Casey’s Guide to Finding Product/Market Fit: Deciding How Much Equity to Give Your Key Employees

Casey’s Guide to Finding Product/Market Fit: Deciding How Much Equity to Give Your Key Employees

Introduction:

Finding product/market fit is crucial for the success of any product. It is the point where a product delivers value to its customers and experiences sustained growth. In this article, we will explore the concept of product/market fit and discuss the importance of measuring retention and new user numbers. Additionally, we will delve into the different approaches to building a successful product and the role of customer feedback. Finally, we will touch upon the topic of equity allocation for key employees and the trend of longer vesting schedules.

Product/Market Fit and Measuring Retention:

Product/market fit can be defined as the satisfaction that allows for sustained growth. It is important to note that customer expectations are never static; they constantly evolve and increase. Therefore, product people should focus on growth and connecting people to the value of a product once it has been confirmed that the product is delivering value. Product/market fit is not when customers stop complaining and are fully satisfied, as they will never be fully satisfied. Instead, it is when customers stop leaving. Measuring retention is the best signal of product/market fit. A flattened retention curve of the key action at the designated frequency, along with month-over-month growth in new customers, is the best way to measure true product/market fit.

Different Approaches to Building a Successful Product:

There are two main schools of thought when it comes to building a successful product: the Eric Ries model and the Keith Rabois model. The Ries model emphasizes talking to customers early and often to understand their pain points and build something valuable. The goal of launching a product in this model is to generate feedback from the target customers. On the other hand, the Rabois model starts with a strong vision of both a problem and a target solution. Customer feedback is less important in this model, as the focus is on achieving the initial vision that sparked the creation of the product. Both approaches have their merits and can be combined to create a dominant combination. A strong vision combined with market feedback is often the key to success.

Equity Allocation for Key Employees:

Deciding how much equity to give key employees is a crucial aspect of building a successful company. According to James Currier, a managing partner at NFX, after a seed round, it is recommended to allocate around 10% to 12% of the employee pool. The allocation varies depending on the role and experience of the employee. A senior engineer may receive as much as 1% of the company, while a junior engineer may receive 0.15%. Business development employees can expect a range from 0.35% to 0.05%, depending on their experience level. It is essential to strike a balance between attracting and retaining talented employees while maintaining a fair distribution of equity.

Longer Vesting Schedules:

Traditionally, employees had up to 90 days after leaving a company to exercise their options. However, longer vesting schedules are becoming more common. This change is driven by the need to retain employees to build something great over a longer period of time. By extending the exercise period well beyond 90 days, employees are given more flexibility and are less likely to end up with nothing. This trend reflects the understanding that building a successful company takes time and that options are a crucial tool for retaining talent.

Conclusion:

Finding product/market fit is essential for the success of any product. Measuring retention and new user numbers is a reliable way to determine if a product has achieved product/market fit. Different approaches, such as the Eric Ries model and the Keith Rabois model, offer valuable insights into building successful products. Additionally, determining the appropriate allocation of equity for key employees is crucial for attracting and retaining talent. Finally, longer vesting schedules are becoming more common as they provide employees with more flexibility and ensure that they can benefit from their options even after leaving a company.

Actionable Advice:

1. Continuously measure and analyze retention and new user numbers to determine if your product has achieved product/market fit.
2. Combine a strong vision with market feedback to create a dominant approach to building a successful product.
3. Carefully consider equity allocation for key employees, striking a balance between attracting and retaining talent while maintaining fairness.

By implementing these actionable advice, product teams can increase their chances of finding product/market fit and building successful products.