s the best understood by all the potential participants, staff, investors, and has the best support for people having ownership, a variety of people having ownership in the firm, which was really important to us. But then where we went in a quite different direction was this idea of a partner. So at a typical startup, you have sort of three classes of people. You have the investors, you have the founders, then you have all the employees, and they’re all treated very differently and have different economics in the firm, and they’re a function of kind of how you join and how you come to be participating in the firm. And we want this model, like I was alluding to before, where it’s more like the staff members are peers with each other and have the opportunity to rise to that level over time regardless of when they joined. So that’s where our partner model comes in, which is sort of drawn from the world of professional services firms, like law firms and accounting firms, and the idea that There is, if you start a law firm, you get to put your name on the sign because you started it and your partner right away, presumably, but also over time people can join and through their contributions to the firm and their commitment and they’re taking responsibility for the success of the business overall, they can eventually become a partner, just like the founding partners. So that’s sort of the idea that we have with the Muse partner. They’re someone who can become a peer with the other partners and have corresponding responsibilities at the firm. So it’s not just that you’re responsible for being a good engineer, you’re responsible for helping basically directs how the business operates, making big business decisions and things like that, and you have corresponding economic interest in the business, much more so on a percentage basis than a typical employee would have. So I guess if I had to summarize with the partner, it’s the idea of we want everyone to act like a real owner in the business, and in order to do that fairly, you need to actually make them a real owner in the business.

00:15:24 - Speaker 2: One way to understand the business structure or how the container is different, is to compare and contrast with other options. You mentioned taking investment, we did take some seed funding from a lovely firm called Harrison Metal, who happily turned out to be understanding or at least willing to try out.

Weird model here, but you could compare to other ways of doing this. So bootstrapping, for example, and there’s a few different approaches on this. I’ve done this in past businesses where you essentially do consulting work on the side or maybe it’s kind of related to you can try to sell your product to someone, but you sort of do some consulting.

With them at the same time that like helps you pay the bills until such time as the product is self-sustaining, or something you see a lot in the iOS developer world is these what I call these indieDevs.

Many times they have multiple apps, but it’s usually one person or maybe two people tops, and they can craft an app in Pretty short amount of time, a few months, maybe they’re doing it on the side, maybe they have other kind of some passive income from existing apps, or maybe they’re just doing it in their extra time alongside a job, and they can do that reasonably in 6 months, put it out on the app store, and then start making not a huge amount of money, but enough to make it pretty worthwhile for a single person.

But as you pointed out, for Muse, which has this first of all very forward thinking or trying to reinvent a lot of these gestures, the human computer interaction aspects, the tablet power user interface, there was just a big investment first on the research side when we were in the research lab, but then even once we left the lab and we’re trying to take this kind of validated prototype and turned it into a product people can really use that just took a lot of time, a lot of iterations in a way that let’s say a safer kind of app wouldn’t.

And similarly, there’s something that I do think is common in the startup world, which is big investments in design and brand, and you expect this from Slack and Tesla and Apple, and certainly Any up and comer startup, you have the money to be able to put a lot of effort into that sort of thing, and maybe we didn’t want to be quite at that level, but I also felt that a lot of investment there was part of allowing this first part of what we wanted to express artistically, but then secondly I think necessary for it to be successful.

So that sort of says, OK, the iOS indie developer path or bootstrap path is really not viable. We need a little more upfront capital than that. But then you can compare it to startups where, in fact, by start-up standards, the amount of money we’ve taken is ridiculously small. I don’t think it would even count as a precede. And furthermore, coming upon 2 years into this, we’re a 5 person team with no particular plans to expand, but in the startup model you’re expected to really quickly scale out the team, be 8 people, 10 people, 12 people in that first year or 1st 2 years. And so from that perspective, the 5 person team, we would be growing much too slow, but we felt that that rapid team growth first of all, wasn’t necessarily quite the kind of environment we wanted to work in. And second, it wasn’t quite right for what we wanted to express with the product. And so we ended up in this middle ground that was neither the bootstrapper path nor the startup path, and that led us to thinking, OK, how do we get some investment, be able to make that investment in things like design and brand and exploring this more radical interface, but not necessarily go on the, you got to become a unicorn startup path.

00:18:49 - Speaker 1: Yeah, exactly. Another way to think about the funding situation would be, as you get more funding and you have more external investors and owners, you tend to have fewer degrees of freedom.

So at the extreme end of you’re a large publicly traded company in many respects, including basically legally at the whims of the owners, they can more or less insist that you act purely in their best judiciary interests, and if they don’t like what you’re doing, they can take over your company by various means.

And at the other extreme, you would have the art project where you’re in your house, you can do whatever you want. And, you know, in some respects it’s nice to be doing the art projects you have infinite degrees of freedom, but then you don’t necessarily have the capital and the collaborators and the teammates in a sense to help you accomplish a bigger mission.

So, when we were looking at funding the venture, we wanted to go in the direction of raising a little bit of funding, but no more than we kind of strictly needed to, A and B. In order to minimize the extent to which raising that funding impinged on the desired degrees of freedom in the firm, we raised the funding from people who were aligned with our sense of mojo, if you will, or what what we wanted to do with the venture, and we’re therefore not going to use the fact that they were investors and owners as a way to shape the business in a way that wouldn’t fit with what we wanted to do. So being aligned with the investors was important, I think.

00:20:10 - Speaker 2: Another piece of the puzzle on funding and money flow generally is that all businesses should go through this cycle of they need upfront capital, even if you’re a lemonade stand, you gotta get the lemons and the pitcher and the cups and the poster board and the marker so you can make your sign.

Everyone needs some amount of capital, but there’s always this cycle where initially you’re in the red. You’ve put in capital but you haven’t produced a functioning business yet and you hopefully over time in that time period could be very long. I’m gonna say for, you know, a business like Amazon, maybe it took them a decade plus to go to cash flow positive, whereas maybe for more bootstrap things you expect to get there basically right away, but for us, we wanted to have enough capital to make these investments we knew were necessary to even get a product that people would want to use or pay for.

But it was also important to me or it was part of what I wanted to express with the business was to make a self-sustaining business where the product exists because people are paying for it, not because of continuous injections of venture capital.

And partially this is my experience in the startup world, both with my own companies and other companies I’ve advised.

But in the end, you will always serve the needs of the people who give you money, and that’s just kind of the physics. You can resist that in some ways, but it’s just kind of the long term, you’ll always converge to that. And so if your customers are the ones giving you money, then they’re the ones you’re serving. But of course they can’t. Maybe putting aside some unusual cases of big Kickstarters or whatever. For the most part, you can’t be completely customer funded to start. That’s where professional investors can really help out. They want to give money to fledgling businesses for a chance at a return, and so that’s a good deal. But if the startup path tends to be one where there’s long, many, many of capital and so you’re in some ways I’ve seen the it’s quite a joke or a criticism or something, but they say that startups in many cases their product is their stock. What they’re really trying to do is sell their stock and sell it for ever increasing prices and the product that they give to users and maybe even charge for but not enough to break even, that is secondary. And I really wanted the other way around, which is, of course, we need to do our fiduciary duty to our investors and give them hopefully a solid return over time, but ultimately, the sooner we can be funded by customer money rather than investor money, I think the more that will shape the company and the product that I want to make in a way that really is focused on serving customers.

00:22:48 - Speaker 1: Yeah, for sure. And one of the reasons that I like that approach is I basically prefer to serve paying customers versus free customers in general. This goes back to kind of the patio 11 thing of, you get what you charged for or something, where customers who pay serious money for tools tend to be invested in them and want them to succeed and understand their value and things like that. So it’s yet another reason to focus on paying customers.

00:23:11 - Speaker 2: Yeah, it’s a way to filter out people who really find a lot of value in your product from those that like free stuff. Everybody likes free stuff, that’s fine, but I think a business and a product works out best if you can have that real focus on, here are the people that get the most value from what I’m doing.

Yeah I’ll note that I think it worked pretty well for us, this idea of we’ll take this seed-ish round, and then we’ll try to use that to get to, if not profitability, at least kind of a sustainability, at least not be losing money, and that really did create a lot of urgency on the team, I feel, to charge sooner and it was a challenge actually because I think as craftspeople. You think, OK, I don’t feel ready to charge money for this yet. I think it can be better. It still has bugs in it. There’s so many features to add. It’s a very natural thing when you hold yourself and your work to a high bar, but then you made this spreadsheet that basically mapped out cash and how we were spending it and what would happen if we started charging and it really made a difference starting charging just a few months.

Earlier, because it really takes time to build up your customer base and that that is recurring over time, we could get to this sustainability on a trajectory that would allow us to not need to sort of go back to the well for for more funds and or just go out of business, and that was really focusing and I think it pushed us to charge a little sooner than maybe we would have otherwise.

And that in turn I think really changed our relationship with our users who are now customers because now we have a different obligation to them and I think that further focused our ability to make a good product.

So overall that kind of charge money sooner and then in turn try to grow into that price you’re offering or that product you claim to be offering. For me that was a really powerful focusing thing for the team and for the product.

00:25:03 - Speaker 1: Yeah, I think that was big and by the way, it was made all the more challenging by our take on pricing on iOS.

Part of the hypothesis about how this venture can work with a small team, a relatively modest amount of funding, but still reaching self-sustainability.

Is a prosumer price level on the $10 a month, $100 a year range, versus almost all iOS apps, which are $0.03 dollars, $5 maybe $999. It’s the wrong number of zeros to be able to make the physics of the business work. And so at the same time as we are craftspeople who it’s tough to charge for a product that isn’t where we want to be eventually, we’re also dealing with the challenge of we’re doing something quite different with iOS pricing, so it’s dealing with two things at once there.

00:25:47 - Speaker 2: Great, so we’ve got kind of this partnership model, small talent dense team, people who are all owners in the business.

We’ve got a small bit of seed funding, so we can do a bigger investment than a pure bootstrap thing, but something trying to get to Sustainability sooner, and not be on a long term kind of multiple rounds of investment, and we’ve got prosumer pricing that potentially makes it possible to get to something sustainable for a 5 person team within kind of the physics of how many people are out there that need a tool like this, and what they’re willing to pay and that sort of thing.

So that was, I think, kind of roughly the picture we put together, we wrote an internal memo that outlined mostly everything we just talked about back in the summer of 2018. So now the question becomes, OK, we’re coming up on two years in, how’s it going? Is this working the way we thought it would?

00:26:39 - Speaker 1: Yeah, I think it’s working out great so far.

Now, there is a huge question mark around the financial success and viability of the business.

We haven’t fully demonstrated that yet, and that’s a question mark that’s going to be out there until we have that information, it’s hard to fully evaluate this model, right? But in terms of how it feels to work day and day and the staff that we’ve attracted, that feels. Great to me, and I especially love this feeling with the partnership model that you have 5 people who are operating at the top of their game, and who you fully trust to make great decisions for the business independently. That feeling is awesome and really helps us, I think, move quickly and punch above our weight, even as a 5 person team.

00:27:19 - Speaker 2: You know I’ve always kind of liked the what I think of as the pirate ship model, kind of a group of people who band together for a common purpose, but it’s not this top down classic command and control.

One person is in charge, everyone else just executes, and individuals can pursue their own decision making, as you said, but the reality is, I think I don’t. how it would be with even more than 5, but certainly any, I don’t know, before this you were working at Stripe as part of a big team there and amazing company, but it’s just there’s hundreds or I don’t know even now thousands of people and there has to be some coherence to the decision making and so that in turn leads you into cascading OKRs and all the Big company stuff you think of it’s necessary, and you know, I think it’s necessary to do something at that scale, but for me personally, yeah, it is a lot more fun to make individual decisions for my own work and then for my teammates to be able to trust that we have enough shared vision, alignment around purposes, sense of trust in each other’s capabilities as craftspeople, but also that we were seeking a similar outcome in the business. And that people can have a lot of autonomy while at the same time, we’re working together for a common purpose. We’re not making decisions that contradict each other or will make the whole thing feel incoherent.

00:28:33 - Speaker 1: Yeah, exactly. And furthermore, I think there’s a sort of talent arbitrage that we’ve been able to pull off here in two respects.

First of all, I think people are stepping into a level of responsibility and impacts and skill that they wouldn’t have stepped into so quickly or just such a. extent, if they were in a bigger organization where they had a more specialized and confined and limited and structured role. And that’s the result of you give people responsibility, you trust them with it, and you make them big owners in the business, and they take that very seriously, and they tend to step up to the challenge if you find the right people.

And second of all, I do think that the model is very attractive to some people, and I won’t put on the spot here, but I, I think people have found their way to the venture that otherwise they’re basically not hirable by general purpose companies, right? But because the model is so unique and attractive, and because there is that mojo, I think you can bring people into the venture that otherwise you basically wouldn’t have been able to hire.

00:29:27 - Speaker 2: Yeah, for me, looking back at this almost 2 years, we’ve been doing this slightly unusual model. I actually went to review the memo that we wrote back in summer of 2018 just to kind of look at our original goals and see the degree to which we’ve executed that versus it’s evolved. And one interesting thing in there was essentially what the risks or open questions are, and I’m happy to say that two of those we’ve already answered in that. Intervening time, just as we’ve discussed. One is just our ability to raise money. So we went out to look for seed funding from the kinds of investors who normally would invest in startups, and we had kind of a weird story where we basically said, look, this isn’t unicorn potential. We’re not trying to follow the standard startup model. We do think there’s something quite interesting here. We think there’s a potentially a very good business here. But, you know, we’re explicitly not on that path, and we’re looking for less money in exchange for less ownership, and we’re not gonna fit the normal model and for many, actually most investors, that was a, well, we like what you’re doing, it’s interesting, but this just doesn’t fit our model. But we did manage to find some folks who liked what we were doing and certainly it helped, I think a lot that you and I have and others on the team, you know, we have a really nice CV.

In the tech world and the amount of money we were asking for was so small that people felt they could take a risk. I think that would be tougher to do without the career capital that we have in this particular team, and I would like to see if there are more businesses that can do with a model like this. It would be nice if it was more possible for people who didn’t necessarily have the background of Stripe and Hiroku and whatever else to be able to get this kind of funding. So that’s one item to risk is the raising of money.

The other one is the ability to hire, and I think I outlined that in the previous podcast episode on this, which at the time we’d just been joined by our fourth partner, Leonard, but it’s one is can be an outlier, so I thought, OK, well, we got pretty lucky with that, and he really seemed interested in being not just a great designer as he is, but also someone who would have broad ownership in the business and interested. All pieces of it, not just his sort of specific discipline, can we replicate that? And the addition of Adam Wulf to the team made me say, OK, yeah, it seems we can, right? We got not just the original three who wanted to do things this way, but then 2 more we were able to attract, as you said, maybe even people we wouldn’t have been able to hire if we were a slightly more conventional company, that that was appealing to them. And I do think it’s not a highly scalable model, but it’s scalable enough to serve our purposes, and we have no plans to expand the team beyond 5 for the foreseeable future, but we also think that’s the right number of people to execute on this vision. So from the perspective of answering those two risks, I would say that is going well.

00:32:02 - Speaker 1: What are the other risks on the list?

00:32:05 - Speaker 2: Uh, the other big one is the one that you just mentioned, which is can we get sustainability, right? Because I think that for the record, at the time of this recording, we are not revenue sustainable.

Let us say if we run out of our little nest egg in the bank here, we would not have enough to keep the business going, at least in its current form.

But the graph is trending in the right direction, we have new customers every week, and if you look at the way that the lines meet in terms of, you know, bank account going down, revenue, and new customers coming in, we do think it is viable to get there, but we won’t know until it happens.

So I think that remains the biggest risk, and if we do start to get close to being in the red on the bank account, and then we have to ask the question of, OK, you know, do we just sort of give up and go to business, to be revenue based financing, which could be interesting, but I think maybe we might not be the right shape of business for that, or do we go back to Silicon Valley investors, but now we’re sort of like breaking our model, right? We’re saying, well, we were just going to raise this one round and charge money right away and try. get to sustainability based on that, but if we need to go and refresh from that well, that pretty naturally takes us into just the startup path of raising perpetual rounds of funding, and your eventual outcome is acquisition by a larger company or in some cases going public, but I just don’t think we have the right kind of business, nor is what we want to express the sort of thing that makes sense for a big public company, right? Yeah, and then addressing the more personal side of it, which is just creating this company, this vehicle uh that is a place we want to work. I like you wanted to be a little less of a manager, a little more of a maker, and It is interesting because, you know, we do spend a lot of time. I spend a lot of time tweaking CSS and manually typing expenses into QuickBooks, which is a perpetually rote and frustrating activity and many other small things that were, how we raised a little more money on the startup path. Yeah, we would be hiring office managers and other kinds of people we would have a bigger team that would mean that we could do less of that stuff. You get more leverage or something like that, but that’s actually what I wanted. I’ve gone both directions and I think I’m at my best when I’m, I like being on a team, that’s really important to me. I want to do things that are big enough that they require a team as opposed to just, you know, kind of a solo activity or even like a two person partnership. But I like to be on a very small team where you can be doing a lot, but most of what you’re doing is making, I would call it, rather than the management and leadership tasks that come naturally with the expansion of a team.

00:34:42 - Speaker 1: Yeah, totally. And I think in addition to this maker versus manager access and how that’s influenced by the size of the team, I also think that a smaller team gives you more degrees of freedom, which is great if you’re someone who just likes freedom, like me, but it’s also great if you want to do something unique that requires moving several variables at the same time.

So for example, this local first idea that we’re working on, this idea that you have all the data on your device and it’s very quick to access and it’s secure to you and things like that, that requires pulling levers on engineering, products, business strategy, the client side, the server side, interfacing with the research at the lab.

There’s all the stuff that you Got to kind of pull together. And if you had to coordinate a bunch of people to do that with meetings and planning documents and all that, it would take forever. It might just not get done. Whereas if it’s a small number of people or even one person, you’re much more able to come up with these weird combinations of variables to produce novel results. And that goes back to this idea of making a statement or building something unique for the world.

00:35:43 - Speaker 2: Another element of degrees of freedom is outcomes.

So outcomes could include, you have a profitable business, but it could also include something like an acquisition or an IPO and the startup world, there’s really the outcomes that matter are acquisition, IPO, or go out of business, and that’s sustainable but moderately sized business is a non-goal.

That’s actually a bad outcome from the perspective of investors and the whole.

The system is kind of built around that.

You shared a nice article with me some years back called VCM Math, which I’ll link in the show notes, but the way the person puts it is, you know, venture capitalists in pushing these businesses to become a billion dollar company in 10 years. This is not because they’re jerks, it’s because the model demands it.

This is how it works. That’s where this money comes from. It’s only possible if you push for these polarized outcomes.

And that’s well and good if you know what you’re getting into and you’re seeking that kind of go baker bust result, but for the, I think potentially large number of potential mid-size businesses, very solid mid-sized businesses, that’s of course not a fit.

And so by keeping that smaller amount of Capital upfront, keeping the team smaller, we leave more possibilities for what counts as a good outcome.

And so, of course, we still can have a startup style outcome, and that might be something we consider good, but there’s also other outcomes that I would consider extremely good. But that in turn leads into, OK, how do investors as well as the partners who have this significant equity stake and in fact are taking lower salaries than they would in other places in order to get this equity stake, but how does that equity become worth something? So the startup world typically it’s through. or IPO and there’s no other outcome. So you did quite a bit of work on the financial pieces that could potentially make this work. So how do investors or partners over the long run, if news is able to be a successful and profitable business, how do they realize the results of their effort?

00:37:52 - Speaker 1: Yeah, this is a tricky one. So certainly if there’s a standard outcome in the startup world, like an acquisition or something that’s straightforward and it’ll work like other places, just the percentages would be different because again, we’ve given much more ownership to the staff.

But if you are profitable, it’s quite challenging. So I hope our listeners who have joined for discussions of gesture-based interfaces will forgive my aggression in US tax law here, but it’s actually really important for how you compensate your staff.

So, tax and securities laws makes it quite hard for people, individuals to get cash out of a company like this, and I can kind of play through the different scenarios that we thought about. So one thing we’ve considered is the idea of small scale tender offers. This is where a company or someone else offers to buy shares from existing investors and in that way, existing owners of the equity could get some liquidity and have cash to support their families or what have you.

00:38:46 - Speaker 2: And small digression there when I first encountered the term tender offer, I just thought it was the sweetest thing. Here’s an offer for you tenderly for your shares, but I, I don’t think that’s what it is. It’s, it’s that they are tendering an offer, right? But it basically just refers to an internal stock purchase, right? A transaction where one person has some and they’re going to sell it to someone else on an open market transaction. And is that similar to or the same thing as stock buybacks and kind of public companies?

00:39:13 - Speaker 1: Yeah, so a stock buyback would be buying the stock from the public, which I guess could conceivably be some of your staff if they own it on the public markets, where the tender offer, I associate that more with a more closely held private company, and it’s not a public transaction, it’s more of a private offer to specific individuals to buy the equity.

00:39:33 - Speaker 2: How does that relate to, we mentioned taking inspiration from the partnership model, attorney firms, and so on, and I think it’s pretty standard there that when you’re going to leave the firm, they buy you out, right? Even maybe with a restaurant, you know, you can imagine a couple of people in a restaurant, one person decides they’ve had it with the business or they’re moving on to other things in life, it’s normal for one person to buy out the other person’s steak. Would that be a tender offer or something else?

00:39:57 - Speaker 1: Hm, interesting. I suspect that’s a little bit different because those are probably LLCs or otherwise not Corps, and again I associate tender offer with basically with the Delaware Corp, and that could, for example, even be written into the contract that not only are they gonna offer to buy you out, but in fact you have to sell. At perhaps a formulaically determined price, so that way they might specifically not want the ownership to escape the currently active employees, for example. Basically, I think when you have LLCs or other non-Corp structures, things can get a little bit weirder and different just because they’re not as solidified and standardized in terms of how they operate. But there’s some similarities in spirit of, OK, you’ve completed this part of your journey and you want to get some liquidity for that, and the company has interests in acquiring that equity, and so it makes mutual sense to do this transaction.

00:40:42 - Speaker 2: Yeah, I guess they all seem similar to me in that typically an ownership stake in a private firm of any size is just totally non-liquid.

You cannot really do anything with it.

You can look at, OK, in theory, our last funding round value us this amount or I could take a multiple of revenue, the company is worth a million dollars and I have 50% of it.

Yay, I’m a half a millionaire, but that’s not really how it works because you can’t actually sell those shares versus public markets, which of course, It’s very good for liquidity in that way, and then an acquisition scenario where one company is buying 100% of the stock of another company, and then you just divvy up that share price among the owners, and that’s why those two scenarios create exits for the investors or create ways to get liquidity for the investors and the employees who have taken options.

But if you say, as we have said, You know, we don’t plan to take either of those paths. We want to build a profitable business that goes in perpetuity, making good software. OK, then how do I ever realize the outcome of my shares? And so the tender offering is one mechanism, as are these others we mentioned for creating liquidity isn’t the word for it, but just the mechanism for one person to sell their shares and get out and get some money to someone else who’s maybe more active in the business.

00:41:58 - Speaker 1: Yep, yep. And another nice thing about tender offers is they don’t need to apply the same to every person, by which I mean if it’s just the case that you or someone else because they’re leaving or whatever, wants to make this exchange, we could potentially set that up versus having to do something equally on the basis of current ownership.

And another example of something like that would be a dividend which we can talk about. Yeah, there’s a lot to like about tender offer, but it’s not something that we would do lightly. There’s a variety of reasons. One is that you need quite a bit of capital for it to actually make sense for it to be material, and for you to have an appropriate amount of cash in the bank and the company even after the transaction. So in that sense, it’s definitely a ways out. But also, unfortunately, there’s all kinds of really weird tax consequences which we don’t need to go into the details here, but Basically, by doing a tender offer, you could potentially impair the equity of the other owners, if you do it wrong or do it at the wrong time or do it too much. So it’s fairly fraught. But it’s a potential thing out there. Another thing that we thought about and liked was dividends, and dividends are nice cause they’re very mechanically fair.

00:42:56 - Speaker 2: Big fan of dividends. Yeah.

So just to define that, this is the idea that in a way it feels like almost the purest expression of capitalism or how businesses are supposed to work, which is when a company turns profit, they can choose to take some portion of that profit. Some, they’ll reinvest back in the business, kind of retain earnings, I think that’s what that is usually called, but then the rest they say, hey, we made some money, let’s share it with everyone who helped make this business happen.

And that share is determined by your ownership in the company. And so for me, I had a, I guess personal experience with this in my very first business, which was a basically a bootstrapped. Business, a payment gateway called Trust commerce, and we had been operating, I don’t know, founders, you know, living on their own savings and whatever, just trying to pay our bills with whatever money came in, or trying to pay the basic business bills, servers and offices and phones and stuff like that. And I remember the first time we were left with $1000 in the bank account that was not accounted for us, well, what should we do with this? Well, we could pay ourselves, that’d be great. And so we wrote dividend checks for $300 for each of us, because there were 3 people in the company, and it felt really great. It felt like this, we made a product that people valued enough that there was a little bit left over that then we could give to ourselves. And even though the, the number, the absolute number was small, that feeling of kind of profit in its purest form is a really nice one. And so dividends are just the idea that the company is making money, so you share it with the owners, and that’s something. It’s not really part of the startup world and even not really as much a part of, I feel like public equities, where I think they could usually call them growth stocks or something like this. I’m probably speaking out of my wheelhouse here or income stocks or whatever, but the idea of just you’re going to buy the stock in a company, so that then when that company makes money, they send you a dividend. Those are usually a lower return type of stock versus ones that are based on the growth of the stock itself. You buy it at a lower price, you sell it later for a higher price. But the income stocks, again, that is business at its most pure and fundamental, which is the company made money, you own a piece of the company, therefore you get a portion share of that.

00:45:04 - Speaker 1: Yeah, and it’s nice because it’s mechanically fair. If you have $100,000 to distribute in dividends, you look at the cap table, so and so has 5%, great, they get a $5000 check, and you know that everyone is being treated fairly, at least insofar as the equity in the company is owned fairly, and you don’t need to have a lot of discussions and machinations about how you actually split up the cash.

But dividends are challenging for their own reasons though. One reason, for example, that you don’t see a ton of dividends in the public markets is some companies don’t have cash to throw off. A lot of it is currently, instead of being dividended out, it’s being used to buy back stock, which is kind of equivalent actually, but buybacks get basically better tax treatment.

So there’s those pesky tax laws again, causing weird distortions, but in our case, it’s hard because Some staff have straight stock and some staff have options. And that again is because of tax law. Basically, the US government doesn’t want you giving straight stock to people. They view it as compensation that needs to be taxed immediately, even though it’s a liquid. So basically, to avoid bankrupting your staff, you have to give them options. But then options in uh the Corp, when you dividend now you dividend to the stock owners, the straight up stock owners, not the option holders, so that probably wouldn’t be fair to them.

00:46:13 - Speaker 2: And to be fair to the tax man here, trying to levy income taxes on stock earned for work is very challenging because that stock has zero value when you get it, and it’s very likely to have zero value ever, but then in some cases it can be worth a lot, right, that initial stake that, I don’t know, you know, the Google founders had turned out to be worth a huge amount, but the vast majority of startups and even businesses will end up. Not being worth anything.

So how do you tax something when you can’t know its value except extremely retroactively? Yeah. And I’ve had my own challenges with that because I’ve basically built a career around starting companies or advising for companies and taking equity and kind of have this, I don’t know, flywheel of I basically earned some money on past ventures, and then I can use that to pay my bills or whatever and earn pure equity in future ventures, and then All of those pan out, but I kind of have a portfolio strategy, you might say if I own stock in companies I’ve started over the last decade or decade and a half as well as companies I’ve advised for in some cases invested for. And so all of that income, all of that stock was worth 0 when I got it, but much of it turns out to be worth $0 ever, but then some of it turns out to be worth a good bit. And when I can cash that out, I can use that to pay my bills and continue my career.

But how do you tax that because Typically you tax things at the time they’re earned, but this can only be evaluated when it kind of resolves, which can be often 10 years later, that a piece of stock you earned pans out and has a value that can be attached to it. So it’s not an easy problem. I think it’s still an evolving area. Certainly the US tax law. I know Europe is grappling with this as well, because it’s just the standard models for how we think about income just don’t fit well with us.

00:48:04 - Speaker 1: Yeah, definitely an area that’s being worked on. It’s just too bad that it hasn’t been figured out yet in a way that would be more advantageous to basically giving staff more compensation.

00:48:13 - Speaker 2: Yeah, it can be frustrating, which is basically trying to do something that’s as fair as possible for investors and people earning what they call sweat equity, where they’re essentially earning stock in exchange for their work.

We cannot treat those the same because the tax law basically means that, as you said, the people earning equity through sweat get screwed, and so then you have to create these different classes of stock and do different things, but then that effectively means You have more and more divergence in the stakeholders, which is against the spirit of what we’re trying to do. We’re trying to create this thing where everyone’s in it together, we bring different things to the table.

Some people bring their efforts, some people bring their money, some people bring both, but everyone can hopefully have a sense of fairness in the sense of kind of knowing what you put in and knowing what you potentially get out or how to share in the success long term.

00:49:05 - Speaker 1: Yeah. And there are ways you could potentially work around this for dividends.

You could do a sort of phantom dividend where you say there’s 100% of the cap table and straight stock and there’s an additional 40% in options. You can dividend it out 140 units, 40% to the option holders, and 100% to the stockholders, and the stock would be straight dividends and the option holders would get like a bonus basically.

To do something like that, and you could even imagine doing more basically ad hoc type things like that where you essentially make a formula and then do a bonus payout, but make it more formulaic less just like, oh I think you did a good job this year, here’s a check and more you have this sort of ownership in our.

Current cap structure and based on that, according to this formula, we’re doing bonus payouts like that, but that also gets messy because there is an element of discretion and also when you’re dealing with investors, like they don’t want to get a $17 check, and you got 4 more employees, you got to take down their address or whatever. This is a lot of weird mechanical stuff there. So I, I think realistically it’s, we gotta wait a few years and see how this all plays out and what the shape of the business is, but what we’ve done is we’ve built up a lot of potential energy, a lot of ownership, a lot of equity with the staff members, and hopefully we can find a way to convert that into kinetic energy to continue the analogy in the future. And I’m pretty optimistic. It is asking the staff to trust us to a significant extent that we’ll be able to figure that out and treat it fairly, but I’m pretty hopeful that we would be able to do something that’s fair to everyone.

00:50:28 - Speaker 2: So, would you recommend a structure like this to someone else who wanted to start a company and or do you imagine, you know, if you had to start a new company yourself today, would you reach for a structure like this?

00:50:42 - Speaker 1: Yeah, well, we thought about this for a very long time and it was hard to come up, and we spoke with a lot of experts, and it was hard to come up with a better setup.

So one way to think of this is, insofar as we’re talking about staff compensation, equity ownership, it’s kind of in the standard Silicon Valley model, but with the percentages dialed way in favor of the staff. So in that respect, it’s kind of strictly better, I would say, than a typical Silicon Valley model. And so it can’t be that wrong, strictly better at least for the staff, I would think.

And we didn’t talk about the other things that we do there in terms of very long exercise windows and more favorable investing schedules and so on, but basically, we’ve taken the standard mechanisms that are used in stock, Delaware Sea Corps and turned the variables that we can so there’s as favorable as possible as staff. And I think at least that is a good thing if you would have otherwise considered it a standard Silicon Valley model.

The one other option that I do think is interesting, but that I couldn’t quite see ourselves going down was Using more like a phantom stock approach, where you have essentially an internal ledger that’s separate from the ledger that you have with Delaware in terms of the equity ownership in the company, and it’s on the basis of that internal ledger that you would make decisions about how you do payoffs. And there are some companies that are exploring this, you know, it’s like every month you work with the company, you earn a point, and then if we ever do dividends, you divide the dividend by the number of points and that’s how much we send you a check for, something like that. That’s nice cause it gives you a ton of flexibility, but it’s much less precedented, and it places even more trust in the company, because you have less of the legal guard rails to confine what they can do or not do. So I think that’s interesting because of the flexibility, and I would love to see people try that more, but I wasn’t ready to, you know, establish a whole bunch of new case law just for the sake of this venture.

00:52:21 - Speaker 2: Now, precedent is very important. There’s the general business wisdom is try not to innovate on the model, try to focus on your product and your and don’t get too caught up in company mechanics.

It turned out that this was something that we were both passionate enough about in terms of the place we wanted to work, but also I honestly do think we needed a different type of container, right, that we knew that as we talked about towards the beginning there where an individual productivity tool and what you can sell for even at a prosumer price and what the mechanics of distribution and things look like there versus other, you know, there’s a reason why Venture funded stuff is either Enterprise, SAS, or, you know, a monetized consumer products. Those are models that work well with that funding style, and the thing we wanted to express in terms of the product and the thing we wanted to exist in the world, as well as the company that we wanted to work at, I think just demanded a different model. I don’t think it would have worked with another one, so I think that was a way to justify the ways in which we are deviating or innovating a little bit on the container side of it.

But then at the same exactly as you said, I remember a lot of design choices we made and things like, you know, we’d love to give employees options or we’d love to give employees pure stock, but that’s just way too hard or even impossible without these punishing tax consequences.

So, OK, we’ll kind of have these two classes of ownership in the company, that’s not the spirit of what we’re doing, but like, at some point you gotta bend a little bit to realities and what there’s precedent for and what attorneys and accountants are used to working with and all that sort of thing.

00:53:54 - Speaker 1: Yeah, and I think in all of this there’s also a very real morale element where let’s suppose the company is very successful some years from now, all the current and former staff are going to remember that we worked very hard to try to do the best we possibly could by them.

They were like basically on all the email chains with the lawyers, more or less literally, and we would debrief and talk about, OK, here are the options that we have.

What do you all think? Does this work well for you and things like that, versus a model where That was all opaque and there was not even an effort made to try to set things up as best as possible for the staff. I think that just helps people feel like they are being treated well.

00:54:28 - Speaker 2: Well, speaking for myself, I am sometimes in the position of offering advice, let’s say, to folks who are thinking about what kind of vehicle they use for their business, and kind of the new approach does come up and Certainly, it’s huge to ask, what are you actually trying to make, because you need the right vehicle for what you’re doing. If you need huge upfront capital or a big staff, I’m not sure this model can work, to be honest, or if it’s something that can be done with more of a small team, 1 people, 2 people in a shorter period of time, then maybe this is also not the right way to do it.

And there’s other kinds of vehicles as well. For example, I think The nonprofit is a little bit underutilized, can be an incredible vehicle even for software and technology products.

We know of maybe someone like Mozilla or the Apache Foundation. There’s many smaller examples such as processing Foundation, which does this kind of generative art coding tool language thing. There’s many others where I think if you think, OK, what we want to make is more open source or it’s more of Long term kind of benefit, less of a maybe it’s more educational or maybe the target audience is not, you know, the mechanics aren’t there for a for-profit business, maybe you can make it work as a nonprofit, and again, there are more and more options for how you do that sort of thing these days between Patreon and so forth.

So I think trying to think in terms of, here’s what I want to make, and here’s the team, and here’s the place I want to work. And then here are some different types of containers. How does that fit and in particular what’s the funding model, you know, if you’re gonna do the nonprofit, you’re gonna be out essentially fundraising all the time because you’re trying to raise donations, and that works well. I think it works great for something like, say, Wikipedia and the Wikipedia Foundation. They made something very sustainable there and something that probably would not work the same if they had to come up with some for-profit business model. So, I think the advice I give others and then for myself and thinking of anything I might do in the future is think about what you wanna do and then be aware of the full range of options and not just go with the thing you know, because if you started a nonprofit before, maybe that’s what you know. Start another one, he started a startup before us, you know, he started another one, but actually there are a lot of options here. They each have their pros and cons or are more suitable to different kinds of products, markets, business models. So just try to pick something based on an informed look at those tools.

00:56:49 - Speaker 1: Yeah. And if I could put on a spin on this, if you think about the full space of possibilities for how you accomplish a goal, there’s one point which is you’re 100% focused on earning as much money as possible through a fast growing for-profit venture. And if you make a heat map of where people currently spend their energy, there’s this massive white hot glowing spot right there.

There’s so many zillions of startups trying to try every single angle and opportunity in that area. And so the marginal return to investing your personal time in terms of the impact on the world might be relatively smaller there, whereas there’s this whole space that I feel like is really under explored, and if you just make it about 80%, making a profit and 20% making a statement, that opens up all kinds of incredible opportunities, and you can bring in these tools like maybe what you need is a for-profit, maybe it’s nonprofit, maybe it’s a community, maybe it’s a, I don’t know, meme, seriously.

If you open yourself up to those possibilities, I think you have a lot more potential to have an impact just because so few people are considering that right now.

00:57:50 - Speaker 2: Well said. Well, let’s wrap it there. Thanks everyone for listening. If you have feedback, you can write to us by Twitter as at museappHQ or via email as hello@museapp.com. You can also help us out by leaving a review on Apple Podcasts, and I’m hoping that if there is a small giants 2 book somewhere in the far future, Mark, that Muse might be included in it if we can do this well enough.

00:58:16 - Speaker 1: That’d be awesome.

00:58:17 - Speaker 2: All right, till next time.

00:58:18 - Speaker 1: See you, Adam.