Why selecting your co-founder(s) could be the most important decision you make. Ever.
In 1999, I had a desire to get involved in the “dotcom” scene. Working at a large consulting firm, I had developed some software that had “potential” commercially. While I was originally shy about taking what I had learned and making a real software product, a co-worker encouraged me to “run with it”.
He was smart, still is. We shook hands and decided we would be “co-founders”. What ensued was a three-year journey of ups and downs that not only took our friendship but also our company with it. We both agreed that I should have “slightly more” to prevent deadlock over important decisions.
We added a third “founder”, a technical guy and raised money from a “seed fund”. The eventual goal was to land “real” venture capital. And while I was “technical” I didn’t want to play that role.
We raised top tier venture capital. With a thirteen-slide power-point and multiple-laps around Sand Hill Road in Silicon Valley, we received backing from TWO, top-tier venture capital firms. I thought I was amazing. The firms would tell us repeatedly that they back teams and markets and try to limit “execution risk”. I guess we fit the bill.
We closed on the investment. We went about recruiting a killer board with top-level execs from all over. We built a first-generation “MVP” product and sold it to three, yes three enterprise customers. We REALLY thought we were something.
With our freshly filled bank account, product and customers, we went about the process of “scaling”. We hired almost 100 people, including a “proven CEO” to help guide us. In hindsight, he was actually really good and I learned a lot from him. But, I was immature and was getting a big head. So were my co-founders.
The initial funding turned to a big “Series B”, which was designed to scale big and fast.
THEN — the New VP of Product Development tells us the MVP product needs to be redeveloped on a proper “architecture” and we need to stop selling the old product. Crap.
In this process, we took a really dilutive round of financing. So much that our founder’s original “shares” were basically negligible. The board could see my interest waning and decided to “top up” my shares. But they neglected to top up the two original co-founders with me. From that point forward, our paths were somewhat set in a different direction and I was the enemy.
The resulting carnage is a topic for another post, but what I will say is the decision on how we handled founder shares set the path for this company from day one.
So now what? How do I handle this NOW?
After almost twenty years since this experience, I have been involved in countless “founder” share conversations and seen many “founder marriages” break apart, but I’ve also seen some blossom.
In fact, since this experience, I have insisted on retaining control of my companies. This isn’t healthy either, because sometimes, OK A LOT of times, I am simply wrong. But it does make decision making easy. This isn’t completely good.
I’ve studied several academic models for allocating founder shares, commercial “systems” for assigning value and tracking time, etc. None of them work all of the time, but some of them may work for your situation.
Here’s my summary:
The unfortunate reality is the founder-share negotiation remains one of the most critical decisions you will make. It’s rare that founder relationships stay the course for the full life of the company. Talk to a good attorney, protect both your interests and get to work.
Feel free to contact me at charlie@enspir.com
