What are the odds, specifically? According to a decade of extensive research by Noam Wasserman – an HBS professor and author of the new book, The Founder’s Dilemmas – 52 percent of founders are gone by the time a company raises its third round of funding. Only 27 percent of founders who step down initiate the move themselves; the other 73 percent are fired.
To learn more about the phenomenon, I asked Wasserman — whose case studies are already being taught at 15 top business schools around the country – to sit down with me over coffee earlier this week. We discussed why founders lose control, when, and whether there’s anything to be done about it. Our conversation has been edited for length.
What’s one common, early misstep that worsens a founder’s chances of steering a company to success?
The bad founder equity split. One of the most make-or-break stages for a team is accurately splitting the equity and ensuring it can be adjusted for uncertainties. In my data, 73 percent of founding teams split the equity right around founding, and 33 percent of the teams split it evenly. But at founding, you don’t even know yet what your business model is; you don’t know what your strategy is. You’re going to pivot at least once, if not multiple times, and you don’t know whose skills are going to be appropriate when that happens. You don’t know even know in terms of the team’s commitment what will happen. Everyone has the best of intentions, but all sorts of things happen along the way that can impact everyone’s level of commitment.
Not doing the hard work of evaluating whether a particular split makes sense – punting and saying, ‘I don’t want to introduce tension, so let’s just go 50/50’ — is very much destining a startup for major problems.
How can you put off decisions about equity without alienating everyone?
I’m not in the camp of pushing it off as long as possible, because that’s definitely going to cause problems on other fronts. The better model is taking an early, first cut at trying to match the contributions to the amount of ownership that each person will have, but also anticipating there will be uncertainties and defining how they’ll affect the split.
In my course, I teach about a team that was uncertain of whether their idea person could come fully on board. He’d just become a father when they were launching; he had a very nice job. He wasn’t sure he wanted to mix startup life with family life. The team had a very open discussion about it, then said: ‘If he’s fully on board, here’s what the equity split is going to be. If he’s partially on board, this is what the split will be. If he’s not on board, this is what it will be.’ There are all sorts of ways teams can adjust vesting terms, too.
What other early decisions can a founder make to strengthen his or her position?
For first-time entrepreneurs, maybe waiting a little longer and accumulating more skills, a better network, and a bigger nest egg makes sense. An entrepreneur who wants to maintain control also has to figure out how to find rising stars who aren’t as expensive so they can control their burn rate. They might also pick a model that will be more self-funding, or pick an industry where they can go a bit more slowly [without vast financial resources].
In your book, you note that many effective founders are replaced, including when investors suddenly focus on building out a huge sales force or want to expand into other areas in which the founder has no experience. When that happens, is it better for the founder to stay on the board or move on, and do most founders have a choice?
Founder-CEO succession is one of the highest tension points in a company’s life, especially because it’s often the case that the entrepreneur is succeeding at the time, and so not anticipating being switched out for another person. Most founders do maintain ties to a team through a board seat, but it’s very high risk, especially if the founder is unhappy with the change and unhappy with what the board is trying to do, including possibly changing out early, loyal employees and pivoting on strategy. The change can take a company to the promised land; it can also mean the beginning of the end.
With so many unknown variables around every corner, some critics argue it’s impossible to teach entrepreneurship through a book or class.
We can definitely take common themes learned through trial and error and educate people so they’re better equipped to deal with the messiness of life. If we can teach them about the mistakes we can anticipate, it lets them focus on the other inevitable pitfalls that we perhaps can’t.
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