I found myself saying to the reporter over and over, "This may seem obvious, but..." and it's true that many of ideas don't seem like anything new. But because I see them happen over and over again, I thought they were important to highlight for anyone starting a startup.
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?
I am going to go out on a limb and say that a lot of what PG and the like say is far more applicable to 20-something non-entrepreneurs who fresh out of school (while still in school) want to start a company. I don't mean to diminish PG or his always-valuable advise. I am merely pointing out that a lot of these points are far more applicable to a certain class of entrepreneur.
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):
I'll go out on another limb and say that the biggest benefit of having a cofounder isn't another set of hands to do the work, it's another mind with significant skin in the game who will challenge your thinking and point out all the flaws in your ideas - and, of course, who you trust enough to actually listen to when they point out those flaws.
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.
If you hire the right people, empower and listen to them they will be the source of feedback you speak about. The problem there seems to have been someone not humble enough to listen to anyone. There's nothing magical about a cofounder. Imagine two guys like your PhD.
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.
Thanks for the really great advice. I'm interested in the unequal equity. We have a 60-40 split which seemed fair as I'd worked full time on the company and raised a significant Kickstarter funding before my co-founder committed 100%. Could you comment more on issues you see this brings down the line and how this plays out? Also, does this conflict a little with your next point about clear leadership?
Are you interested in some abstract concept of "fairness", or in your company being successful over the next handful of years?
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....
Obviously want to optimize for success. What I'd really like to know is what are the pitfalls that non-even equity split can bring, so that I can watch to see if that's happening and potentially mitigate.
Unequal splits are an invitation to resentment and the degraded communication and problem solving that comes with resentment. If you've done a bunch of startups, you've probably had the experience of having a harrowing argument with cofounders, and the realization of how easily your company can disintegrate based on nothing more than silly interpersonal conflicts. Some people, myself included, take from this the lesson that you should rig your startup to minimize these issues as much as possible.
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, 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.
This article was of course a distilled version of a much longer conversation. The uneven equity split that causes problems is usually along the lines of 75% vs. 25%-- or worse, when one founder gets 10% or less. We see this happen quite often (and advise against it if we're not too late). The founder with 10% often becomes resentful and doesn't feel properly incentivized when he/she is working just as hard as the founder with 85%. A startup is so much about execution-- usually over a long period of time that the argument of "it was my idea" isn't very compelling. (60/40 is usually totally reasonable though, especially in a situation like yours.)
I'd give yourself a gift for getting the company off the ground. 5% seems right, but I suppose 10% is not out of the question. Then split the remainder with your co-founder. This process would lead to 52.5/47.5 and 55/45 splits respectively. 60/40 is a 20% gift; I think that's a little high but it could be justified if significant progress has been made. Also, your vesting should of course have an earlier start date.
My 2c as a founder who's done both 50/50 and non-50/50 startups.
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!
> 5% is an enormous amount of equity to grant for anything.
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.
While you probably won't receive a 5% grant as a non-executive hire at a venture-backed startup, my point still stands for salaried employees. If you can make $125,000/year, a company offers you $80,000/year and suggests that it's making up the difference in equity, you should still run the numbers. For 5% to compensate you for your sacrifice in this scenario, the company would need to be worth $900,000.
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.
There's no such thing as an "objective" fairness, and if it would exist, it wouldn't matter anyway. It only matters if your partner sincerely thinks if it's fair or not, and whether he will think so in the future.
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)
You can try out my co-founder equity calculator (http://foundrs.com). While it's not biased, I hope it never gives a 50/50 split. There are many reasons why 50/50 is bad.
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.
They don't teach you that in "MBA class" because it isn't true. Equity allocation and executive authority are mostly orthogonal concerns. Smart teams of equal cofounders manage to pick leaders all the time. Controversial decisions at early-stage companies don't get decided based on equity; by the time the equity card gets played, your company is dead anyways.
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:
This sounds good. One point I don't agree with is this one:
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.
Those who don't take a salary don't take any risk, so I would say the IOU should be greater than the missed salary as a minimum.
So pay it back with interest. The point is to avoid forcing the valuation question into internal tactical decisions, which is what you're doing if you issue shares to offset deferred salary.
Your calculator appears to, among other things, allocate equity based on who paid for business cards.
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.
Regarding the co-founder problem, time for a music analogy...
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.
You seem to be confusing "solo founder" with "single person company". A solo founder can go and hire ten people, build an amazing team and knock it out of the park. A "single person company" is severely bandwidth limited across all required disciplines. That's the case of your music example.
It's striking that choosing a cofounder one barely knows is a common problem. I'm trying to get something going with my best friend (I've known him since we were six years old), and people we meet will sometimes ask us if we would consider bringing on some guy they know as a third cofounder.
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.
Choosing your best-friend isn't a guarantee that you won't have co-founder issues either. One of you has to be the CEO, and if you are both used to being equals, the one who isn't CEO has to deal with the fact that their role is less than the CEO.
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.
It is an obviously foreseeable problem because the whole "startup echo chamber" keeps pressuring everyone to have co-founders for sake of having co-founders.
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.
It's very easy to. Plenty of stuff from First Round shows up on the HN first page. So do stories from all kinds of sources. There are regularly articles on bootstrapping, as well.
