Early Stage Startups: The Biggest Killers
forbes.com
forbes.com
Unless your co-founder is strongly in the direction of a saint, there's a good chance you can choose only one. In the scheme of things, if your venture is successful over the coming years, the details of the original starting positions of the two of you isn't all that big since you're now both 100%; you say so yourself, 60-40....
No, you're optimizing for "fairness" as you see it, for yourself. This split will do nothing good going forward ... unless, of course, you will internally burn at the idea of your cofounder getting more than what you view as his fair share. Which should tell you something, and brings me to:
The pitfalls are inside people's heads and hearts, so I think you'll find that strategy to be particularly difficult to execute.
The cofounder should be obvious; others who, especially down the road when the starting details are lost in time, will ideally see you two working just as hard as each other, and wonder why the split is so uneven. I don't see anything good that can come from that.
I'd really like to see the data which suggests equal shares lead to better success outcomes (maybe YC has this?).
Another reason to avoid unequal splits is that they often presume you can see into the future. Who's to say that whatever you did to "earn" an extra 10% of the company isn't going to be more than offset by something your cofounder does later?
No, it isn't. At a company that has raised capital or generates revenue, 5% might be enormous, or it might not be. It all depends on the company's valuation.
The fundamental problem many early-stage startups run in to is that they haven't raised capital, don't have revenue and they try to use equity as an alternative to monetary compensation.
In these situations, "sweat equity" is almost always a poor alternative because the math rarely makes sense for the recipient. For instance, if you're an experienced developer who can make $125,000/year and a friend wants you to become a co-founder of his business, forgoing salary until some future date or event, how much equity in a business worth $0 today do you need to make up for your salary? It's a trick question, and the answer is not 5%.
Equity can be a very complex matter, but it's also very simple when someone suggests that it be used as a substitute for cash. If somebody wants to pay you for your services using equity, forget percentages. Determine what it's reasonably worth in dollars, if anything, today. If you are willing to accept less than the dollar value of your services, you're being generous to the company, not the other way around.
I don't actually disagree with you about employees asked to work on equity-only and deferred salary. It's just that I call those people "cofounders".
One of the problems employees face in Silicon Valley is that the valuations on angel and venture-backed startups are exorbitant, so the equity is overpriced. Seed stage startups with no traction (and sometimes no launched product) can still sport million-plus valuations. As an employee, it takes a leap of faith to believe in these valuations and use them as the basis for valuing your equity. Fortunately for these startups, enough individuals are willing to take that leap of faith.
1. The gift need not be equity; cold, hard cash to solve this problem.
I had a side project that I decided to turn into a business when a co-founder became available. We wanted to do a 50-50 split and achieved this by "selling" the IP I had created to a new entity which had the 50-50 split. The cash can stay on the books as an Owner's Contribution (for LLC) or as a liability.
2. My first startup was 65/20/15. My current one is 50/50. The psychological implications of both are very interesting. When I had 65% control, I could ultimately make all the decisions, but the others definitely felt some resentment or maybe a better way to explain it was they thought well he's gonna ultimately do whatever he wants so there's no need to fight too hard about everything. It never felt like it too much convincing to discuss big decisions (nor did I necessarily get tons of input). These were very good friends and we managed it, but anytime there's an obvious veto power, it changes the character of any deliberations.
What 50-50 does besides the "feeling" of fairness is that it forces you to convince the other person that it a certain way. Knowing you cannot just trump someone, you must persuade someone else of the way to go. Both of us understand that there has to be a decision made, and we can never know 100% the right way to go, and sometimes we let one person "win" and vice-versa. It does add a lot of confidence that when we finally do move forward with a direction, everyone is 100% on-board. I would add it helps a lot if you and your co-founder have complementary roles (CTO/CEO) as that can create clear delineation on who gets to "trump" in certain cases. Always better to let the person who has to execute the decision make it!
re: even equity split - I'm interested to understand a little better how this is a killer? I understand the rationale that is posed in the article, but it seems to be a pretty blanket statement not applicable to all situations.
Either way, I've had lawyers (in SV specifically) suggest a slightly uneven split (i.e. 51/49), because there is nothing worse than hitting a stalemate on founder decision making. Additionally, I've yet to see a recent tech S-1 filing where founding members have had a complete 50:50 ratio. (Twitter, Facebook, Trulia, Box are just some that come to mind)
The obvious one is that it kills decision-making. One day, the two co-founders will disagree, but since no one can overrule the other one, the company will drift and possibly die.
But there is a much more interesting problem (that they don't teach you in you MBA class): founders going for 50/50 is a sign that the company doesn't have a real leader. Rather than have a very unpleasant conversation about why you, the alpha CEO, should be the ultimate boss, no one feels comfortable having that discussion. You sit one evening around the table discussing how to incorporate, you sort of shyly say "what about 50/50", your co-founder stares at the floor and nods. Done. You have a 50/50 split, and a huge red warning sign of future company failure.
Source: I wrote the calculator below and had detailed discussions with 100+ founders about how to split their equity with their co-founders.
Your calculator appears to, among other things, allocate equity based on who paid for business cards.
I don't think anyone's done a better job of explaining how to handle equity than Joel Spolsky. Here's his answer to this question:
https://gist.github.com/isaacsanders/1653078
He even addresses the "paying for business cards" question!
(FWIW: Matasano is an "equal split among founders" company; we elected to make Dave our President and Decider.)
What happens if not all the early employees need to take a salary?
Don't resolve these problems with shares. Instead, just keep a ledger of how
much you paid each of the founders, and if someone goes without salary, give
them an IOU. Later, when you have money, you'll pay them back in cash.
Respectfully, appearances can be deceiving. Without giving away the secret sauce, it's fair to say that most of the questions in the calculator are not measuring what they seem to be asking for. To get to the truth of a situation, indirect questions often work better. I'll ask you to trust me a little bit.
I had a similar problem when I started out and your calculator was one of the tools I used to make a point. wrote about it too and links to few other resources I used plus the above calculator http://carrotleads.com/how.php
and yes I don't think 50-50 split is right. If someone joining after 1 yr dev as in above example from @technotony can't stomach a 40% share with the original founder getting 60% then that needs to be clear upfront and partnership terminated.
what is to say such people will not want more than 50%. any split must be fair on what has been done, what will be bought to the table and need to be protected by vesting schedules.
IMO the calculator takes most key factors into account.
I am searching for a co-founder for two main reasons; startups are a lot of work for a single founder, and a brainstorming partner can provide a different perspective or tell me when I'm wrong.
My devotion to my family, and a promise I made to my late father will keep me trying to move forward no matter what. I've been through the highs and lows of the emotional rollercoaster of entrepreneurship, and I understand the willpower necessary to keep moving forward during those lows. I'm very reluctant to choose a co-founder I wouldn't be willing to join in a fox hole.
In your opinion, what is the most important reason that a single founder has such a disadvantage, when it relieves the company of facing other startup-killing issues you mentioned in the interview?
If you take a single 18 to 25 year old "kids" with no business experience whatsoever and a life experience mostly devoid of struggle I'd be the probability of failure is absolutely huge. Entrepreneurship can test you in incredible ways. It can take you to the deepest and darkest moments of your life. And, if you are alone and are not "built" for it you will crumble.
Anyone with a good amount of business experience has a far greater probability of success if only because they've done it before and understand the game. You can hire people for the other functions that need to be performed.
I guess my point is that a co-founder is not some kind of a magic pill that will auto-magically make things better. Teaming up with someone with limited or no business experience and you hardly know is a formula for disaster. If both of you are newbies and you have some external coaching (YC) then, yes, things could be better.
I had a situation with someone who wanted to partner-up for a mobile app. I flat-out refused to partner (in the sense of company co-ownership). We put together a revenue-sharing agreement (50-50 was fine for this case). Control and all business decisions remained with me. I would eventually learn this was a great decision when this person went off the rails half-way through development.
It sounds like you have solid business experience. Don't buy into the SCV mantra of having to have a co-founder. Do it your way. Now, if you have to play on their turf then it's their rules. Outside that, there's no reason you couldn't be successful. Not one.
BTW, I don't buy YC/SCV statistics because they do not include the millions of solo-founder businesses that are launched every year. There's everything from lunch truck operators to restaurants, web design shops and tech companies. I am going to go out on a limb and say that if you looked at that data you might see that solo founders have a far greater probability of success than the SCV crowd mantra paints.
Again, if you are taking business virgins out of college to start businesses, yes, absolutely, get two, four or six of them because they are very likely to commit business seppuku if on their own. Also, VC's need insurance if they are going to make an investment. Multiple green founders is safer than one green founder.
Here's an example of what I am talking about (and it looks like no VC money):
http://www.forbes.com/sites/hollieslade/2014/01/24/after-her...
No matter how much business experience you have, you will face situations in a startup where you have to make decisions with highly imperfect information. Having someone by your side who is willing to point out things you may have missed or cases where you have gone seriously off the rails can be invaluable here. After all, nobody seriously believes their ideas are wrong - it usually takes somebody painstakingly pointing it out.
I worked at a startup, early in my career, where the primary founder had cofounders, but they had low enough equity stakes to not be seriously incentivized to challenge him. This was not a wet-behind-the-ears 25-year-old; he was nearly 50, had finished an Ivy League Ph.D in 3 years, had worked as a professor and a quant on Wall Street, and had both technical chops and deep domain experience. But while I worked there, I saw him make a bunch of boneheaded technical moves, simply because there was not enough time in the day for him to both keep tabs on the market and understand the technology in enough detail to make informed technological choices. When I went to the other cofounders about this, they were like, "Well yes, I agree, but it's his company, he gets to call the shots."
He kept at it for 11 years total. He called me up a couple years after I'd quit - not just one job later, but two - to admit that he'd been wrong about the technology I'd been complaining about. By then it was too late; the tech world had passed him by.
Startups are hard. Use all the resources you have available, including the people who challenge you.
One of the toughest things to do as an entrepreneur is to let go. It's all too easy to want to own every corner of your business and micromanage it all. And that's the easiest way to torpedo a business. Your job as a founder is to eventually surround yourself with people smarter and more tuned-in than you and hand them control of different aspects of the business. People care and fight for their beliefs when they feel responsible for something. If an entrepreneur creates an "It's my business; My decisions" atmosphere you'll get the kinds of reponses you quoted and nobody will care enough to offer constructive feedback.
Companies can be launched and taken to "flight altitude" by experienced solo founders. They generally cannot survive if said founder does not divest responsibility to build a fully functioning organization with smart and dedicated people.
It's not easy.
As a student there is this idea that you should be in a band, making music. Getting there needs lots of brainstorming to come up with the songs, lots of practice, jamming sessions, rehearsals, going out to try and get gigs, musical collaborations, partnerships with DJ's and support acts, getting gigs and publicising the gigs. Then there is the dream of getting signed by a record label.
The idea that you could do all of this on your own is quite laughable, isn't it? Even solo artists usually have a producer or a song-writer that is in effect a 'co-founder'.
Yet some get there on there own. Take for example Cliff Richard. The Shadows were his band but also mere hired hands with no equity. Cliff Richard didn't even have to write songs, those could be acquired somewhere else much like how a developer can pick up frameworks and make them their own.
In music there is an understanding that an artist can be solo. Just because they are not in a band does not mean nobody believed in them. Record labels don't tell them to go away and come back when they are in a band, if the talent is there then they will sort out whatever is needed, whether that be session musicians, songwriting or production.
This music analogy may appear a long way off software MVPs, however, it isn't. Another thing to learn from the music industry is that people don't expect a product (a song) to be number one on the hit parade for eternity. New shiny things on the web should be seen that way too, expected to be popular for a while in the 'top 40' and then to 'sell' consistently as back catalogue.
The people who band together for a startup after having known each other for a month would never marry someone they have only known for a month. Clearly the message that startups are a big deal for any relationship hasn't sunk in as it has with marriages.
Better to be a single founder covering for everything than sign on "co-founders" you cannot get along with or do not see pulling their weight or having significant disagreements on how the company should be run and the rewards distributed.
There will be times where the demands for your time will be greater than theirs, and vice versa, and if one of you is strongly technical, while the other isn't, you may see an imbalance of work, especially when you're building your MVP.
Business & startups in particular, come with an enormous amount of stress, and may put you two at odds with each other, which can be tough, as the two of you, under different circumstances, might have been each others coping mechanism.
Running out of Money.
Co-Founder Issues
Lack of Traction
Those are the startup failure trifecta.