October 14, 2013
Don’t have time to read? Here’s a quick but comprehensive summary of Noam Wasserman’s “The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup,” released March 31, 2013, by Princeton University Press.
Who should read this: Anyone considering founding a company, particularly those in life sciences and technology.
Elevator pitch: Noam Wasserman succinctly breaks down startup pitfalls, highlighting the importance of making smart decisions regarding relationships, roles, and rewards. He challenges founders to figure out whether they are motivated primarily by wealth or control, and make corresponding choices to accomplish their goals.
Author: Noam Wasserman is associate professor and Tukman Faculty Fellow at Harvard Business School. His HBS class, Founder’s Dilemmas, was named one of the top entrepreneurship classes in the county by Inc. magazine. He focuses his research on early founders’ decisions, particularly those that can trigger startup dissolution.
You’re taking the leap and starting a company. But do you go solo, or bring in cofounders? If you plan for co-founders, what skills will they have and where will they come from? The basics for facing this first dilemma:
Know your capital. Do you have the necessary human, social, and financial capital to get the startup off the ground? If not, you may need cofounders who have the technical expertise, sales background, or social connections that you lack. The most successful solo founders are those with significant expertise in multiple business and technical functions, a hearty financial cushion, and valuable industry connections in the relevant field.
Don’t flock together. Birds of a feather flock together, and so do founders. If your founding team is too similar in background, age, and experience, you’re likely to have overlapping skills and role confusion, which can cause tension. Creating a more diverse team gives you access to a wider network and those skills that you originally craved for your team in the first place.
Avoid temptation. As much as the siren calls you to found with best friends and family, don’t give in. As much as they may share the intangible qualities and values of the startup, they are highly likely to cause trouble (like when the board asks you to fire your brother). There’s data to back this up; don’t lose your loved ones for the sake of the startup, because you’ll likely lose both.
Above all, make your expectations clear for the founding team. There will undoubtedly be “elephants in the room” you need to address. Address them. Bring in an objective outside voice if necessary. Some founding teams, including those with friends and family, make disaster plans ahead of time to soften arguments and exits.
You chose to have a founding team and picked the very best people to complement your weaknesses in human, social, and financial capital. Now it’s time to determine the workflow.
Yes, you need a CEO. As fluid and dynamic as initial roles can be, you will still need someone to carry the CEO title. And you need to think really carefully about who that person is. One way to make the call is to assess who brings the most to the table – who is most invested in the startup? The original idea person is not automatically the most committed on the team, although most startups will naturally gravitate to crowning the idea person chief.
Differentiate. Tension amongst founders grows from overlapping skill sets and responsibilities – when you envision a better product design, but you’re actually tasked with distribution. Creating a clear division of labor will help accountability and creativity to flourish. But heed this warning: assigning roles and titles prematurely can feed inflexibility and title inertia, when the title of the member no longer matches the individual’s skill set. Successful founding teams balance strict division of labor and collective work styles.
Determine how you’ll make decisions. Founding teams can lean toward egalitarian decision making models (unanimous votes, equal say in every decision) or hierarchy. Don’t fall into a power structure: decide which one you want and which pole fits with your business model, and let others know how it works. This will be critical, especially once you start to hire others without founder status.
Overall, founders need to recognize there will be conflict among your founding team. Any good team doing a great task will face disagreement regardless of how much rapport and camaraderie you have in the bank. Make a plan for how you’ll settle disputes and think through the political implications of the titles you give – changing these decisions later on in the process is painful and sometimes impossible.
You’ve chosen your team and have slogged through roles, but perhaps the hardest set of dilemmas revolve around a technical black hole: equity. Choosing when to spell out equity shares, how to apportion them, and when to revisit the split may be the most delicate set of questions you face.
Address rewards after relationships and roles. Do not spell out equity until you know who is committed to your team and their contribution. Many founding teams early on determine an equal split of equity, only to find out that one member can’t continue with the team or has a significantly smaller role than expected.
It’s okay to care about money. Some members of your founding team will be motivated by decision-making power and control, perhaps a lasting seat on the board. Others will care more about their equity stake and increasing the value of the company as quickly as possible. Having significant equity stakes available for new hires can sweeten the deal for an experienced hand to join your team.
Vesting has its place. It is not always a sign of mistrust if you include vesting in the equity agreement. Dynamic forms of equity arrangements can account for unexpected loss of a team member, a dispute, or the ever-changing market. If the timing is right, put the agreement in writing to keep communication clear and avoid further dispute.
Any way you slice it, equity splits are dangerous but necessary. Decide too early, and the agreement won’t reflect the reality of the company. Decide too late, and you might lose valuable employees and founding team members. Acknowledge that rewards are a common source of conflict, and the least tense agreements will be aligned with the aforementioned knowledge of relationships and roles.
Wealth and Control
Wasserman posits that there are two main motivations for founders: wealth and control. It helps to know which camp you’re in, and will help you clarify decisions about new hires, boards, and when you will need to exit the startup.
Control-motivated founders need to assess carefully their solicitation and acceptance of money from family and friends, angel investors, and venture capitalists. They should expect to grow the company slowly in order to maintain control, whether that be control of product, hiring, or outside cash flow.
Wealth-motivated founders should realize that the ultimate goal is increased value of the company, and that may mean losing control of the board, attracting top-flight hires with excellent experience (and corresponding equity loss), and, eventually, helping the board find your replacement.
Can’t I do both? Most founders, optimistic as they are, will assume that they can be the next Bill Gates and Anita Roddick – the CEOs who have become both King (control) and Rich (wealth). Wasserman makes a clear point that the reason that Gates and Roddick are so unique is because they are both King and Rich. It is an incredibly unlikely outcome, and any founder needs to be ready to pick which outcome they truly want to achieve.
Wasserman does a masterful job of explaining relational conflict in an understandable way. His concepts are simple enough to grasp and deep enough to encompass a wide variety of dynamic and stressful dilemmas. For those new to investor capital, he explains the structure well enough for context without unnecessary complication.
This book is filled with relevant stories of wealth- and control-motivated founders and their decisions. In additional to the qualitative research, he has hard data analysis of thousands of startups in the life sciences and technology spheres. It is well worth your read if you’ve dreamed about or fallen into a startup. The dilemmas he describes will undoubtedly be your own, and you will need the knowledge of founders gone before.
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