Teams. Many entrepreneurs feel like they do their best work as individuals. While it is possible that this is true for the creative process, most are going to need help from others at some point. It is rare that an entrepreneur will generate a high value business alone, so the real question is at what point does a team become involved? Currently, I’m going to focus on founding teams and not on team members that are hired later in the process. Particularly, I want to stress issues of personal participation, control, and personal goals.
If you are going to start a business with other people, chances are they are either friends or reasonably close work acquaintances. A startup is going to put people under the best of conditions and the worst of conditions as you experience the highs and lows of your business. Realize that your co-founders will not likely behave the same in startup conditions as they do in the [potentially more stable] environments where you have seen them perform. Some may excel in a startup environment, but there is a greater chance that they will not. Startups are a little like alcohol that way – people’s best traits and worst traits are amplified by them. Since you do not really know how anyone will perform until the chips are down, you need to ensure that rewards are only received when participation is as it was expected. The world is rife with stories of friends who started businesses, divided up equity, and were going to “go full time” when certain milestones were reached and then, only part of the group actually had the motivation or guts to make the leap. We’ll talk more about this in just a minute. The important thing here is that nobody, including you, should expect a full grant of their promised equity until they satisfy the conditions under which the grant was made. This can mean when they have fully committed to the venture by leaving another job, when they have contributed a certain amount of money, or when they have met certain business milestones. That’s up to you and your founding group to decide. Know it upfront. Agree with each other on it upfront. Document it. [There are a variety of mechanisms to do this depending on your legal structure. A lawyer would best be consulted. Realize that there can be tax consequences unless you structure equity grants properly. In my current startup, SearchLikeMe, all equity was granted upfront, but a declining portion may be purchased back by the company at any time.]
When I say agree on it upfront I don’t mean to hear what you want to hear and tacitly assume that when things are flying fast and furious everything will work out fine. If there is a question you need to ask your [potential] co-founders but you feel uncomfortable asking it, that is a 100% sure sign that you had better ask the question and let it cause the discomfort it will cause now. If you assume an answer and later are wrong, the consequences of the disagreement will be many times worse. Compensation is an excellent example. I have been in startups where every founding member of the team understands what their compensation is relative to every other founding member and it has worked just fine. I have also been in startups where I thought but did not verify for myself that all the details of compensation were communicated among all members, only to find out years later that they were not. When finances were tight, this caused an insurmountable obstacle, the only resolution for which was to disassemble the team.
Another issue your group definitely needs to address is control. Here my advice is if you bring most of the goods to the venture yourself, then make sure you stay in control of the team, whether by force of the equity split or other legal agreement. And make sure your team knows it. Ted Nugent once said reflecting on his band that there was only going to be one alpha male and that was going to be him. There is nothing wrong with that if everyone understands upfront and agrees.
If other members of your team truly bring a contribution of equal significance, recognize that if there is an even number of you with equal voting power, you’ll be at an impasse someday. If there is an odd number of you, someone will at some point not get their way. Never be naive in thinking that you will all always feel the same as that day when you incorporate. Things change. It doesn’t make anyone evil, it’s just life. Make this discussion very open. If you feel like you should have control, then say so. You cannot hide this forever. Ultimately the way you act will reflect how you truly feel, so don’t say one thing when starting the company and act differently after a few months later.
Regarding control, I have seen autocratic control, democratic control, and respectful assignment of duty. As long as it is understood upfront, autocratic control can be effective. This is particularly the case when the leader has demonstrated a history of learning from others before making decisions. If you are not going to be the leader, make sure you really ask yourself whether you can live with someone else calling the shots. Don’t say, “I think it will be OK when we get there.” War-game yourself based on your past experiences. In your work history, have you responded well to instances where you did not have control? Which ones made you angry? Are you likely to see those types of situations in your startup? With the current personalities?
Respectful assignment of duty can also work quite well. This is where each person recognizes the expertise of others in their respective areas and they have decision control over those areas. One person still has to call the shots for bigger decisions. However, with this type of control you really must look at each person in detail and ask yourself a gut-check question: “Do I trust this person more than myself to make decisions about X?” If you even have an inkling that the answer is no, make sure this comes out in the open prior to formation, not later. I once made a fairly smart decision to make a large capital purchase of some used equipment that one of my startups needed for 6 months. I sold the same equipment 6 months later for 96% of the purchase price. To rent the same equipment for the same period of time would have cost over 300% of the purchase price. When one of my co-founders heard what I had done initially, they were furious. They did not understand the ultimate plan, nor did they trust me to make the right decision. I should have realized they did not trust me on this decision based on other behavior and communicated the full plan. Had I done so, a great deal of hard feelings could have been avoided.
Unfortunately, the worst method of control seems to be the democratic method. It may work in larger organizations, where teams do not have to move as quickly or decisively, but in a small environment it is a killer. It’s slow. It encourages “us versus them” camps. It may seem like you and your partners have always agreed when tailgating for the ball-game or planning a hike. But a startup is a different kind of thing. When everyone doesn’t agree, which is bound to happen, groups of people who are most like each other tend to form. People spend more time trying to get their way than getting something productive done. It’s a little like the shifting alliances on the television reality show “Survivor.” Groups form around positions on issues, often with a few people being the “swing” members who relate well to both groups, but nobody’s sure whose side they are on until the vote. It would be nice if a democracy could work, but from my experiences, friends can be surprisingly disingenuous with each other when it comes to soliciting votes in business.
Finally, the most important reason to be in a startup is for your happiness and personal goals. Realize that your co-founders have their own personal goals as well, and they may not be the same as yours. You need to have discussions about exit strategy with each other. Often people are in too much haste to get the business started to truly reflect on the fact that they and their co-founders have differences in the end game. When things change, it might even be hard for your co-founders to know that they should share with you a change in personal goals that might be incompatible. It is incumbent upon you to ask them what their goals are when you start the business. But your personal duty does not end there. Every year you need to put yourself in their place and ask, “If I was them, would my goals still be the same?” For example, someone’s kids may be entering college, requiring that they have more financial stability. Another career opportunity may have arisen. Perhaps they were one of the uncommitted that have not yet joined full time and things have changed favorably at their employer. A family illness may have occurred. If you feel someone’s goals may be changing, ask them about it. The worst thing that can happen is that you ignore these things, happily continue doing business, and let a game changing decision present itself only to find out then that everyone’s head is not in the same place as it was when you all started the company.
All this may seem a bit negative. It’s not meant to be other than to scare you into really, really examining your relationship with your co-founders, their motives and your own motives. When a team works well together, a startup can be a wonderfully fun time, even when things don’t go right. But when there is dysfunction, bad times are horribly amplified. So get to know your co-founders, say things that may be uncomfortable but truly how you feel. If this causes strife that prevents the business from getting started, you may feel you have killed your chances before getting out of the gate. In reality, will have probably saved tons of heartache and money in the long run. If, however, these uncomfortable moments are overcome upfront, you can be off and running, knowing that the team has a good chance of getting through the first year or two. Make sure you re-evaluate those goals each year though!