Co-Founder Dating: Red Flags
Navigating the minefield of potential Co-Founders will often be the first major challenge of starting a new business. The sad truth is that there is an order of magnitude more bad candidates than good and finding the right fit might not seem crucial to you at the onset; However the wrong Co-Founder in an important position can sink your startup fast.
In this article we will discuss red flags that I personally missed during the creation of my first company, things that you too will likely miss with the rose colored lenses of your first startup. You can read this and think to yourself “Well this won’t apply to me,” I did the same thing while reading scores of books on startups when I first started; But everything I am going to discuss in this article DOES apply to you.
I am trying to keep you from the same sleepless nights, bitter battles over equity, and heartache that I endured.
First and foremost lets go over some basics that apply to everyone you choose to bring on to your founding team:
1| Vesting Schedule — Everyone joining your team needs to be on a vesting schedule. The temptation early on will be to give the founding members full vested equity immediately, before any real work has been done. This completely removes any urgency for them to provide any work, if they already own 25% there is no incentive for them to work hard. When I created my first company I gave out equity to the founding members based on what they promised to do, and when reality came crashing down I realized I had given them enormous sums of equity for work that they never were going to do. Now I use the somewhat-standard 4 year vesting schedule with a 1 year cliff. This means that your co-founders will not have ANY equity until the 1 year mark, and will vest every month up until the 4 year period. Like this:
Using this method will create incentive for your co-founders to continually provide value to the company or risk losing their equity in the company. We will go into more detail on the red flags revolving around equity and vesting down below.
2| Set clear expectations — Startups are the wild west of responsibilities, and wearing multiple hats will be a common requirement for founders of a young startup. When I say “Set Expectations” I really mean “Set Minimum Expectations,” Each founder should bring a core set of skills to the team and be expected to implement those skills to add value. If a co-founder is not willing to meet the minimum set expectations they certainly will not exceed them, setting these minimum expectations will help you to transition them out of the company if they fail to meet your pre-set guidelines.
3| Due Diligence is your responsibility — People Lie both intentionally and through omission, and the sad reality in the startup world is that there are plenty of people out there looking to take advantage of you. Corporations have time on their side and giant pools of applicants to sort through before making the decision on hiring a new employee, you have neither of those things on your side. If you are approaching someone with a great business idea offering them an early position in the company you need to do your research. When I started my first company I brought on a Technical co-founder to help offload some of the engineering to, fast forward 6 months and I found out that he actually had less than 10% of the engineering experience he claimed to have; Once I found out that he had lied about his work experience and engineering abilities I was left with dead weight on my cap table. I made this mistake as a Technical founder and someone who lacks engineering skills would have been even more vulnerable to someone who flat out fabricated experience. Everyone you consider bringing on as a co-founder is guilty until proven innocent, nothing should be taken at face value without research.
4| Only bring on a co-founder that brings useful skills — Your first gut reaction when coming up with an idea will be to fill your team with people you feel are necessary. However you should ONLY bring on a co-founder to your executive team that brings a skill you couldn’t just go buy. I brought on someone who was supposed to be a skilled engineer, only to have a glorified secretary doing mindless tasks that I could have hired someone for $10/hr to do. Whatever skill this co-founder brings needs to be very valuable, it could be someone with a long history of successful E-commerce, or a talented engineer who will be able to manage a larger group of engineers later down the road. Don’t hire people just because you like them and they are excited about your company, co-founders should bring a wealth of skills to the team and help to expand your overall network; the strength of your startups network will be tremendously beneficial later on.
Red Flags that I missed and how to spot them
Red Flag 1 | Hobbies Matter
Startups require hard work, long hours, extreme focus, and most importantly creativity to make them a success. Take a close look at the hobbies of your potential co-founders for several reasons:
1| Do their hobbies align with your business focus? — Your team needs to understand your industry on a deep level, and there is no better way of understanding the industry intricacies than your hobbies. When I was working with the BioLite team in NYC this was very apparent with everyone on their team, they not only worked in the industry but lived in it. Camping wasn’t just something that they had a tacit interest in, they all loved being outdoors and understood the needs of their users; Because the team was the user group.
2| Lack of hobbies — Have you ever met someone who goes home at night after work and just sits on the couch binge watching TV? Odds are this isn’t someone you want on your team. The work of a startup is 24/7 and you need to find a co-founder that is going to be dreaming up ideas at any time of the day. A co-founder that wants to unplug from the startup at 5pm every day is going to cause major headaches down the road. If your startup is dealing with production issues, or customer support problems, or the fundraising hustle the last thing you need to worry about is this founder tuning-out because they lack the drive to get things done.
3| Do you have similar interests? — Keep in mind bringing on a co-founder is like adopting a new member of your family, you are going to be spending 80+ hours a week working with this person and it is important that you can get along. Taking breaks as a team is also important to prevent burnout and engineering-block, so having similar interests will help to incorporate team building into your startup culture early on.
Red Flag 2 | Demanding Equity up front
I want you to take a break from reading this and go find a mirror, stand in front of it and say “No”. One of the first skills you need to master when founding a company is standing up for yourself, because everyone is going to try and muscle their way into your company and you are under no obligation to let them do so. Founders early on are always tempted to give out equity upfront, because they don’t know any better. Vesting schedules are usually met with push back from co-founders with excuses like:
“ What if we sell the company in year 2 and I’m not fully vested, that’s unfair”
“ But I designed the prototype and have done most of the work so far ”
“ But the company is my idea”
“ But I’m the one who got us funding”
The truth is you probably aren’t going to sell the company in year 2, getting to the prototype stage is only about 10% of the way to a successful startup, an idea without execution is worthless, and helping to get initial funding doesn’t mean you get to sit on your ass and stop helping.
If a potential Co-Founder is demanding equity upfront you need to walk away, they need you not the other way around and they are clearly approaching this project with the intention of taking you for a ride. Trust me from experience, you don’t want to be operating a startup with a huge swath of your cap table taken by dead weight co-founders that don’t do anything other than give you advice on the very startup they refuse to work on.
There are multiple methods to incorporate equity triggers that apply to the entire company. For instance if the company DOES sell in year 2, there could be a trigger that fully vests all of the founders before the sale is final. Any equity triggers should apply to the entire company and not just a single individual. Avoid creating triggers based on effort (IE. Finishing a prototype, getting to production) as these are difficult to hold up in court and often can lead to a co-founder gaming you into vesting full equity with minimal effort.
Red Flag 3 | Accomplishments > Work History
Many potential co-founders will attempt to blind you by name dropping. Whether that’s naming all of the companies they have worked for, what school they went to, or what kinds of influential people they “know.” The truth is nothing matters more than results, what has this person accomplished that matters to you. When I started my first company I interviewed a potential technical co-founder and asked him what personal projects he had going on. He showed me a project he had constructed, At first glance it was very impressive, and his attention to detail was apparent even in the 3D printed housing he had designed. So what was the problem? The problem was by the time he showed me that project almost 5 years had passed, and I neglected to ask the one question that mattered at the time: So what else have you done? Riding accomplishments from 5–10 years ago is a major red flag, especially for technical founders. As an engineer I am continually improving my skills, always working on new projects both professionally and personally, and in a never ending pursuit for knowledge. Key accomplishments happen over time so I’m not saying you should discredit anything they did in the distant past, but you are building a top tier team that will need to compete against the big dogs in your industry; Riding accomplishments from 5–10 years ago shows that this co-founder has little desire to continually push their personal boundaries.
Red Flag 4 | Lack of network
Starting a company is a numbers game, the more people in the startup world you have access to the better your chances of survival. Name dropping is a common technique for potential founders to try and woo you, but the only thing that matters is the strength of their actual network and not just the people they have met in passing. Who will this person be able to introduce you to as a potential investor? Will this founder be able to reach out to experienced founders for help when needed? Will high profile members of their network vouch for them? If you hear a name repeated by multiple people in the startup community it’s probably because they are respected. If you ask multiple groups in your ecosystem for a recommendation on a co-founder for a specific task and all roads lead to one person, that might be the right guy for the job.
Red Flag 5 | Lack of Focus
This goes for both founders looking for co-founders, and people looking for startups to join. Focus is a key ingredient for success with startups, not every facet of startup life is glamorous and you need teammates that can grind through the tough spots. When you assign them a task you need to know without a doubt that they are on it and will get it done. This goes for founders as well, if you continually throw curve-balls at your engineers and distract your business development team nothing will get done.
I hope this helps to alleviate some of the headaches that I experienced early on when founding my first startup. Do your due-diligence and stand up for yourself, you’ll already be miles ahead of the startups around you.