Editorial Reviews. Review. "Winner of the Entrepreneurship Practice Award , The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can. 1 Sequence of Founding Dilemmas Wealth-versus-Control Dilemmas Principal 1 Relationship Dilemmas, in the Context of the Broader Set of Founding. The Founder's. Dilemma by Noam Wasserman. Included with this full-text Harvard Business Review article: The Idea in Brief—the core idea. The Idea in.
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The founder's dilemmas: anticipating and avoiding the pitfalls that can sink a startup /. Noam Wasserman. p. cm. — (The Kauffman foundation series on. The Founder's Dilemma. The Founder's Dilemma. magazine article. Noam Wasserman. Save; Share. Save; Share. Most entrepreneurs want to make a lot of money and to run the show. New research shows that it's tough to do both. If you don't figure out which matters more to.
If not, you may need cofounders who have the technical expertise, sales background, or social connections that you lack. The most successful solo founders are those with significant expertise in multiple business and technical functions, a hearty financial cushion, and valuable industry connections in the relevant field. Birds of a feather flock together, and so do founders. Creating a more diverse team gives you access to a wider network and those skills that you originally craved for your team in the first place.
Avoid temptation. As much as they may share the intangible qualities and values of the startup, they are highly likely to cause trouble like when the board asks you to fire your brother. Above all, make your expectations clear for the founding team. Address them. Bring in an objective outside voice if necessary.
Some founding teams, including those with friends and family, make disaster plans ahead of time to soften arguments and exits. Roles You chose to have a founding team and picked the very best people to complement your weaknesses in human, social, and financial capital. Yes, you need a CEO.
As fluid and dynamic as initial roles can be, you will still need someone to carry the CEO title. And you need to think really carefully about who that person is. One way to make the call is to assess who brings the most to the table — who is most invested in the startup?
The original idea person is not automatically the most committed on the team, although most startups will naturally gravitate to crowning the idea person chief. Creating a clear division of labor will help accountability and creativity to flourish. Successful founding teams balance strict division of labor and collective work styles. Founding teams can lean toward egalitarian decision making models unanimous votes, equal say in every decision or hierarchy.
This will be critical, especially once you start to hire others without founder status. Overall, founders need to recognize there will be conflict among your founding team. Any good team doing a great task will face disagreement regardless of how much rapport and camaraderie you have in the bank.
Choosing when to spell out equity shares, how to apportion them, and when to revisit the split may be the most delicate set of questions you face. Address rewards after relationships and roles. Do not spell out equity until you know who is committed to your team and their contribution.
Some members of your founding team will be motivated by decision-making power and control, perhaps a lasting seat on the board. Others will care more about their equity stake and increasing the value of the company as quickly as possible. Having significant equity stakes available for new hires can sweeten the deal for an experienced hand to join your team.
Vesting has its place. It is not always a sign of mistrust if you include vesting in the equity agreement.
Dynamic forms of equity arrangements can account for unexpected loss of a team member, a dispute, or the ever-changing market. If the timing is right, put the agreement in writing to keep communication clear and avoid further dispute. Do they want to be rich or king? Few have been both. There is, of course, another factor motivating entrepreneurs along with the desire to become wealthy: The surprising thing is that trying to maximize one imperils achievement of the other.
Entrepreneurs face a choice, at every step, between making money and managing their ventures.
Founders are usually convinced that only they can lead their start-ups to success. At the start, the enterprise is only an idea in the mind of its founder, who possesses all the insights about the opportunity; about the innovative product, service, or business model that will capitalize on that opportunity; and about who the potential customers are.
The founder hires people to build the business according to that vision and develops close relationships with those first employees. The founder creates the organizational culture, which is an extension of his or her style, personality, and preferences.
From the get-go, employees, customers, and business partners identify start-ups with their founders, who take great pride in their founder-cum-CEO status. Their attachment is evident in the relatively low salaries they pay themselves.
That was so even after taking into account the value of the equity each person held. Many entrepreneurs are overconfident about their prospects and naive about the problems they will face. For instance, in , Purdue University strategy scholar Arnold Cooper and two colleagues asked 3, entrepreneurs two simple questions: They invite family members and friends, angel investors, or venture capital firms to invest in their companies.
In doing so, they pay a heavy price: They often have to give up total control over the enterprise. Once the founder is no longer in control of the board, his or her job as CEO is at risk.
But, paradoxically, the need for a change at the top becomes even greater when a founder has delivered results. Let me explain why.
The first major task in any new venture is the development of its product or service. They think investors should have no cause for complaint and should continue to back their leadership. At that point, leaders face a different set of business challenges. The founder has to build a company capable of marketing and selling large volumes of the product and of providing customers with after-sales service.
The organization has to become more structured, and the CEO has to create formal processes, develop specialized roles, and, yes, institute a managerial hierarchy.
A technology-oriented founder-CEO, for instance, may be the best person to lead a start-up during its early days, but as the company grows, it will need someone with different skills. Indeed, in analyzing the boards of privately held ventures, I found that outside investors control the board more often where the CEO is a founder, where the CEO has a background in science or technology rather than in marketing or sales, and where the CEO has on average 13 years of experience.
Thus, the faster that founder-CEOs lead their companies to the point where they need outside funds and new management skills, the quicker they will lose management control.
Success makes founders less qualified to lead the company and changes the power structure so they are more vulnerable. Investors wield the most influence over entrepreneurs just before they invest in their companies, often using that moment to force founders to step down. A recent report in Private Equity Week pithily captures this dynamic: In other Seven news, the company named former Onebox.
One Silicon Valley? In such cases, investors allow founder-CEOs to lead their enterprises longer, since the founder will have to come back for more capital, but at some point outsiders will gain control of the board.
Whether gradual or sudden, the transition is often stormy. In , for instance, when a California-based internet telephony company finished developing the first generation of its system, an outside investor pushed for the appointment of a new CEO. The founder refused to accept the need for a change, and it took five pressure-filled months of persuasion before he would step down.
Used to being the heart and soul of their ventures, founders find it hard to accept lesser roles, and their resistance triggers traumatic leadership transitions within young companies. On the one hand, they have to raise resources in order to capitalize on the opportunities before them.
If they choose the right investors, their financial gains will soar.
My research shows that a founder who gives up more equity to attract cofounders, nonfounding hires, and investors builds a more valuable company than one who parts with less equity. The founder ends up with a more valuable slice, too. On the other hand, in order to attract investors and executives, entrepreneurs have to give up control over most decision making.
Choosing money: A founder who gives up more equity to attract investors builds a more valuable company than one who parts with less—and ends up with a more valuable slice, too. Soon, he had several suitors wooing him, including an inexperienced angel investor and a well-known venture capital firm.
Joining him on it would be only his cofounder and the angel investor himself. If he accepted the other offer,though, he would control just two of five seats on the board. Triandiflou felt that Ockham would grow bigger if he roped in the venture capital firm rather than the angel investor. After much soul-searching, he decided to take a risk, and he sold an equity stake to the venture firm.
Similarly, at Wily Technology, a Silicon Valley enterprise software company, founder Lew Cirne gave up control of the board and the company in exchange for financial backing from Greylock Partners and other venture capital firms. As a result, CA bought Wily two years later for far more money than it would have if Cirne had tried to go it alone.
On the other side of the coin are founders who bootstrap their ventures in order to remain in control. Having set up nine stores, he has repeatedly rejected offers of funding that would enable the company to grow faster, fearing that would lead him to lose control.
Most founder-CEOs start out by wanting both wealth and power. Their past decisions regarding cofounders, hires, and investors will usually tell them which they truly favor.
Once they know, they will find it easier to tackle transitions. Founders who understand that they are motivated more by wealth than by control will themselves bring in new CEOs. For example, at one health care—focused internet venture based in California, the founder-CEO held a series of discussions with potential investors, which helped him uncover his own motivations.
Such founders are also likely to work with their boards to develop post-succession roles for themselves. What do boards do with founders after asking them to step down as CEO? Ideally, a board should keep the founder involved in some way, often as a board member, and use his or her relationships and knowledge to help the new CEO succeed.
Many times, keeping the founder on board is easier said than done. Founders can act, sometimes unconsciously, as negative forces. They can resist the changes suggested by new CEOs and encourage their loyalists to leave. Some boards and CEOs try to manage those risks by taking half-measures, relegating the founder to a cosmetic role, but that can backfire. His successor also wanted Cirne to give up his position as board chairman. Boards can sometimes help founders find new roles.
The more concrete value the new CEO adds, the easier it will be for the founder to accept the transition. Founders who want to be CEO for a longer time in their next venture need to learn new skills.