Y Combinator Startup Podcast - #146 - Startup School Week 5 Recap - Kirsty Nathoo and Kevin Hale

Episode Date: October 2, 2019

We've cut down the fifth week of lectures to be even shorter and combined them into one podcast.First a lecture from Kirsty Nathoo. Kirsty is a partner and CFO of YC. Her lecture focuses on the most common mistakes startups make with their finances and how they can avoid making them.Then a lecture from Kevin Hale. Kevin is also a partner at YC and he’ll talk about the importance of building a successful working relationship with your cofounders and processes you can use to do so.Y Combinator invests a small amount of money ($150k) in a large number of startups (recently 200), twice a year.Learn more about YC and apply for funding here: https://www.ycombinator.com/apply/***Topics00:00 - Intro00:38 - Kirsty Nathoo - Startup Finance Pitfalls and How to Avoid Them2:08 - #1 - Not knowing what to look at: bank balance, money coming in, and money going out2:56 - Burn3:41 - Runway4:59 - Growth rate 5:48 - Default alive - http://growth.tlb.org and http://paulgraham.com/aord.html8:09 - #2 - Not looking often enough: every week9:04 - #3 - Under-Representing Expenses 12:27 - #4 - Out-sourcing responsibility15:11 - #5 - Scaling too quickly20:08 - #6 - Letting runway get too low before fundraising - https://blog.ycombinator.com/advice-startups-running-out-of-money/ 23:21 - Kevin Hale - How to Work Together24:49 - Everyone fights25:43 - Four things to avoid: criticism, contempt, defensiveness, stonewalling27:40 - Make a plan before you fight: divide and conquer31:11 - Know thyself - https://www.youtube.com/watch?v=2s9ACDMcpjA34:12 - Document a process36:20 - Use nonviolent communication37:19 - Observation vs evaluation39:16 - Emotions vs thoughts - https://www.slideshare.net/nonviolent/evaluative-words-list-nonviolent-communication41:50 - Universal needs43:38 - Requests vs demands45:46 - How to Deliver Constructive Feedback in Difficult Situations - https://medium.com/s/please-advise/the-essential-guide-to-difficult-conversations-41f736e63ccf46:01 - Pay down your emotional debt47:18 - Practice having level 3 conversations

Hey, how's it going? This is Craig Cannon, and you're listening to Y Combinators podcast. Today's episode is a recap of the fifth week of startup school. I've cut down the fifth week of lectures to be even shorter and combine them into one podcast. First, we'll have a lecture from Kirstie Nathu. Kirstie is a partner in the CFO of YC. Her lecture focuses on the most common mistakes startups make with their finances and how they can avoid baking them. Then we'll have a lecture from Kevin Hale. Kevin is also a partner of YC, and he'll talk about the importance of building a successful working relationship with your co-founders and processes you can use to do so. All right, here we go.

Morning, everybody. Thank you for coming in at 9 o'clock. It's an early start. So as Kevin mentioned, my name is Kirstie Nathu, and I'm the CFO here at Y Combinator. So I've actually helped now 2,000 companies almost as they've come through Y Combinator. So seen a lot, seen a lot of successes and seen a lot of failures. So I'm going to help you just understand some of the big mistakes that we see some of these companies doing based on their cash, based on their money. And so for every business, whether it's a startup or a mom-and-pop shop, cash is it's lifeblood.

And if you run out of cash, then the business dies. There's really no going back at that point. And it's actually surprisingly easy to run out of cash. We see many startups not realize that they have done that until it's too late to have. actually be able to turn it round and do something about it. So we're going to talk about these three early stage pitfalls. So this is probably most relevant to you right now. And then we'll talk through another three that as you start to raise money and are starting to think about hiring some other mistakes that companies make. So we're going to look at what the numbers you should be

looking at, how often you should be looking at them, whether your expenses are realistic, and then thinking a little bit more about hiring and looking at responsibilities. All right, so let's move on to the first one. So the first mistake is really not knowing what numbers to look at to make sure that the health of your company is good. And really, there are three things that you should know. Your bank balance, the money coming in and the money going out. And these are not difficult.

You don't need anything fancy to be able to do this. This is all information you can get from your online banking or your bank statement. You don't need bookkeepers, you don't need financial software. This is super straightforward, but you would be amazed at how many companies don't look at this. And then using these three numbers, you can then calculate some other things. You can look at burn, you can look at your runway, you can look at growth rate, and you can figure out whether the company is default alive. Okay, let's go through these in order.

your burn is purely money in minus money out again you can get this from your bank statements it's effectively just the change in bank balance between two dates here's an example super easy you have 25k expenses you have 10k of revenue so your burn is 15k if your expenses are a little bit lumpy some companies you know you might have a one-off month where where you i don't know paid a legal bill or something that's super high. You can do this. You can look at average expenses as well to figure out your burn.

And that's often referred to as average burn. So you might look at it over three months to kind of get more of an idea. So then once you know your burn, then you can start to look at what your runway is. And what this means is how long do you have until you run out of money? And the way that you calculate that

is you look at your existing bank balance divided by your average burn. and that gives you a number of months. So here we have 150K in the bank. We've just calculated our burn rate to be 15K. And so we have 10 months of runway. Again, super straightforward, but you'd be amazed at how many companies

or how many founders don't know these numbers for their company. And just a point here that, again, the burn might change over time, but this is a number for you. This is not a number to try to make things look good. This is for you to not lie to yourself. So looking at the burn and going, well, this month it was 15K,

but let's just pretend it was 10K, so then that makes it look like that we have 15 months of runway left. All you're doing is lying to yourself. You're still going to run out of money on the same day. It's just making you feel better right now. So it's super important to really be honest with yourself. on these. You can also look at your growth rate. And so this is just looking at two periods of

time. So your money in in month two minus your money in in month one divided by your money in in month one. So this is looking at the rate that your revenue is increasing. So in our example here, we have 10k of revenue in July, 12k in August, and so our growth rate is 20%. And just a note for the people that weren't the math wizers at school, a constant growth rate is what's going to give you the J curve in growth of revenue. Because if you have 20% growing each month, as your numbers increase each month, that 20% is a larger number.

Okay, and then the final one is whether the company is default alive, or the other side of it is it default dead. So the way you calculate this is if your expenses are, constant and your revenue growth that you've just calculated continues, have you got enough cash to reach profitability? And there's a handy little calculator that Trevor Blackwell, who's one of the founders of Y Combinator, created for you to do this. And basically, there are three things that you can play with. So you can look at your monthly expenses, which is the red line. You can look at your monthly revenue starting point, which is the green point over at the start. And

and then you can change the gradient of that line to be your growth rate, and it will calculate where you become profitable and how much capital is needed. Now, this example isn't the same numbers as the ones that we've just been working through. So in this example, this is assuming that you will need 150K of money to get to profitability, and it will take you two years. And so those are really key things to know, because if you only have 100K of money in your bank account, you know that you've got a problem,

and you know that you either need to find a way to increase your revenue growth or you need to find a way to cut expenses. Because the whole goal here is to be at the point where you can find a path to profitability because it gives you freedom. Being profitable gives you freedom because you aren't in a position to need to raise money. And kind of like dating,

if you don't need to raise money, you appear less desperate, so the investors want to give you money more so it's easier to raise money. So it's actually really important to have that option. It can sometimes, you know, it can be a switch as well. You don't have to necessarily be profitable right now. But if you know that you could turn off one specific expense or do one specific thing and be profitable, then that's also a great safety net.

There's also a really great essay that talks about this in more detail. This was written by Paul Graham. And you can see the link here to. to where that, that gives you more information on this. And again, it's the kind of thing that when we're doing office hours with founders, it's one of the first questions we ask. And you'd be amazed how many people don't know the answer. These numbers, super easy to calculate, super straightforward.

The next problem is that people go along and they say, okay, I've looked at my runway, I've looked at my revenue, I know all my numbers, and then kind of forget about it. But actually, this needs to happen pretty often. You shouldn't be looking at it every quarter or every month. You should be looking at it at least every week. And if your runway is getting low or things are looking not very constant, consistent, you should be looking at it very often, like sometimes daily.

And whenever anyone asks, you should know your numbers. Have a think now. How many of you know how much money is in the company bank account if you already have one? Great. How much of you know your runway? Slightly less numbers, slightly less hands. But that's pretty good. I like it.

I'm impressed. Okay, the next one is under-representing your expenses. So if you think back to that default to live calculator, that assumes that your expenses are going to remain constant. And actually, in reality, that's probably unlikely. Most startups, their expenses will ramp up over time. And you should understand how, that's going to happen. You know, what kind of expenses are going to increase and what are they going

to increase too? So some examples of expenses that may change over time is the first one is undervaluing your own time, particularly in the early days where you're doing everything and you're either paying yourself minimum wage or some very small amount, which, by the way, in California, or everybody should be paying themselves minimum wage. And you're also doing things that don't scale in order to acquire users. And that's totally fine, and that's what we recommend that people do. But it can make your customer acquisition costs

look lower than really they are. And so you should be aware that over time, as you start to hire people to look into these, that those expenses are going to go up. Hiring people is not just their salary. For every person that you hire, you need to provide them with equipment. You need probably desk space.

you need health insurance probably, depending on where you're based. And so all of these things cost extra money on top of the salary. And so depending on location, a good rule of thumb is that an employee will cost about 25 to 50% more than just their salary. So if they're being paid 100K a year, then your fully loaded cost to the company is going to be somewhere between 125k to 150k. And again, that's super easy to forget about. You think, oh, I'm going to hire an engineer.

I'm going to pay them 100K. That means, you know, that's all that's going to cost. But it's amazing how those numbers do add up. So just be aware of those. Finally, assuming paid acquisition costs remain constant is another mistake that we see people make a lot. Whilst it may not seem like this, oftentimes in the early days,

it's actually easiest to find your own. users because they're the ones that are totally motivated to use the product. And actually over time, it gets harder to find and convert users. And so the cost of doing that goes up. And so again, you should be thinking about that. You should be looking at what your costs are right now and thinking, are they reasonable? What do we think they might go up to? Because if you can look at things in the worst case scenario,

and you have, you know, in the worst case scenario, you calculate that you have eight months of revenue, eight months of runway left, but actually then things are better than that and you end up with ten months of revenue, then that's bonus, right? You've got a bit longer to figure things out. Runway is not a vanisymetric.

It's not one of these things that's supposed to make you feel good. It's not one of the things that's supposed to be used to compare yourself against other companies. It's for you to know the health of your company. And so don't ignore this stuff. Don't lie to yourself. Don't try to massage these numbers to feel like it's making yourselves better because all that's going to happen is you'll run out of money and it'll become a shock. All right.

So these ones now are starting to get a little bit more as you raise money, as you're starting to hire people. So it's good to bear in mind right now, but these are probably less relevant to a lot of you for now. Okay, the first one is outsourcing responsibility. And often the CEO will hire a bookkeeper to prepare the finances for a company as they start to get a little bit more complex. And that's a total normal thing to do. We recommend that people do that. It's usually once people raise some money, it's not a good time. It's not a good use of the CEO's time to be doing the books.

And the CEO can be doing much more high leverage things. But the thing to bear in mind is that even though the bookkeeper is doing the books and preparing those numbers, the responsibility is still everybody is in the company, particularly the CEO, but all the founders, everybody should know what these numbers are. An external bookkeeper isn't going to know the business like you know the business. You know, oftentimes they will, the way that they work is that they will get hold of bank statements and they'll see money coming in and they'll see money coming out and they'll do their best guess about what these things are and they won't always be right.

And you can't really expect them to always be 100% right because they're looking at it from a very removed position. And so it's up to the founders and it's up to the team to look at those reports that the bookkeepers send every month and to make sure that you understand them and to make sure that if anything that comes through that looks strange, you question. It's not necessarily, I think a lot of it is that people are concerned that asking questions will make it look like they don't understand their numbers. But usually what happens is if you don't understand what these.

numbers are looking like. It's usually because there's, there's been some misunderstanding in the reporting of the numbers. And so if you're like, well, I thought my revenue was going to be a bit higher this month. What's going on? Why is, why is this, you know, why is this this number? Then you can actually go in and look and query what's, what's going into that. And, you know, you might find that there has been a mistake made. And this is, this is probably one of the number one things that I get founders coming to me complaining about. They'll come up to me in this total panic. And I'll be like, the bookkeeper messed up and they told us all this wrong stuff and now I don't know I have no runway and I don't know what's going on. And actually what happened is the bookkeeper sent them the

monthly reports. They were like, tick, done my work. Founders didn't look at the reports, didn't figure out what was going on. And now there isn't enough time left for them to turn the business around either to get profitable or to raise money to figure things out and the company dies because it runs out of cash. So super, super important to be on this all the time. Hiring too quickly and scaling the company too quickly is a, it's really easy to do to hire too quickly because you're under a lot of pressure to hire people. It feels like it's a, it's a really easy, really measurable piece of information. You know, you talk to founders and want to of the first questions that they will often ask is, oh, so how many employees are you at right now?

And you say, oh, I'm at 25 and you're thinking, oh, no, I've only got 10 employees. That means they're, you know, way more successful than I am. And actually, that's totally not true. So we already mentioned that hiring employees cost more than just their salary. But you should also be conscious that every hire is actually an investment into the business. and you should be making sure that you're getting a return on that investment. And now for some types of employees, that's super easy to measure. So, you know, think about a salesperson.

If they're not bringing in more sales than it's costing the business to hire them, then clearly you're not getting a good return on investment. But then think about a community manager or a support manager. It's much harder to measure that. And that's kind of one of the things that as a CEO, you need to be looking at and you need to be figuring out to make sure that all the people in your company are actually working to make the company more valuable. And sadly, this is the point where, you know, if people aren't working out, you should be

prepared to fire fast. You know, if people aren't pulling their weight, then they need to leave the company. And like I say, it's easy to fall into this trap that the more people you have, the better you're doing. But actually, the best companies do more, with less. And so actually, the real way that you should measure yourselves is what's my ratio of revenue to employees? Because the higher that is, the better you're doing. You're doing more with less. And that's the path to being profitable from an early stage, which then takes the pressure off to the worry about whether the company is going to continue. And it's also easy to feel like you have to kind of compete with all the flashy startups that have raised bunches of money and they're all

hiring data scientists right now and, you know, oh, that means I must need a data scientist, so I'd better hire a data scientist. Actually don't. You know, again, the best companies do more with less. And if you can build a really great company with less employees, then that's amazing for everybody involved. And bear in mind, you know, you should be treating this money carefully. It's not a case of just, oh, I need to hire this person. I need to hire that person. Because what the investors who are giving you this money for, they're asking you to do something, basically a miracle. They're asking you to take their money and turn it into 10 or 100 times that amount of money to give back to them. And the way you're going to do that is by being careful with your

expenses and making sure that your revenue grows. As a follow on to that, scaling before you get product market fit is also another dangerous thing that people fall into quite easily. at the point where you're still figuring out what your product is and you're trying to find product market fit, you should be spending as little as possible. And then that will give you the runway to have time to figure out what it is that you should be building. And then, you know, people will be beating down the door to buy your product. More employees will not help you get to product market fit. It will not help you get there faster.

It will not help you get there more efficiently. And one of the conversations that I have with founders is something along the lines of, oh, my sales are low because I don't really have enough salespeople. So if I hire another couple of salespeople, then my sales will obviously increase. That doesn't sound like product market fit to me. You know, if you have that, then customers are beating a path to your door. And, you know, it feels like the wheels are falling off as you're trying to look after all. those customers. So just hiring more salespeople isn't necessarily going to be the thing that sets

that going. Also, convincing yourself that you need more developers or you need more people to get the thing that gives you the product market fit. Another conversation along this is something like, I need four more developers because then I can build feature X, Y and Z, and then obviously everybody will buy it. But again, if you have product market fit, then even your janky V-0 that doesn't have all of these fancy things is solving a big enough problem for everybody

that they're willing to pay for it and they love you for it anyway and then you can start building up on the more features. And then you can start hiring to do that. This is the one that there's no coming back from. The other ones, if you make these mistakes, you can probably solve this and you can,

you know, if you hire too quickly, you can figure that out. if you don't know your numbers, you can learn your numbers. This is the one that is, you know, no going back. So if you let your runway get too low before raising, you're going to have problems raising your money. So the first thing is you should always assume that you will never raise any more money.

Always assume that the previous money that you raised will be your last and that you should be aiming to get to profitability on that money. So again, the conversations that I have, with founders where they say, oh, it's fine, my investors are going to put in another million dollars. It'll be totally fine. That's kind of scary if you're relying on your investors to do that because they don't always. Sometimes they might, but they don't always. So Steve's stage money is the money that you'll raise off and on just an idea.

You'll be able to talk to investors about an idea for a product. You've got a hypothesis that you want to be able to check and they will give you some money. once you get to series A and beyond, that becomes much, much harder. You know, you need sustained growth, you need to have more of an idea, you need to have product market fit. This is why it's a lot harder to raise money as you go through the life of the company. And in particular, don't leave it too late because if you're running out of runway, your leverage goes down as you're trying to raise money.

So if you have six months of runway, let's say, and you think you're running out of runway, you're and you think you're about to go and start raising money, that's pretty scary. It could take three months more to actually get an investor to agree to put money in. And as your cash balances are decreasing over those three months, you know, you're losing leverage. You can see from here that probably at six months, maybe you can just about pull it off. But really you want to be thinking at 12 months runway, that's the point where you're thinking, okay, maybe I need to think about whether I raise money or whether I'm thinking about getting to profitability. And also, if you get to six months and you're unsuccessful in raising money, you really don't have a lot of time to turn

this around to get to profitability for the company to succeed. Again, there's a really great essay on our blog that goes into this in more detail. Link down here. So you can read that at your leisure and hopefully take that on board. Okay. So, in conclusion, most companies die because they run out of money. It's super easy not to run out of money just by looking at a certain number of things. Knowing your cash balance in your runway, understanding how your expenses are going to increase, understanding that the ratio of revenue to employees is a better metric than just the number of employees,

and having a plan to get to profitability because you should assume you're not going to raise any more money. All right. Thank you very much. All right. Now for Kevin's lecture. So in a startup, founders basically have to figure out how to optimize for a relationship

that lasts for like 10 years. And that's a crazy thing to do with someone you might only know for a couple of months or have only known in a sort of work setting. And the thing is like the only models for understanding that kind of relationship actually come probably from, our parents. And so I'd like to start off with some marriage research. So this is John Gottman.

He studied his marriages in Seattle. He's been featured in this American life and a bunch of different places. And basically, he has a cool magic trick. He can watch a couple fight about something for 15 minutes and predict with 85% accuracy whether they'll be divorced or not four years from now. If he watches them for an hour and have them also, share their hopes and dreams, his prediction rating goes up to 94%. And so this is the same videos they would show to priests, psychologists, psychiatrists, marriage counselors, successfully married couples, and they don't predict better than random chance. And so John Kahnman, he's figured something out. There's something about the way we will have an argument that determines longevity. And one of the most

surprising things that he discovered was that it's not that successfully married people who will last a long time that they never fight. Turns out everybody fights. And we all fight about the exact same things. Money, kids, sex, time, jealousy, and the in-laws. And time is usually what are we going to do with our free time? And the thing that's interesting is, like, I think all of these map out to the stuff that we're going to fight about in a company.

And so you, with your co-founders, are going to have these issues. And the thing is, what's nice about knowing everyone fights and that you know what you're going to fight about is that we can make a plan for figuring out how to deal with this one situation that will determine whether we will work together on the thing that we're so passionate about down the road. The other thing that John Gottman figured out is that there's four, major things we want to avoid when we're fighting. And when we do these things, they will create sort of leading indicators that the relationship is in serious trouble. I'm going to go through

each one of these. So criticism. This is basically like you're talking with someone and you're like, hey, you know what? I have a serious concern about this bug that we are trying to fix and I'm really worried about this thing. And I'm not sure that we're going to be able to deploy on time and someone comes up and says like, well, you know what I don't like is the fact that you leave a bunch of dirty dishes in the sink. And criticism is basically this idea that we don't fight on one topic. We start trying to bring all these other issues into play instead of addressing the one issue at hand. Dangerous. Contempt. This is a pretty easy one. It's intention to insult. So basically I say like, hey, I'm worried about this bug and we're not going to be able

to deploy on time. And someone says, oh, I don't like your face. right? That's contempt. And what you want to avoid is making things personal, right? So we're in a business. This one's kind of easy to understand. It is that someone not owning responsibility about the problem. And so we can't move forward because someone won't admit that there's a problem out there. We defend that we haven't done anything wrong. And therefore, there can't be resolution between two people. if the other person thinks there's a problem. This one is a super dangerous one. And it's when basically you're like, hey, I got a problem.

And the person just walks away. Won't engage, won't talk to you. And so there can be no way to create any kind of resolution. So just as you wouldn't do this without doing some of this, we want to make a plan. And I'm going to talk about four different things that we can do that helps avoid and protect us from those four horsemen. The first one is divide and conquer.

This feels pretty straightforward, but you want to do this early in the relationship with your co-founders and the early stages of your company. So here's our list again of the types of things that we might have problems with. And in the early stages of the startup, let's say Adora and I are doing a startup together, just her and me.

Then what you want to do is just kind of say like, oh, who's responsible, what stuff? And what this will do is, like, if there's a problem in that category, then that person that we have assigned ahead of time to be in charge will be the ones that will ultimately either make the decision or ultimately are responsible. This protects us from defensiveness. So notice here on jealousy, this is about competition, usually.

And so usually, in the early stages of your startup, you should not be worried about competition. Competition is not usually what kills you in the very illage stages of your company. As your company ages, it might change and look something like this. You'll sign things to different sort of positions and heads. And as a result, then when there's problems come up,

you know basically that sort of is delegated. Now what happens if things go out of hand, even up at those sort of levels? Well, basically, what you want to do is decide after you delegate who has ownership, determine what is success and failure. You want to know also ahead of time, hey, we've divided up the task. But we also want to know is like, hey, when is there going to be interference with the person that is supposed to be leading these decisions? What is considered, like, it's success enough that we shouldn't be interfering and just let them do what they think is best. And what is considered really bad so that we have to interfere.

and something has to be done about it. So in this case, good examples would be like, hey, if we've successfully fundraised, we don't need to talk or replace the person that's responsible for that. If we're shipping on time, if we're rated top three amongst our sort of peers, or we've built a referral program that's working,

hey, we don't need to be criticizing the person that's working on the stuff or they're doing a good job. On the corollary, we want to define, hey, what are the things that basically are going to trigger conversations? Really hard conversations. Like, hey, if we hit this sort of area, we need to put the brakes on and we need to discuss what's going on and actually try to resolve these problems. A lot of people like the delegate stuff, but they don't have a way of saying, hey, when are we going to have a conversation about this when there's trouble? And these are really, really easy to do. And the reason you want to do these early while you're sober, emotionally sober, it's because once you get angry and emotions come into play,

then you might not be thinking rationally. Now, ultimately in the end, usually it's the CEO in the company who has final say. Now, you as a team can decide differently how you want to resolve it if you divvy up the stuff, but ultimately, whoever is the CEO usually is the one who resolves it. And if there's problems with the CEO, then it's the board. In the early stages of the startup, the board is usually composed of just the founding. So you have to ultimately work it out. The second defense against the force horse horseman is knowing yourself.

This will protect you from stonewalling. And what I mean is what is your attachment style? So there was all this research that was done in the 1960s about how people approach relationships. And basically, it was determined that there's sort of three major types. there's a secure attachment style. And that means basically it's like, hey, you know what, I don't have a problem going up to people,

relying on them and having them rely on me and sort of like us creating a relationship. I don't mind being vulnerable and I don't mind other people being vulnerable with me. That's called a secure attachment style. There's an anxious style. So there's a type of person that will be like, you know what, I kind of don't get enough love.

as not as much as I want. I kind of want to like hold on to people and I kind of want to have people constantly confirm with me that they want to be with me. I feel like it's a little difficult. And then there's another point, that kind of person is like, I find it kind of difficult creating relationships with people and I kind of want to run away sometimes because it's really scary or I'm worried that I'm going to mess it up. And the thing that's super important here, especially with your co-founder, is you want to know your co-founder. attachment style because that's going to dictate how you are going to be able to resolve and understand your differences. Now, what it turns out, oddly enough, is that an anxious attachment

person and an avoidant attachment person, these are the two most common in the world, there's not that many, like, well-developed, secure people out there. They tend to want to be with one another. So the person that wants to run away and the person that wants to cling. And so what you have is someone who needs space to make a decision and the process problems and tension, and there's someone who needs validation constantly, the process, conflict, and issues. And so when those two people are together and they don't realize what the other person needs, they don't realize that they're going to have to bend to sort of make it work. There's lots of good books on attachment styles. There's a wonderful Wikipedia page that covers it. I would recommend watching this YouTube video. It's from a school

of life. And what I would highly recommend is basically understanding that like if you're with someone that is of the opposite type, that you're going to have to do work either to reach across the aisle. Like if you're an anxious person, you're going to, and you're talking to an avoided person, you just have to realize like, oh, that person needs space, but that doesn't mean they're running away from you. And if you're an avoided person with an anxious person, that if someone need your attention or if you need your space, then you have to let them, I was like, hey, I'm going to be back. I realize that you're going to need an answer for this.

I'm going to go away. I'm going to figure stuff out. And I promise a time that we will deal with this. Document a process. So this will protect you from criticism. And so basically, when you're emotionally sober, it's the best time to create a process for dealing with disagreements. And the reason you want to do this is because once you're upset and angry and filled

with emotions, you are not going to be. thinking straight. And so the odds are you might say something you regret, might say something that you don't mean, and the other person might do so. And then you will have a much different problem than the bug not being fixed and deployed on time. So one of my favorite examples of this comes from the company called Matter, and they created a spreadsheet for dealing with disagreements. basically it's a disagreement decision framework and basically it just talks about it's like hey when we have a disagreement we should just document it this helps makes things really really transparent makes us understand both sides very very clearly would talk about the different options we say who

made the decision what the decision was the date was done and then rationale and so when we walk through this process if we've decided this ahead of time then it means that we are not afraid when disagreements come up it's like oh we have a process for dealing with this. And we will figure it out by filling out Excel. There's lots of different ways to do this. You don't have to follow their sort of very specific framework. They have lots of really great justifications in their article. You just have to agree ahead of time what you want to do. So therefore, when you are upset, you just go, okay, great, we have a process for this. And the process says, oh, it says, go have a time out or eat a bologna sandwich or like take a nap first.

and then we'll figure out what we have to do. It could be a process where it's like, hey, if there's a real disagreement and both sides feel equally strong, we will flip a coin, and then that will be the decision for the test of time. We will let Lady Luck decide it. It doesn't matter.

You just have to both agree. This strategy will protect you from contempt. So the way that you avoid making things personal is you have to figure out a way of communicating with another in a way that will not be threatening. There's an amazing book on this. It's called Nonviolent Communication by Marshall Rosenberg, and it helps you be honest with other people without criticizing, without insulting,

and without putting down other people. And the magic comes in the structure that feels somewhat fake for people who are not into being touchy-feely. Basically, when you're giving some kind of criticism, you want to basically have it in this format. So when some observation, I feel an emotion because I'm needing some universal need, would you be able to request? So we're just going to break down each one of these different parts. And they're all, every single one of these are tricky. And it's a thing that a lot of people will try to do and you'll spend your whole life trying to get really good at.

And it gets really difficult. So the first one is you need to make an observation versus having an evaluation. So basically, what you want to do is start your disagreement or criticism by anchoring it to something that is concrete. You do not want it to be something that is connected to opinion. It should be something that you actually saw or heard. Because therefore, you can't disagree with something that actually happened versus something I heard via rumor or something that has to do something that seems emotional or something that seems like an opinion. So I'll give you an example. An observation would be like, you said that you'd send that document last week,

and I haven't received it. All right? So that is a great observation. An evaluation that someone might say instead in the heat of the moan is that you're fucking lazy. Right? That kind of feels like an observation, but it's not. It's evaluating the person.

Give you another example. Your work is sloppy. That is not. Objective. Instead, hey, three of the numbers in this report were inaccurate. That's where you want to start. You're always late. You want to be really careful because that's a generalization. It's an evaluation. Observation. Hey, you arrived 10 minutes late to the meeting this morning. Evaluation. You ignored me. Observation. I sent you two emails and I haven't received the response. Notice, when we start with observation, we start with a fact that can't be refuted.

And so we're not going to end up arguing about something else. Notice all those other evaluations, they immediately will trigger an emotion in you. And that's why you want to be really careful that when you start this criticism, that you don't start with one of those. The next is we have to talk about emotions, right? So I saw this irrefutable observation and it made me feel something. and what we have to be really careful of is not saying thoughts, but instead talking about feelings,

which is kind of odd, but it's connected to the next point in the structure. So an emotion will be, I feel frustrated. Now, a thought would be, and it could be put in the same structure, it's like, I feel that you aren't taking this seriously. And the way you can tell if something is a thought or a feeling is you substitute the phrase,

I think with I feel, and it still works. So, I think frustrated. It doesn't work. So that's a feeling. I think that you aren't taking this seriously. Oh, that's a thought. There's a couple of emotions that we have to be particularly careful of. One is anger,

because anger is usually tied to a bunch of hosts of other things. So when someone says that I feel angry, you or you realizing that you feel angry, you want to be really, really specific about what's causing the anger, what's triggering it. The other tricky emotions are evaluative emotions. And usually what you need to figure out is what underlines that evaluation. So I'll give you an example. So I feel blamed, right? Someone else is evaluating me. I feel blamed. The impact actually is, I feel scared. Someone is blaming me, and so I feel scared. So it takes a lot of work to understand that when someone is giving me some,

if I'm feeling like some kind of judging feeling, what is at the core root of it? Other examples are, I feel judged. The actual impact is I feel resentful. I feel misunderstood. The impactful statement is actually, I feel frustrated. I feel rejected. The real impact is I feel hurt.

It's super, super, super hard. I'm going to have a link inside of this presentation to a PDF. It's three pages of evaluative emotions, impacted feelings you probably actually are feeling, and then connects us to a universal need that you need to overcome it. Which leads us to our next thing. every negative emotion lies an unmet universal need. And so what that means is that like when you're feeling one of these frustrated or blamed or scared or hurt feelings,

there's something that's missing that you're going to need. And the thing that's really tricky about universal needs is you have to be careful of realizing, is it a strategy or is it a need? and is it truly universal? So I'll give you an example, right? You might be able to say, I need a sandwich. That is not a universal need. So you have to be really careful, right?

And then you might say, like, I need a sandwich to give me nourishment. That's more like a strategy. A much better way might be. Let me see here. You might say something like, I need you to copy me on every single email.

But the thing is, that's not a universal need. That becomes very, very specific. A universal need would be, I need some transparency about this process. You have to be careful of not making needs about something that's very specific to yourself or just that situation. Because once it's a universal need, then it's something that everyone can agree that everyone should sort of have. So other universal needs are like, I need support.

and the way you turn it not into universal need is by saying something like, I need support from you. It's not everyone needs support from Henry, right? But everyone does need support. And it says you include from you, it stops being universal. So you want to be really careful of this. Okay. Request versus demand.

So at the very end, so basically we said like, hey, I noticed something that can't be refuted. I've told you about a feeling and how it impacts me. And I told you that basically it results in some universal need that we all can agree that we need to have. And now we get to saying what we'd like to have change as a result. And what you want to make is a request, not a demand. The difference is that a request is an invitation to the other person to meet our universal needs. It's much easier to be able to do than to say like, I order you to do something. So what we want to do is make it very specific our request.

So I request for you to be more respectful is not that great because who defines what's respectful? My version of respectful might be different from someone else's. Your request should be something like, I request that you arrive to meetings on time. Say what you want. Don't say what you don't want. So what a lot of people will say is that I request that you don't disqualify. dismiss other people's ideas straight away. The thing is it doesn't indicate the behavior that you do want,

and so it becomes really difficult to act on. A better one would be, I request that when a team member shares an idea, you ask two or three probing questions before sharing a conclusion. And then stay curious. And so sometimes you might make a request, and someone might say no. And what you need to do is not just freak out that the whole process isn't working. The idea is actually to be like, hmm, maybe I haven't put this request in a way that can meet more needs than just myself. Could I do this in a way so that they can understand and be on board for everyone to be sort of involved? If you want to learn more, there's a really great article on delivering constructive feedback in different situations by Dave Bailey. This is on Medium. I'll have a link to it.

I think goes into far more detail as a very, very good starting point for giving out this really hard feedback. We all know what technical debt is, right? So when we're building out software really, really quickly, and sometimes you're like, well, that's not going to scale really well, and it's going to be dirty and quick, but I'm going to get it out the door, and I'm just going to put that in the back of my mind. It's something I have to fix later. Well, in our relationships one another, you will incur emotional debt. And I'm like, technical debt, you really don't want that to go for very long. You want to pay this down every day. So it turns out, also in John Gottman's research, that it wasn't that people who were really good

at being in a marriage only fought about really big things. Turns out they would immediately bring up stuff even when it's really tiny or small. They would never let a small thing grow to be a medium thing and then eventually a big thing. They immediately will talk about it's like, oh man, can you close your mouth while you're chewing real quick? It's just like kind of bothering me right now, and then do it in a way that's sort of respectful. And so like when you're with your co-founders and you're in this really sensitive relationship and you're finding stuff that's being really troubling, like you can communicate those needs really quickly and you will prevent those small things from becoming big things. The best way to start doing this,

is the practice. So at YC, we call these level three conversations. So level one is that informal conversation. We have other people where it's just like data exchange, passing information back and forth. Level two conversations, have some emotions, talk about some things that are personal. Level three conversations, they're relational. They're engaged with something that's happening right now between two people that is super, super important. It is a, deep dive into what it might be really troubling or what might be really mattering to two people. And in a startup, there's a lot of things that's going to matter to all of the people working on the company.

So let's go through some examples of things that you guys can do after this talk. So goals, some good ones are, what are our short-term goals for the company? You'd be surprised at how. often people are not on the same page about this. Are we using the right metrics? We've got lectures on those. The answer is I hope so by now. And then are we, that's supposed to be hitting our goals, not hiring our goals. Are we hitting our goals? Roles, who's responsible for what? Super sensitive, right? So is it clear who is responsible for what? Like, just have that conversation. Do we agree that the current division makes the most sense.

And this might be super simple answers, but if there is any kind of disagreement, we want to hash that out. And performance. Okay, so is our workload distributed in an optimal manner today? Do we all feel a high level of dedication and a motivation right now?

Great thing to just check on every day. And then what mechanisms are in place for providing feedback to one another. Have we carved out time for paying down emotional debt? Do we feel like we can have these level three conversations at any time? Do we have a process in place for thinking through this stuff so that we can be honest about where we are in our company? Look at some things up.

How to work together. Everyone fights so you want to make a plan. You need to figure out what's your attachment style, what's your roles, what's your goals, what's your goal? What's your goals and a process before emotions get involved? Do it while you're sober. Use nonviolent communication to share honest feedback without criticism. And then pay down emotional debt on a regular basis.

This is the most healthy way that you will make sure that things will not turn into a giant blowup. You can start having hard conversations. conversations right now. There's no doubt in my mind that there's probably some issue that the two of you or three of you or four of you or God forbid seven of you are not talking about. Thank you very much. All right. Thanks for listening. So as always, you can find the transcript and video at blog.combinator.com. And if you have a second, it would be awesome to give us a rating and review wherever you find your podcast. See you next time.