The Founder's Journey: From Idea Maze to Exit

Choose Your Frontier

For a founder, an idea is full of possibilities. New ideas are the modern frontier. You can build worlds without exploring new lands or raising empires. One person’s idea can grow into an enterprise that creates meaningful work and stakeholder wealth. The products and services that emerge improve consumers’ lives. Founders invent the future by creating new ways for people to exchange value and co-create with one another.

If you feel called to a new frontier, preparation is key to increase your odds of success. An overview of the topics covered in this essay:

1. Founder-Opportunity-Fit: Why are YOU solving this problem? Why are you solving THIS problem? And why does the world need your offering NOW?
2. Visit the Future for a More Successful Journey: Working backwards helps connect the dots that illuminate possible paths forward and reveals the trade-offs inherent in your specific path.
3. Prepare Your Personal Finances: It pays to be as rigorous with planning on the personal finance side as you are on the business side.
4. Assembling an Early Team: A new frontier is rarely reached alone, the right team members recognize the challenges and align their expectations to reality and personally prepare for long-term success.
5. Financing the Adventure: Raise capital to bring the future into the present more rapidly than bootstrapping can support.
6. Equity Incentives and Paths to Exit: The equity value of a successful venture will create materially more wealth for a founder and early team than almost any other endeavor.

This essay will help you waste less time in the maze, lose less control of your business, and improve your experience building a startup. The world needs more great founders and we hope this essay helps you become one of them.

Begin with clarity on founder-opportunity-fit and why the world needs your offering now.

Why are YOU solving this problem? And why are you solving THIS problem?

An initial idea that sparks the desire to found a startup is often sparked by obsessive curiosity or direct experience with an unsolved friction during work or a hobby. Pursuing a problem that aligns with your values, priorities, and interests will help you persevere through uncertainty. 

If you have the drive to launch a startup, first understand what you’re committing to. Think deeply about why you are going on this journey and what you want out of it. 

In your mind, what is the best, moderate, and worst-case scenario along the following dimensions? 

1. Business outcome & wealth
2. Personal experience & status
3. Impact on the world

Which is the most important piece for you? What is the size of outcome you see for each? How intertwined are they? In what ways are there tensions among them?

As the founder, you need to keep your eyes on the horizon and address the terrain at your feet, always positioning for advantage in the landscape ahead. You need to determine the appropriate resources for the journey and assemble a crew capable of getting there.

Most important, you will need a vision and compelling message about the future. A clear map for others to internalize and shape their life around ignites possibility. And this vision will serve as a type of north star. Use it to check in with yourself over time to make sure that what lies ahead continues to align with what you want to experience.

A Brief Survey of the Startup Journey Lifecycle

Although the desire to found a startup may come before conviction of what to build, building the right thing at the right time has a greater influence on outcomes. The open-ended nature of starting a company from scratch can be daunting but there are three general phases to navigate along the journey.

1. Insight Generation Phase: Identify unmet needs and innovative solutions.
2. Customer Acquisition and Engagement Phase: Attract desperate customers and generate loyalty for your solutions.
3. Scale and Expansion Phase: Grow operations, enter new markets, and increase customer base.

Irrespective of what phase you’re in, the ideas that follow will help you gain clarity for your path while keeping the larger scope of your journey in mind.

Any problem is an opportunity. But not every opportunity is the right one for you. Once you're on the scent of an interesting idea, it’s a good exercise to explore the hunch through "backcasting".

To backcast, drop yourself in the future and disconnect from the present. Immerse yourself in the future. You aren’t just getting a sense of how many minutes various routes take to walk there like with Google Maps. You’re in “street view”. You're clicking from block to block, familiarizing yourself with what you will experience along the way. What will people be doing in the future? What evidence will you observe to know your hypothesis was correct? What current or emerging trends/technologies are making this possible?

Working backwards helps connect the dots that illuminate possible paths forward. How do specific efforts build on each other? What path dependencies exist? What are potential dead ends? What can you explore in parallel, what must you tackle sequentially, and how will you figure that out? What hiring strategy supports your best thinking?

Take as many trips as you can backward from the future and then forwards back into it. The more vivid your experience, the better. You will eventually begin to notice what’s missing in the future and come up with insights to bridge the gap. What futures feel valid but need your skills and passion to be the catalyst for change? These rare perspectives are rewards for exploring.

The decision to start a business will impact the people and resources in your life. It will also inform the team, resources, and the sacrifices needed to get there. Backcasting helps you proactively revisit inflection point decisions and forks in the road.

Business Backcasting to Be Less Wrong

The specific frontier you choose to explore will influence the most relevant backcasting experiments and follow up questions. But the goal of this exercise is to develop intuition for the trade-offs that have not yet emerged. You want to be less wrong as early as possible for as little cost as possible.

Being less wrong is about testing and iterating. While useful in all three phases of startup building, it’s most critical to invest in being less wrong during the Insight Generation Phase.

The first hypothesis to be less wrong about is YOU building THIS business. You want to quickly disqualify yourself from the obligations of a future that isn’t the best use of your life. Backcasting helps identify obstacles far enough in advance to brainstorm possible ways around. This works best as an iterative process to inform resource allocation, hiring strategy, and tempo across the three phases of building. Each new insight can influence your strategy. It also shapes what you see as possible from the next vantage point.

Discovering what's possible on a small scale within a domain can increase the chances of creating something novel. It also reduces exposure to paths with no value.

Examples of learning as much as possible for the lowest cost at different phases:

1. Insight Generation Phase: Hacking on the side for months before quitting your job and losing access to critical cash flows that support your family.
2. Customer Acquisition and Engagement Phase: Having willingness-to-pay conversations with potential users or creating design partnerships to test prototypes before overinvesting in a solution.
3. Scale and Expansion Phase: Improving the quality of future hires through conversations with high performers in that role to understand how they help with aspects of the business you’re less familiar with

When backcasting it’s fair to assume that every startup idea has been considered. As a founder, your job is to explore every corner of the idea maze to understand where others got stuck, what assumptions or lack of technical developments lead to poor outcomes, and then ideally stumble into paths few others know exist. Minimally you want to learn enough to stop wasting time on the wrong idea as quickly as possible.

That time spent in the maze combined with your skills and perspective brings clarity to the map you’re creating. The path forward materializes, making it easier for people to see what you see and help you accomplish it. Doing this well has two payoffs. First, it creates a more articulate vision of the future to attract people and capital. Second, it generates better ideas for de-risking the next phase of the journey.

Personal Backcasting to Be Honest with Yourself

Early and iterative backcasting from the personal perspective is also important. How can you learn as much as possible about whether you want to spend your time, money, energy, and social capital in THIS journey?

An example that can work for anyone is to write a letter from the perspective of your future self 10 years from now. The letter is to your present self, expressing gratitude for who you are and the decisions you made to create that life 10 years in the future.

What do you see? Who are you with? What are you excited about? Who is co-creating with you? What have you accomplished? What was deprioritized?

What skills and relationships will you need? What systems are you relying on to stay healthy and present? What sacrifices are necessary to make that happen? What trade-offs are not acceptable? Is this still a good idea for YOU?

Another example is the Wheel of Life, shown below. Imagine placing a dot on each spoke of the wheel to indicate your current relationship with that area of life. Then imagine repeating the exercise each year while building your startup. How might your wheel change and how will it feel to be the person living that future and being faced with those trade-offs?

World class performers visualize future success to execute in the moment. They know the feeling of the starting line and the smell of the arena. Definite optimism in spite of the unknown is a hallmark trait of founders for a reason. Backcasting offers similar superpowers. The more time you spend meditating on the future the more natural it will feel when you get there. Behaviors which support that future will feel more intuitive, helping you become the type of person who will increase the odds of what they claim to care about.

A Future Aligned and Intertwined

It is unwise to climb Mount Everest in a single push. Climbers move methodically from one basecamp to the next. They study the terrain and prepare for the environment. Their ambition to reach the peak does not overshadow the importance of a sustainable pace and resource utilization.

The goal is to backcast an intertwined vision for the business and your personal life. The commitment to build a company isn't just an obligation on your present self to push the ball forward. It's an obligation on your future self to be in a position to receive the ball and do something useful with it so your prior efforts weren’t in vain. The more ambitious the vision, the further this obligation extends into your future. And depending on the financing strategy, it may require working on tasks you don’t like at a breakneck pace over a long time for modest cash compensation.

Whether you can see your vision through to the end depends on your ability to problem-solve in a sustainable way. Even if the end isn’t a life-changing financial outcome, there can be progress in other areas that are important to you. Alignment ensures that.

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For someone drawn to the frontier, one of the worst possible experiences is being right and not executing against the vision because of a lack of endurance - financially or energetically.

Being at the early stage of a business pushing towards a frontier is fundamentally different from most jobs. This is especially true for a business that has not proven product-market-fit or received funding to scale.

You don’t get rich working at early-stage startups because of salary, bonuses, and benefits. Wealth creation happens through equity ownership in a growing business. Cash compensation is lower than similar roles at mature companies and the future value and liquidity timeline of equity is more uncertain.

Unless you are independently wealthy or are supported by a significant other, personal cash flow burn will significantly affect your startup building experience. Just like a business has a runway for upcoming endeavors, you will need to cover the projected financial costs of life experiences outside of the business.

It pays to be as rigorous with planning on the personal finance side as you are on the business side. While trying to be less wrong, you also want to avoid being right but running out of resources before you capture the value identified in each phase of the business.

Lean on backcasting to consider what life will require of you for the duration of your commitment toward building. While timelines are uncertain, it’s often true that the farther along the frontier or the more non-consensus your idea is, the longer you're likely going to wander the wilderness. 

A useful but non-exhaustive list of questions to ask yourself:

• What personal investments are you ready to make? 
  • How much cash do you have saved? 
  • How long does it support your lifestyle? 
  • Is your cash savings structured in an appropriate way? Do you have systems in place to keep you focused on your unique role as founder?
  • What does the total risk profile of your investment portfolio look like? Are there any adjustments to improve your margin of safety?
• Are you fully prepared to take lower cash comp for an open-ended period of time? (Particularly important if you’re considering bootstrapping) 
• How long can you and your family take this bet? 
  • What financial sacrifices can be made? At what points will frictions emerge? 
• What is your opportunity cost? What would need to change, how, and on what timeline?
• What business milestones need to be hit for your personal finance situation to “normalize” if you’re making sacrifices to get things started? 
• What dials can be adjusted to influence various financial risks associated with your journey? 
• How can you create buffers to allow extra time to see your ideas come to fruition?
  • What are the “break glass if” scenarios?

The goal is to understand how dedicating X years to your company affects your personal finances. Then, plan your next economic steps accordingly.

And don’t forget about future co-founders and teammates. They will ideally be following similar exercises to prepare for their startup journey. And it’s important that everyone is economically positioned to be all-in on the business for as long as it takes.

A new frontier is rarely reached alone. On the journey through the three phases of a startup, the composition of the early team is as critical as the idea itself. The success of a company relies on congruence across the team to increase the odds of success and mitigate detrimental outcomes. As a founder, creating a compelling vision and clear map forward can reduce risks for the necessary people to join your mission.

Your backcasting exercises and the stage of your business will inform who is the right fit. Across all stages you’re looking for people with a shared belief in the importance of the future you’re building, a passion for filling in the gaps of what’s needed to manifest that future, and alignment on the strategy to get there. But assembling a team with the right temperament and risk capacity for the earliest stages is unique for every startup.

Progress can be slow and daunting at the beginning. It may take years for traction to emerge and even longer before an opportunity to convert equity value into cash. The duration and ambiguity of these commitments is a major reason why building startups is difficult.

Understanding what drives potential team members is crucial. Their vision, the economics they need, and their engagement with the business must complement the phase of the company. Overlooking misalignment in an attempt to speedrun the early phases of building a startup can undermine the entire journey.

Every startup is unique so your fact pattern and vision will determine the specific criteria for your search. But a rational approach to the inherent risks of participating at a given company stage is non-negotiable. Here are a few items to keep in mind:

• Does their desired compensation split of cash and equity align with the current stage of the business, current market comp, and their ability to drive business value? Do they have awareness of how their comp expectations impact the business?
• Whether or not they have experience in a similar role or at a similar stage, are they willing to do what’s needed for THIS business at THIS time?
• How else can you learn as much as possible about the compatibility of this founding member or teammate before hiring them?

The right team members recognize the challenges of early startups and align their expectations with the company's long-term success. They understand that their contribution is pivotal. They too have personally prepared for the risks of joining an early-stage venture, showing sincerity about the opportunity and commitment to the mission.

The default path for business growth is to keep expenses below revenue growth to continue reinvesting in scale. However, founders often seek a range of investors to help fund their journey with the goal of eventually becoming profitable. Friends and family, angel investors, crowdfunders, and seed funds all invest in founders at the early stages to delay the need for immediate profitability.

The primary purpose of raising capital is to fund high capital expenditure businesses into production scale ventures or to beat a better capitalized competitor to market. Financing can also bring the future into the present more rapidly than bootstrapping would allow.

There are various ways to get capital into an early-stage business: notes, SAFEs, equity rounds, and more. Each mix of investor and investment type introduces a complexity of incentives and rules.

Alignment remains the most important task for the founder. Make sure the financing strategy matches the phase, growth potential, and realities of the business. Also, consider the team's capacity to cover distance and terrain to make it happen at varying levels of funding.

Venture Capital Incentive

In the modern entrepreneurial landscape, venture investing is a way to subsidize expeditions into the business frontier. But, it's crucial for founders to discern whether this fundraising path aligns with their vision for the business. 

Professional investors make parallel bets. They’re investing in many companies per year from a fund that invests for many years. Their outcomes follow a power law distribution. A few successful investments will account for most of their returns. Funds are less concerned about any given company being successful and are more focused on the companies that prove likely to “return the fund”. They hope one company does and prioritize that optionality with as many of their promising companies as possible.

While the VC spreads their risk across multiple bets, the founder is making a single bet with this startup; their outcomes are binary rather than distributed. Which brings us back to the importance of the exercises outlined earlier in this piece. You cannot get your time, money, energy, or life back. And accepting venture capital checks obligates you to this startup, pivot or not, for several years. The less work you have done in the Insight Gathering and Customer Engagement phases, the less likely you are to know for sure that YOU should be building THIS business with the baked in obligations of venture incentives.

The path of venture fundraising brings specific investor expectations and requires navigating fundraising trends. Ultimately, an investor needs to understand how their capital will position a business for the next milestone. This could be reaching profitability or the next round of financing. Their priority is to pursue paths that lead to the largest outcomes even though the founders may want to focus on different priorities.

Most businesses are not positioned for “venture scale exits” – typically a return that is multiples of the invested capital. But such exits are needed given the business model and risk profile of venture investors. If you can't commit to holding up your end of the bargain for investor incentives, consider alternative paths to get your business off the ground. Be especially wary of these commitments before you are confident that you want to bet your life on this idea, because raising a few million dollars obligates several years of it.

Thinking About Dilution

A common misconception about fundraising is that it drives dilution. This is technically correct but not the full truth. Dilution actually happens based on the allocation of capital. If capital is allocated such that the value of the business grows beyond the impact of the dilution, stakeholders are still better off. A smaller slice of a bigger pie is often worth more than a bigger slice of a smaller pie. Dilution happens when the value creation from new capital does not outpace the reduction in ownership percentage of stakeholders from the fundraising event. 

Intentional fundraising matters as does efficient allocation of capital to get to the next leg of the journey. For example, fundraising too much or too early in the Insight Gathering or Customer Engagement phases is more likely to lead to inefficient capital investment because founders are forced to prematurely spend money. Life then becomes harder down the road with a track record of irresponsibly allocating cash and equity which lowers your early investors’ probability of winning. Learning as much as you can for the least possible cost is a critical skill - the art of being less wrong as early as possible. Especially when taking venture capital.

Valuation Traps and Metric Expectations

The frontier doesn’t come with GPS guidance or rerouting recommendations to save time on your trip. And unlike the real world where relying on maps for traversing well-known territory is helpful, in the startup space you will not get far trying to pattern match success. Resist the temptation to evaluate yourself based on measures that don't apply to what you're doing. For example, fundraising achievements and team expansion may bring external validation of growth. However, they can distract from the specific needs of your business and in some cases be detrimental. There are embedded obligations lurking all over.

Don't let other people's decisions push you down a path that isn't meant for you. For example, a venture firm that raises a massive fund wants to write massive checks. Massive checks require massive valuations to limit dilution. And massive valuations require herculean efforts to grow into. Herculean efforts naturally lead to a lot of spending and hiring. This can happen before hypotheses have been sufficiently tested. Once you have the money it's hard to spend as little as possible to be less wrong. Going fast down the wrong paths doesn’t translate to meaningful progress. Success along the wrong dimensions can make it more difficult to operate in alignment with what you set out to do and why.

Even if you can get access to some liquidity on your equity at high valuations, it can put the company’s long-term trajectory in a perilous position. The terrain you have to overcome depends on our current positioning and the obligations you make for yourself. If growth in equity value was “given” before it was “earned”, the future team will need to work a lot harder to bridge the gap. A founder's ability to attract talent will be directly influenced by their ability to grow the value of a new hire’s equity and that person’s clarity on how their participation will create value.

Stakeholder Alignment and Maintaining Control

Understanding and aligning incentives is paramount. Engage with investors whose incentives complement your mission. Work diligently to maintain this harmony. Achieving this cohesion isn't easy but it's essential for lasting success and impact.

The legal terms of fundraising documents will shape your life. It's important that they support your vision for the future. With appropriate counsel, backcasting can help strategically position the business, narrative, and trajectory to align with your ideal terms. Being well reasoned going into negotiations makes a difference.

How do these terms influence control and board composition? What exit opportunities can be blocked based on these terms? Under what circumstances can I be fired as founder? What does the investor’s time horizon look like and where are they in the fund lifecycle? Will the founding team be permitted to sell a portion of their equity at future fundraising? 

It's crucial to ensure alignment between your business's fundamental needs and the VC's incentives. Choose investors who understand your business and only agree to terms that support growth without sacrificing a company's core mission. As a founder, keep your eyes on the horizon and look beyond immediate gratification of fundraising milestones. 

Bootstrapping: The Path of Autonomy

Bootstrapping allows founders to maintain control and grow at their own pace. However, it requires a clear-eyed view of the challenges and assumes a slower growth trajectory. This path suits those who can sustain the business until it reaches profitability or product-market fit without external capital.

It also limits participation to those who can afford those risks. The lack of cash flow and economic uncertainty will be too risky for many potential team members. Even though venture capital does not inherently increase the odds of success, the capital can provide cash flows to bring in the team who can help the business succeed.

Bootstrapping does provide upside but it may require a creative lens. Until a business becomes cash flow break-even, any distribution of capital as salary or benefits is a form of liquidity. Compensation cannot happen until there are excess cash flows from the business due to success. This is because the business lacks the capital necessary to fund compensation.

Bootstrapping can be an effective strategy, especially in the earliest stages of being less wrong - methodically working through the Insight Gathering and Customer Engagement phases. It allows a founder and early team to control their destiny much earlier in the process. It also allows the team to layer evidence they are on the right track, positioning for stronger fundraising terms in the future.

The equity value of a successful venture will create materially more wealth for a founder and early team than almost any other endeavor. Founders need to get comfortable making decisions with limited information, but that doesn’t need to be the case with equity and exits.

The outcomes and strategy depend on business type, fundraising approach, and company vision. To make sure you’re well equipped, an overview can be helpful.

Founder’s Stock and Employee Pool Design

The founding team and sometimes key early employees get access to Founder’s Stock (Restricted Stock). It is important to allocate equity at the early stages. This includes appropriate vesting schedules and terms. Each round of funding will require adding more shares to the “employee pool” to incentivize new hires. It will also allow equity refresh grants to the existing team. The types of equity created throughout a startup’s life depend on the company’s stage and its investors’ incentives. As a venture-backed startup makes progress and takes on additional financing, the company will likely issue Restricted Stock, Incentive Stock Options, Non-Qualified Stock Options, and then Restricted Stock Units. Each equity type has a time-based incentive for equity upside. However, the functionality, tax implications, guiding regulations, and embedded desires and concerns are vastly different.

Backcasting can also help you anticipate the equity necessary at each milestone to bring on the appropriate people. Investor documents will likely have a boilerplate employee pool framework. Make sure to adjust it based on your business's needs. It all depends on the team you’ve built. It also depends on what you have proven so far and how much risk is involved in reaching the next milestones. The amount of equity one gets is often inversely correlated to the amount of cash they require from the business. This includes total cash out, not just base compensation. Cash and equity should be allocated in service of getting to the next milestone with an eye toward what comes after.

Paths to Exit and Exit Dynamics

Companies that endure will either stay private, go public, or get acquired. But it is harder for companies that stay private to offer liquidity for the team. And venture investors are unlikely to be satisfied without the ability to convert their investment in your company back into cash for their LPs.

An exit via acquisition is nuanced. A founder’s desire to sell can often signal a lack of belief in the longer-term value from the person with the most information and upside. You’ll often see acquisition by entities with a pre-existing relationship with the company or founder, because the founder has nurtured that path to exit.

Acquisitions can be complex as well because deal terms vary wildly, and not always in a positive-sum way. Is the deal stock for cash, stock for stock, or some mix? Are all stakeholders treated fairly or are some people getting screwed over? Does the team get accelerated vesting or how long will they need to stick around to retain their equity value? Alignment with the right buyer will impact the quality of the exit nearly as much as the price.

However, the incentives and terms of prior investment rounds may make selling your startup more difficult. This can happen because of an unattractive cap table or due to dissent among a controlling stake of shareholders. Generally, venture capital expects home runs. If a business shows signs of having IPO potential, that will be the direction their influence nudges the business toward.

Consider the return investors are looking for at your phase and in your market, and then identify the financing structure that works best. It should support the necessary growth to get to the next level. Study the exit sizes in your domain/market. Understand what outcomes are small and large. Learn what business metrics it takes to get there and what pricing models work. Back into your metrics, realistic growth targets, and see what outcomes look like.

Venture-backed startups usually generate the most wealth for founders when sold before the series A. The business is cheap enough for larger companies to buy. It’s also early enough that the team hasn’t suffered much dilution. But selling before the series A forgoes the experience and opportunity of exploring deeper into the frontier - at least with that specific venture. Which may or may not align with your ideal future when founding the company..

After raising a series A, investors may introduce serious hurdle rates for exit valuation to ensure a minimum return on invested capital. They can even block acquisition if the founder wants to sell for a life-changing exit. When your business smells like the outlier that drives power law returns for the venture investor, their duty to LPs is to help realize that possibility. Their duty is not to the founder. The dilution that impacts ownership percentage at exit is shaped by the terms of each fundraising round needed to exit. There is a saying in venture “tell me the price and I’ll tell you the terms”, so be careful what you ask for.

Everything can be trending in the right direction but the exit terms could screw employees, investors, stakeholders, or everyone. Investors and acquirers can propose these terms. However, founders must always agree to them.

Keep incentives top of mind. It is painful for a founder if their startup goes to zero. For a professional investor, it’s just one of one hundred shots on goal. Any exit for a founder may create life changing wealth, for an investor only major exits move the needle.

Exits are a difficult dance. If you are leading the company, your energy and commitment to building sets the tone for the team. The longer a company goes without offering liquidity, the harder it may be for the team to continue participating. Keep yourself honest about how bought in you are and when it makes sense to exit.

Closing Thoughts

The future isn’t knowable and this essay isn’t intended to indicate it can be. Not every potentiality can be preconceived and used as leverage. But there are lessons and frameworks that increase our odds of success.

Alignment is everything. Lead with authenticity in pursuit of your mission and surround yourself with great humans. This goes beyond your core team to strategic advisors, in life and in business. When possible, bring in business attorneys, finance/tax pros, those ahead of you on a similar journey, and even performance/life coaches. It’s important that these professionals are loyal to you and help you execute along your journey. A personal board of directors beyond your investors.

As you stare into the frontier you hope to travel, be honest with yourself and others about the obligations you are creating. Spend time thinking about all the ways your business and personal life could be thrown off by your exploration and organizing your resources to increase your chances of making it through. And be thoughtful about risks that can prevent you from venturing out ever again. 

The future is manifested by passionate, strong-willed individuals. If you are one of those people with one of those ideas, consider what the world will be missing if you don’t follow your inspiration into the frontier.

Special thanks to our founder friends and the Upstart team who helped clarify our thinking for this piece.

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