Many founder teams are friends and already have a close relationship. They may even have marital or blood relations. Enthusiasm and excitement eventually run straight into the issue of equity. How will this group of enthusiastic folks divide up the equity?
The above background can impede the necessary discussion. Often an egalitarian focus drives a plan for an equal split of ownership. If there are 3 founders, a 1/3 split is chosen as the least likely solution to ruffle feathers; but may lead to problems down the road
- What happens if one person loses interest and fades away?
- Do they still get 1/3 of a company that they aren't contributing to?
- What if the founders disagree? Does every decision require that two folks agree? How will that impact the third person?
So a fair distribution among friends can be problematic. Other questions challenge a team of "equals." For example, will the stake of the CEO be the same as the person who is in charge of sales? In the beginning, the sales position may be pretty easy, and the CEO is pushing hard. An equal split is inevitably going to frustrate the eventual CEO. If the CEO's role is demanding and stressful shouldn't that person get a larger equity stake?
When you play out these and many other scenarios it is clear that an equal division is a foolish idea. But that often doesn't overcome the fear of breaking up the team or that facade that "money doesn't matter." So what can the team do?
The best strategy is to agree to divide up equity later once roles and responsibilities are defined. And that retention of equity must depend on a long-term commitment. You can keep the "we're all in this together" vibe and at the same time establish a plan that will serve your needs going forward.
Look at the skills and talents and find the holes. You'll need to fill those holes quickly. Be ready for the reality that the people you choose are going to want equity or a decent salary. It's unlikely you have a salary that can compete with real-world jobs with competitive wages, offices, and fringe benefits. Be ready to give up equity.
In sum, it's okay to start with a homogenous group. But eventually, you need a heterogeneous team of people who get along. With such a team, when the times get tough you'll have the comradery AND the skills you need to weather a financial storm and succeed going forward.
Reference:
- Lahm Robert J. Starting Your Business: Avoiding the “Me Incorporated” Syndrome. EzineArticles. October 18, 2005.
- Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 4.
- Herrenkohl Eric. How to Hire A-Players: Finding the Top People for Your Team- Even If You Don’t Have a Recruiting Department. Vol 1 edition. Hoboken, N.J: Wiley. April 12, 2010, ch. 1.
Love your opening. I think we all struggle with the ownership issue since we are talking about our babies here. Of course, we don't own our babies either. They will eventually grow up and fly away. We can only hope we've instilled them with proper values and a god foundation. As with children, we aim the arrow as true as possible then hope something doesn't blow it off course on its way to the target.
ReplyDeleteHaving just sent my second "baby" off to a college in California your analogy is quite timely. What the child/business becomes is in reality the decision of the child/business. It's a painful realization. Luckily in business you can easily create another and start fresh.
DeleteHi Brad. I like the way you touched on so many variation of potential conflict and harmony. I recently interviewed David Hanna, a small business consultant and coach for Nasha Lending. He came from a background in psychology and said it has been very useful in business for him. He recommends when searching for a cofounder and founding team members to also include a personality test such as Meyers-Briggs or the DISC personality test, which is specifically for business partners. I'm surprised Wasserman didn't include this option in his book, as it is a great way to shed light on complementary skills and potential sources of conflict in a startup.
ReplyDeleteGreat post. And thanks for posting your blogs in blackboards. I was having trouble locating the ENT 600 blogs on your page.
JOY
Joy,
DeleteI agree completely. I find the most useful part of Myers-Briggs to be introversion versus extroversion. I'm quite the introvert. It's very important that other people who I work with understand that I'm not one to enjoy a crowd but I prefer one to one communication. Knowing that, I would want to hire an extrovert to be more involved with fundraising or other networking functionality. Thanks for stopping by.
-- Brad
Great post! Knowing that the business is made up of people that make the business flourish is key. When you think about sports a person does not make it to the football championship a team does. If you want the business to go all the way you have to have team players that also want the same thing. They are putting in a much risk as the CEO if not more because they are taking a chance on the business as well. So they desire some time of compensation or reward.
ReplyDeleteSometimes I think putting together the team is the real challenge. With the right team the rest should be easy. Sadly that's not true probably. But perhaps that's why so many startups fail. The team just gives you the chance to play
DeleteGreat post Brad! I think your opening is a great point, and one idea many do not consider is selling their idea. The notion that we have to start a business because we have a great idea is a little over the top. Why shouldn't we just sell the idea, if we don't want to deal with all the traditions of choosing titles and determining equity? Song writers sell their music all the time to other artist who can sing the song. It's the same concept, and I think more people should consider it. In the music industry, you find that sometimes song writers make more than the artist who sings the song. I'm definitely a fan of putting in the initial work and then letting someone else "sing my song' while I collect royalties. What do you think?
ReplyDeleteI really enjoyed the Carole King musical that made me aware that her real skill was as a song writer. It was a real eye opener. I don't think people realize that.
DeleteMy design for a potential company is following that model. Get the pieces in place and then step aside. I think it solves many of the problems of CEOs who aren't qualified or grab all the equity or want to be king. It leaves lots of equity for others and avoids the bitter fight later about replacing the CEO. Alas, it's probable too weird to be accepted.
I find innovation is lacking in VC funding (except equity/reward crowdfunding). Perhaps that's because there is so little diversity in investors.