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January 29, 2018
Founding a startup is akin to a wedding, a declaration of mutual devotion. It seems inappropriate and even counterproductive to plan for a breakup, yet in entrepreneurship, failing to make the prenup part of the wedding vows, so to speak, can prove disastrous.
Excessive confidence and optimism in the startup’s prospects can lead entrepreneurs to involve family and friends both as employees and as investors, imperiling both the relationships and the startup.
They need to expect the best while preparing for the worst and to make decisions strategically rather than reactively.
But acquiring these resources typically requires that founders cede more and more control. Cofounders and key employees want equity.
Founders who consistently make decisions that build wealth are more likely to achieve what I call a “Rich” outcome (greater financial gains, lesser control), while founders who consistently make decisions that enable them to maintain control of the startup are more likely to achieve what I call a “King” outcome (greater control, lesser financial gains).*
Founders who choose to remain King should indeed end up less Rich.
Founders who dive in too early may doom themselves to destructive failure.
the most powerful, though often unnoticed, influences may come from the early messages sent by the words and actions of older relatives or by the culture in which a person grew up:
to the financially motivated, it tended to mean a large gain in wealth, but to the control motivated, it tended to mean that the startup would bring to the world the product or service they envisioned.
Two of the motivations (autonomy and power & influence) persist throughout their 20s, 30s, and 40s, but in their 40s, male entrepreneurs also become motivated by altruism and variety.
Working for other organizations can, in itself, make it harder to eventually found one’s own startup.
human capital includes formal human capital acquired through schooling (e.g., getting a degree in biomedical engineering or computer science) and tacit human capital acquired through work and life experiences (e.g., knowing how to negotiate with equipment sales reps).12
“Including professional school, getting more education increases the likelihood that a person will start his own business.”
the advantages of ignorance are often easily outweighed by the disadvantages of inexperience.
But everyone could see they weren’t working well together. . . . [I learned] the fit between personalities was so much more important,” a lesson he then applied when building his startup teams.
Barry, for example, spent years building connections with potential employees, customers, advisors, and investors before he started Masergy.
Research has shown that people who accumulate more social capital before founding are able to attract more human capital (such as cofounders) and financial capital (such as seed capital) with which to launch the startup,35 and to do so more quickly.36
“You can divide your 24-hour day into three parts: eight hours work, eight hours personal, eight hours sleep. If your eight personal is not in sync with your eight work, then your eight sleep will suffer.”
A study of fast-growing startups found that, for 71% of them, the founder got the idea while working at a regular job.
However, optimistic founders also tend to create unrealistic business plans based on rosy projections and to underestimate their competition.
Founder optimism can also affect the decision about when to leap, leading some to leap sooner than they should and others to leap when they shouldn’t at all.
One hears a lot about “following your passion.” Potential founders should avoid the mistake of thinking that their passion excuses them from a rational assessment of their circumstances.
“[t]he heart is forever making the head its fool,”
“Follow your heart, but listen to...
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I learned that leadership is all about taking in information and making a decision—shared information but not shared decisions.
Founders who want to retain 100% of the equity for themselves, or who plan to launch the startup on their own and later hire employees to fill their holes, are also more likely to fly solo.
may prioritize a need for control over growing a more valuable company,
Social capital refers to the benefits derived from one’s place in information and communication networks. New startups need to reach out to recruit employees, establish relationships with potential partners, meet potential investors, and gain access to many other outside resources.
He decided not to move forward until he had secured cofounders who had the human capital to fill in his technology and business holes, the social capital to get to potential nonmusician hires and potential investors, and additional financial capital.
Each new cofounder increases coordination costs and inefficiency.
As highlighted by Stinchcombe, the larger the team, the greater the coordination costs and the higher the risk that roles will overlap and cause conflict within the team.
“Complexity increases exponentially with more cofounders.”
The founder has deep, relevant experience; the founder is driven to keep control of the key decisions; the industry does not demand fast growth; and the idea and its implementation are relatively simple.
Even if someone was employee number ten, if he was the first hire for his function, I’ll call him a founder.
Indeed, studies have found that the greater the heterogeneity among executive team members, the greater the risk of interpersonal and affective conflict5 and the lower the group-level integration.
The psychology of a family unit can really create an impasse in the growth of a company.
as people try to balance being nice and being business.”
Teams with diverse networks are often more creative and innovative,
Founders should consciously counter the powerful draw of homophily by watching for potential teammates who can add not only complementary skills but also complementary networks and strong relationships with a diverse set of contacts.
founding team whose members are similar in various objective ways (their human capital and social capital) can deprive the startup of necessary diversity. However, a founding team whose members are too dissimilar in terms of “soft factors” (commitment, opportunity costs, risk preferences, etc.) can be setting itself up for early and disruptive tensions.
“There are always points in the startup’s life when things are going very, very badly, and the stress can be unbearable. Knowing the other people in the boat with you can be very helpful in navigating the rough waters.”
“In my opinion, those who found companies with friends will (a) lose the company, (b) lose their friends, or (c) lose both.
Most surprising, teams with prior social relationships were even less stable than teams of strangers.
This is not to say that friends and family members should never found a startup together, but that they should make sure that they proactively analyze the potential consequences of their prior relationship and take the steps described below to reduce the inherent risks.
A family/friends team could turn out to be either the best or the worst of both worlds.
A boss-subordinate relationship, for example, may make perfect organizational sense but will not suit a pair of best friends very well; nor will positions of equal authority suit a father and son.
Teams of friends may start off strong and enthusiastic, but as the realities of life in the workplace begin to settle in, professional issues can creep into cherished personal relationships.
“A friendship built on business can be glorious, while a business built on friendship can be murder.”
The closer the prior relationship, the greater the damage if tension from the business spills over into the relationship.
It’s very hard to maintain a friendship after the business relationship turns sour.”
