Start Out the Right Way
Or why so much of your startup’s fate is sealed when you start it
The Next Founder helps founders build great startups. We offer advice on managing your mental health and productivity, hiring and managing great people, building a strong culture, and keeping people aligned and working on the right things. See the series overview at Welcome to The Next Founder and find out more about me at My Story.
In “Start Out the Right Way,” we’ll talk about all of the things that can go wrong between you and your co-founders and your teammates when you start your company, some of which are very common. We’ll propose a concrete list of things you can do to “start out the right way.”
If you have feedback or suggestions for future posts, please comment or contact us at uninvent@substack.com.
“Beginnings are such delicate times. A beginning is the time for taking the most delicate care that the balances are correct.”
— Frank Herbert, Dune
“Coming together is a beginning, staying together is progress, and working together is success.”
— Henry Ford
“Instead of looking for a person who checks all the boxes, focus on a person with whom you can imagine yourself writing a story that entails edits and revisions.”
— Esther Perel
Marriage, separation, and divorce
You meet up for drinks with a few co-founders from last year’s incubator program. During two rounds of Manhattans and some soul-baring stories, you learn that your paths have diverged wildly.
Sarah tells the first story: her co-founder Peter bailed on her and quit their startup only six months after they started. The first version of their product didn’t resonate with customers, and he wasn’t interested in rewinding, pivoting, and testing other ideas to get to product/market fit. He took half of the company’s shares with him since neither he nor Sarah are on a stock vesting plan. Sarah now has to convince Peter to return the majority of his equity, or else she’ll shut the company down with nothing to show for it.
Sanjay goes next. His startup has several large companies interested in buying their product, but his technical co-founder, James, is passive-aggressively sabotaging their efforts. James is angry about the 70/30 stock split he and Sanjay agreed to when they started a year ago. He has seen how crucial building the product and hiring the engineering team is to the company, and he feels he made a mistake agreeing to anything other than a 50/50 split. James is slow-rolling his work, is not giving Sanjay access to the code, and is threatening to leave and start another company in the same space if Sanjay isn’t willing to renegotiate the equity split.
The other founder from your cohort, Xiang, dreads going to work every day. He agreed to let his co-founder, Lucy, be the CEO, and he took the CTO position. Lucy works alone, rarely sharing what she is doing or asking for his input. When he asks to be included, she shuts him down with, “let me do my job, and you do yours.” Xiang feels like his two-person company is more political and siloed than the 10,000-employee tech giant that he resigned from to start this startup.
You feel fortunate since you and your co-founder are working well together, but Sarah, Sanjay, and Xiang thought the same thing the last time you talked to them. Do you have any similar landmines lurking in your company? Did you start out the right way?
“Founding” is the “foundation”
Change gives birth to startups, and startups effect change, so you shouldn’t start a startup unless you want to be part of the change industry. You are trying to change the market you sell into. You will likely change (“pivot”) your product and business model one or more times. You’ll constantly be adding people to your team and letting others go. Change is your friend. Bring it on. “Chaos is a ladder,” and all that.1
But a few things at a startup are very hard to change, and most of them are set at the beginning. You might not appreciate the importance of some of the early decisions you make until years later when you end up with tales of woe like our friends from the vignette we just heard. Most of these decisions involve your founding team.
The founding team is the foundation of a startup (it’s right there on the label). They decide what market to attack and what product to build. They attract the rest of the team. They close the early customers. They attract investors. They set the culture. Amazing things happen when the right founding team teams up, attacks the right market, and works harmoniously together.
And when they don’t, it can get ugly. Co-founder conflict causes as many as 65% of startups to fail, worse than the divorce rate in most countries.2 Anyone who invests in or works with early-stage startups knows that when you meet a founding team, one or more of them will likely be gone within two years. The startup often doesn’t survive.
Even when the founding team stays together, several things can derail them. They may fight over important decisions and who makes them. They might discover they have different management philosophies. Or they may be too similar, fighting to work on the same things but leaving other important areas uncovered. They might not be equally committed, with one founder ready to spend several years working through the inevitable challenges, and the other quitting as soon as customers reject their first product, which they usually do.
A lone founder has a different set of issues. They don’t have to navigate co-founder issues, but they lack the extra bandwidth, skills, and emotional support the right co-founders bring. They might struggle to raise money, be extra susceptible to stress and burnout, and be more likely to quit. Their decisions about the first few employees to hire are especially critical since that team has to compensate for the missing co-founders.
So a few early decisions, like who is on the founding team, how to split the equity, and how to assign responsibilities, can make or break a startup. Building a startup without that foundation in place is like building a skyscraper on a crumbly brick foundation on sandy soil.
In the early days of your startup, you can do a few things to make sure you start out the right way.
Work with an attorney
You might think it’s hard for a tiny company with no money or customers to go too far off course, but startups often find trouble right out of the gate, in the way that many plane crashes happen at takeoff. You can avoid many problems if you work with the right attorney.
Find an attorney who works exclusively with early-stage startups in your locale (this is not the time to ask your brother-in-law, the estate planning lawyer, for a favor). An attorney can help you understand the decisions you need to make, including where to incorporate your startup, how to split the equity between co-founders, and how to implement stock vesting. They’ll ensure your company is prepared to raise money and, once you do, will help you navigate the process.
Many attorneys will work for free or reduced rates for early-stage startups, expecting to make up the difference once your company raises money, grows, and generates more fees. Find one and build a relationship early.
Get engaged before you get married
Many founders report that their relationship with their co-founder(s) is one of the most intense in their lives. Founders often spend more time with each other than with their romantic partners, and founder “divorce'' is heart-wrenching (and expensive). Co-founders usually go through difficult times and disagree on high-stakes decisions, often causing conflict to grow and trust to erode. Their relationship needs to last years to have a chance of building a large company. When their relationship is full of tension, the whole company notices, and it can lead to slower execution and worse decisions.
If you and your co-founder(s) have already worked together for years, you are lucky. Don’t stop reading, though, since we’ll discuss what can still go wrong within teams that thought everything was copacetic.
If you don’t have a co-founder, should you stop and find one? We won’t try to settle that perennial debate here. You can find arguments and anecdotes on both sides. But we are quite sure that the wrong co-founder is worse than no co-founder, so don’t rush out and join up with the first plausible partner who comes along.
Be patient. Sure, it’s easy to go to a “founder dating” event and find someone who looks good on paper, but you need to spend time, probably months, working together to find out if you are a good fit. Carve out a trial period, and check in regularly with each other to see how it’s going.3
Only co-found a company with someone when you are clear about what skills, connections, creativity, and commitment they bring to the enterprise. Never add a co-founder just because you think investors want you to have one. Yes, you should understand the (mostly valid) reasons investors prefer to invest in startups with more than one founder, but only add someone to your team if they actually solve those problems, not for the optics. You can’t know that until you’ve spent time together.
Seek complementary skills
Although most of us don’t like to admit it, our friends are usually like us, sharing the same interests, skills, and personality traits. In the tech industry, engineers often hang out with other engineers, sales reps network with other sales reps, and MBAs booze it up with other MBAs.
Founders do need to share some core values to work together well, but if their skills overlap too much, they can run into challenges. Two engineers as co-founders might neglect sales and marketing while overemphasizing product development. Go-to-market founders often struggle to build a technical team, since many engineers won’t work for someone who doesn’t understand product development.
This is why the “hacker and hustler” founding team is common. One or more co-founders focus on the product and technology, and the other(s) focus on acquiring customers. But they should share the same core principles for the kind of company they want to build and the values and culture they want to instill:
Think through the skills you need on your founding team. If you don’t have them, you might need to find an additional co-founder or make some early hires to shore up the gaps.
Talk about why you’d quit
Founding a company requires an unreasonable amount of confidence that you’ll beat the odds and be one of the rare startups that succeed. However, even the startups that work usually take longer to get traction than the founders thought they would.
You and your co-founder might convince each other that your stamina is unassailable, but the truth is that everyone has a breaking point. There is a moment in your future where, if you aren’t making enough progress, you’ll walk away.
Discuss with your co-founder(s) what it would take for each of you to reach that point. How long can you go without cash if you can’t raise funding? How long will you keep hope alive if you don’t get product traction? No, you don’t want to start a company with a “bail at the first sign of trouble” co-founder who quits when the initial product doesn’t immediately fly off the shelves, but you both should be honest about how long you’d keep plugging away and see how closely your time horizons match.
Plan for possible pivots
Most founders love their initial product idea, sometimes spending years chewing on it before starting the startup, but when that product meets the real world, they learn their vision is partially or entirely wrong. The founders may only need to make small changes to the product feature set, pricing, or messaging, or they may need to go back to the drawing board and find a new idea.
Some founders embrace this. Their goal is to start a successful company, and they are perfectly content if the idea diverges from the one they started with as long as it’s still a reasonable fit with their skills and interests.
But some founders aren’t interested in pivots — they started the company to do this idea, and if the market rejects it, they’ll push ahead until they crash into a wall. The founder who brought the initial idea into the startup is often the most stubborn. Their identity is wrapped up in being “the idea person.” If their idea is tossed out, they see their status tossed out with it, leaving their value to the enterprise in question.
Even if the product idea survives, some founders are committed to a specific business model. A founder committed to building a product-led growth company might have no interest in a startup that requires an army of sales reps. A founder who wants to bootstrap a startup might reject a plan that requires giving up some equity and control to venture capitalists.
Co-founders should talk about how they’ll react once the feedback starts rolling in. How close do you have to stay to the original idea to stay interested? Same product? Same market? Same business model? If you are too far off, you might want to slow down.
Vest your stock
Imagine you and your two co-founders split the equity in your startup equally. You incorporate the company and issue a third of the stock to each of you.
Six months later, one co-founder changes his mind and quits. Or runs out of money and quits. Or has a health scare and quits. Or dies, and is, well, no longer contributing. Your co-founder’s 33.3% stake in the company is “dead equity.” It doesn’t represent any work or money adding value to the company. It’s a permanent drain — from now on, every founder, employee, or investor involved with your company will realize a third less value than they otherwise would have. You’ll struggle to stay motivated and attract new hires. Raising money will be nearly impossible.
Solve this with stock vesting. You, your co-founders, and your employees will all need to vest your stock over at least four years, perhaps even longer. Raising money from angel investors or VCs will force you to put this vesting plan in place anyway (no sophisticated investor will invest without it), but there is no reason to wait. Have the discussion up front and put the vesting plan into motion right away.
Depending on your locale, there are various mechanisms to do this, either via stock options or by giving the company the right to buy back your shares on a vesting schedule. Again, work with your attorney.
Mind your intellectual property
A nascent startup is just a small collection of people and their ideas. When those people sit at a table together brainstorming strategies, hacking some code, or building a sales pipeline, you can easily see the contributions of each person like you doing a group project at school. Sarah wrote some clever code. Sanjay generated a list of prospects to cold-call. Klaus mocked up a cool user interface.
But an invisible entity is sitting at that table with you: the corporation you just founded. All of the work your team is doing is to add value to that legal entity, which means that Mrs. Corporation will own all of the intellectual property (IP) that you create.
What makes it even more confusing is that in some places, namely the United States, the corporation does not automatically own that intellectual property, even if the people creating it are paid employees or contractors.4
Everyone who works on your startup has to explicitly agree that the intellectual property they create is owned by the corporation. This is true for co-founders, employees, contractors, agencies, and even that random college roommate of yours who hung out in your office for a month before deciding to get a job at TikTok instead of joining you. They all need to sign a “Proprietary Information Inventions and Agreements” document (PIIA), where they assign the IP they create to the company and agree to keep the company IP confidential. Again, your attorney can help you.
You do not want those people to show up years later, once you have had some success, claiming they own a piece of your business. You don’t want a round of funding to fall through because you can’t get a disgruntled ex-founder to retroactively sign a PIIA. You don’t want an acquisition to fall apart because you can’t produce the PIIA of some randoms who worked for you briefly eight years ago.
Does it seem awkward having a contractor sign an agreement who is only going to work with you for a few weeks? Does it seem awkward having your college friend sign a contract even though you trust him completely? It doesn’t matter. Do it. This is what it means to be a founder.
Put someone in charge
Co-founders are often friends or are at least friendly. They may have been peers at previous companies. They usually work side-by-side, contributing equally, to start the company. They often split the equity equally or close to it.
But corporations are hierarchies, and someone needs to be in charge. Every company needs a CEO so that someone has final responsibility for decisions and results. Co-founders should figure out who will be the CEO early in their relationship.
Some founders avoid this discussion because they fear it will be awkward or that they’ll uncover irreconcilable differences. That is exactly why you should have the conversation. You need to ensure you are aligned, plus you need to be great at having difficult conversations with co-founders. You’ll have harder ones.
“We’ll just make all of the decisions together” does not work, since you’ll never reach consensus on every one of the long series of hard decisions that are in store for you. “Let’s be Co-CEOs” has the same problem. Founders often do it for the wrong reason: to avoid conflict when they both want to be the CEO. Important decisions can go unmade since no one has the final call, and your team can end up confused about how to get things done. Some startups have made it work, but, if you do it, you need to do it for the right reasons and find a way to split responsibilities so that you define which of you is the single owner for as many functions as possible.
Treat your team like owners
Let’s say your startup has three co-founders. They are employees 1, 2, and 3. You then hire three more people: employees number 4, 5, and 6. What is the difference between your three founders and three employees, other than who gets to brag about having the lower employee number?
The answer is whatever you want it to be, but you should seek to minimize the gap between founders and non-founders. If your plan is, “The founders make all the decisions, and we hire employees to implement our plans,” you are well on your way to creating a culture as political and toxic as many large companies. You also won’t be able to hire anyone great if you expect them to sit in the corner and be worker bees at a 6-person company.
“Founder” is not a job description, and it won’t necessarily be the case that the founders are the most talented and most senior members of your team. Your job as a hiring manager is to hire the best people possible. If you bring in someone more talented than you, you’ve done a great job. Sometimes founders even report to senior hires who were brought in later.
The qualities you want in your first ten or so hires are not that different from the qualities you want in co-founders. You should be clear about what skills they bring and that they complement yours. They should have some interest or passion in your business and be a cultural and philosophical match with your team. They should want to take on a broad set of responsibilities, learn rapidly, and be willing to live with the risk of failure.
You should plan to give these people large equity grants –- it’s not fair for them to do the same amount of work and take the same amount of risk as you but get a hundredth of the equity just because they joined a few months later. If you want them to act like owners, they need to be owners.
Now that you’ve started out the right way, we’ll talk about why you need to focus on what matters and “Ignore the Noise.”
If you have feedback or suggestions for future posts, please comment or contact us at uninvent@substack.com.
When George R. R. Martin coined “Chaos is a Ladder” he probably didn’t know he was talking about startups.
Noam Wasserman covers the 65% statistic in his great book The Founder’s Dilemmas, which we refer to several times in this series.
YCombinator has great resources for finding and vetting co-founders, including a set of questions to discuss with potential co-founders. First Round Capital has an even more extensive list of 50 questions. Ester Perell also has some excellent writing and a podcast on co-founder relationships.
If you are really interested, you can read about Stanford University v. Roche Molecular, a U.S. Supreme Court case that ruled that employees usually own their inventions unless they explicitly assign them to their employers.
Awesome writing here Mike! So much here that founders can learn through your experiences! Hope all is well ... Ian