March 28, 2012
Sometimes I’m listening to an entrepreneur tell their story, winding through the details of their new-founded passions, and I hear it: the red flag, the corporate Achilles Heel. Unaware of what beans they’ve spilled, they continue spewing pivots, PHP, and leanness, but I’ve stopped listening. Finally, I regain my composure, put up my hand, and say, “Wait a minute. Can we back up? Did you just say….”
To protect founders from doing the same, I made a list of foibles to avoid:
- Equal Ownership – 50/50 ownership is a recipe for failure. There’s exceptions to every rule, but exceptions prove the rule. Startups beat big companies because they’re more nimble, more decisive, and less cumbersome. Equal ownership usually translates into sloths and makes startups as effective as the US Congress (whose inability to get anything done helps explain why its approval rating is lower than leprosy). If you want to outmaneuver the competition, don’t handicap yourself.
- Founders’ Commitment – Are the key founding members committed fully, or just until they find another job? There may be a serious issue if one founder doesn’t initiate activity, needs prodding, or shows other signs of non-commitment. So institute a break-up clause: agree to make this work for a certain timeframe, and founders who leave early should forfeit all ownership, cash investments, and other rights.
- Financial Wherewithal – Are the founders financially able to dedicate their time to make things work? Will a critical partner leave the team because he’s short on cash? Talk it through.
- The Handshake Deal – I wouldn’t go into business with anyone who I thought needed more than a handshake to seal the deal. But after the handshake, I’d want it documented and signed in triplicate. I heard a story this weekend about two founders who worked for 6 months assuming ownership was split 60/40. The only problem? Both founders thought they had the 60. In other words, verbal agreements can come back to bite you during financing, an M&A, or an IPO.
- The Old “We’ll Figure That Out Later” Gambit – Often it seems easier to delay difficult decisions. We think, “Mature adults can figure out little things like who’s in charge or what’s the ownership structure, so why dwell on it now? Let’s just start building and we’ll figure it out later.”
Look, people have expectations and those expectations won’t be more easily addressed at some future date rather than right now. Why? Say you don’t agree on the value each founder brings to the table and how that value translates into equity ownership today. In my experience, today’s disagreement will widen and not close tomorrow. Many a founder has wasted hard work and financial investment as “Later” turns to “Now,” and a stalemate and corporate divorce ensues. If you’re not going to be able to agree, find out early.
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