Co-Founders and Why You Might Need Them – Or Not
Written by Carl Jones
The pros and cons of having co-founders
We understand the difficulty of making this decision. How do you select the right person? Will you both be able to work together? What happens in hard times and when you are working under pressure? What happens if they don’t work out after six months, yet they hang around forever on the cap table, through an equity stake they never really earned?
My own father had difficulties with partners in his business. After the last one he swore he wouldn’t go into partnership with anyone else. In saying that he also built “his” company with his wife, so in my mind he had a co-founder the whole time.
While these are all valid points, there are ways to deal with these issues.
Do you really need a co-founder?
To begin with, I’ll contradict myself, the myth of needing a co-founder has already been debunked. CrunchBase, a large database of the start-up ecosystem, analysed thousands of start-ups. The analysis showed that more than half the exits recorded did so with a single founder. In fact, the average start-up had 1.72 founders.
On the flip side, a lot of investors and accelerators, including 500 Startups and Y-Combinator, are notoriously anti single founder companies. Paul Graham, of Y-Combinator, has single founders as the top reason for start-up failure.
Why you might do…
We don’t take that much of a hard line, however, having single founder companies in our own portfolio gives us some unique insights as to why the approach can be challenging.
What we have found is that single founders start to work in a bubble. They don’t have anyone alongside them, through the good and bad, to help them when they face the challenging decisions, or to challenge the decisions they do make.
I’ve experienced first-hand the difficulty of making strategic decisions alone. It’s tough. Compare that to being able to talk through strategic issues with people who are with you at the coalface, and then basing your decision off a robust debate with different viewpoints. Hands down I would prefer the latter. Yes, a good mentor or board can help, especially when they have the right experience, but not quite in the same way that a co-founder can. When you are in it together, you really are in it together.
Mentors take their own context from their past success(es) and at times their lack of ‘skin in the game’ can flavour their advice. With all the will in the world mentors and advisers can’t, and shouldn’t, be alongside founders every step of the way. Their engagement tends to occur during weekly catch ups, or more frequently during crunch periods.
Our own companies seem to flourish more when they have multiple founders. Their strategy is more robust, the culture is stronger, and the gaps are diminished. Each founder brings a different set of strengths to offset the others’ weaknesses.
While there is an argument each way, our belief is that that having a co-founder adds a huge amount of value to building your start-up and is preferable to going it alone. We wouldn’t recommend having too many – three seems to be the ideal maximum – as you can get negative effects from too much dilution and by having too many cooks in the kitchen.
How do you approach bringing on a co-founder?
Strengths and Weaknesses
First you need to have a good handle on where your own strengths and weaknesses lie – you are not just adding people to make up the numbers. Having a strong team in each of the core areas is important (Rei Inamoto’s Hacker, Hipster and Hustler), so consider where you lie in this mix. Dive deep into potential founders’ skillsets, experience and backgrounds. Have they done this job before, or are they just seeking a title on a business card?
Be wary of bringing friends or family on. There may be a good rationale for doing so, but they must clearly fit the bill in terms of their experience, capabilities and culture. When you are close to someone their faults are hard to see, so seek advice from people who will be straight with you.
Co-founder, or employee with an ESOP (Employee stock ownership Plan)?
The important thing to keep in mind here is whether you are simply bringing on a (possibly lower paid) executive with an equity stake, or ESOP, or if you are bringing on someone who can share the decision making with you. If it is the former, then they are just an employee – which is fine but make that distinction. If it is the latter, then you need to be prepared to share the decisions and give up a reasonable chunk of equity. We often talk about alignment and it’s no different in this situation.
Equity and Vesting
If you are offering equity, we recommend you do so only after you have spent some time working together. Either bring them on first as an employee, or alternatively, if you want to attract them in with equity then make sure there is a clear agreement in place for vesting – being the allocation of equity over time i.e. percentage points each year over a 3 to 5-year period. It also needs to be a fair amount, as a 5% stake sounds more like an employee with an ESOP. You need someone who is committed for the long term, but you also need a way out if it all falls apart.
In summary, we do take on companies with single founders, however, we encourage you to think about the skills you might need alongside you and whether they are best suited to come in as an employee or a co-founder.
Ultimately it is your call, but it is worthwhile considering whether you need a partner who can ride the roller-coaster of building a start up with you, or an employee who will work with you, until they don’t.
There will be arguments for whatever you choose, so its really in your hands to decide – that is until you bring on a co-founder.