One of the first big decisions every founding entrepreneur has to make is whether to dive into the deep end alone or as part of a founding team. There are plusses and minuses on both sides. It’s a lot easier, or so it would seem, to make the leap in tandem with someone you trust. Shared risk.
Many venture capitalists also prefer to invest in startups led by founding teams for that same reason.
On the other hand, taking on cofounders cuts equity, immediately. It also introduces a dependency on consensus to make major decisions, or any decisions. Those two drawbacks can seem irrelevant when you’re talking about a six-week-old company worth nothing, but careful planning on the front end can save a world of heartbreak, and even the company itself, down the road.
I’ve never started a new company with a cofounder, but I’ve never started a new company alone. This hasn’t been a rule, it’s just been the way things worked out, and it has worked out very well for me.
But that’s me.
For one, I’m technical, enough so that I can whip up a viable beta on my own. It’s never pretty, but sometimes you don’t need pretty out of the gate. For example, a well-known designer/UX friend of mine offered to redesign ExitEvent for free early on in its life. I respectfully declined (with much gratitude), telling him, “Ugly is how we roll.”
The truth, however, is that I didn’t want to polish a moving object. I code in such a way that I can tear everything down and rebuild it within a couple days if not a few hours. This is much harder to do within the limits of good design.
Eventually, once it was acquired, ExitEvent went through a massive redesign. It’s much better now.
That anecdote also suggests one of the other primary reasons why I usually set out alone. My entrepreneurial style is to get an MVP out quick and respond to feedback immediately. Within the span of ExitEvent’s first 12 months, it was a meetup, then a network, then a news source. It was crucial that I didn’t have to take the time to sell any of those changes to a team.
But by no means was I alone on the ExitEvent journey. I had other local successful entrepreneurs helping me set the tone, I had advisors giving me a constant stream of feedback, and of course I had writers creating content and partners hosting and pouring beer for the events.
So what’s the difference between putting people around me to help stand up my company and taking on one or more cofounders?
That depends on your definition of “founder.”
And there should be only one definition.
Too many times, I see first-time entrepreneurs take on cofounders for the worst reason possible—that founder status is defined by how early you join the company. This should never be the case. While it’s perfectly acceptable to hand out equity to bring on early help, founder status is an entirely different animal.
Even if that other definition is tripped—that founder status should be applied to anyone without whom the company could not exist. This sounds great on paper, but again, this shouldn’t dictate founder status. You may not be able to create the company without technical help, but technical help can come from a lot of different sources.
Oh yeah, money invested in the startup has nothing to do with founder status. An investor is an investor, regardless of who they are or when they commit.
Founder status should be defined by a few objective things:
And then there is a more subjective definition—Are you working for this person? Because you will be.
- Did this person help originate the idea, or has his or her expertise in the field expanded the original idea into a new idea?
- Does this person have the vision necessary to make the company successful?
- Is this person going to be responsible for making decisions regarding the direction and the future of the company?
But to put it in terms that are easy to understand, when you take on a cofounder, you’re getting married.
I know that’s not the most politically correct analogy, so I’ll back it up by stating the difference between taking on a cofounder and hiring an employee is NOT the difference between getting married and dating. It’s the difference between getting married and hiring an employee.
They’re that far apart.
Regardless of which way you go, you have to make sure you trust the person and he or she is right for you and vice versa. I'm always cognizant of the fact that I could mess up a person's life, so I have to make sure he or she has the same love and the same risk tolerance as me.
But when it’s a cofounder, it doesn’t stop there. You are committing to this person, you are placing all your trust in this person. And if it goes bad, well, if you’ve ever been through or seen a messy divorce, it can be just as awful.
There can be irreconcilable differences. Maybe you no longer see eye to eye, you have to pivot and he or she doesn’t agree with either the decision or the new direction. Or maybe the thrill is just gone, circumstances have changed in his or her life that knock the startup down on a personal priority list.
Worst case, you didn’t know enough about that person going in—not as a friend or a colleague, but as a life-partner. And then you find out at some point that your partner now a liability. And you can’t get rid of the person because he or she's got a ridiculous amount of shares, a board seat and/or voting rights.
Again, I hesitate to make the analogy to a prenuptial agreement because for one, I don’t believe in them, but in the case of starting a company, they’re a requirement. There should be some basic agreement, preferably drawn up by a lawyer, stating who owns what, when it vests and what happens when it unwinds.
Like I said, hiring is hard too. You may lose talent early on by sticking to your guns and keeping the equity allotment in the reasonable 1-2% range (you can go higher earlier, depending on your needs and situation).
Always think of your business as a $100 million business, not a $100K business, and do your math that way. Ask yourself, if everything goes right, is this person’s contribution worth $10 million or $1 million or $100K, and delve out the equity that way.
If the contributions are worth half, $50 million, then make that person a cofounder.
Most of the time, in fact nearly all of the time, the decision to go cofounder over founder makes sense and works out for everyone involved. But that doesn’t mean you shouldn’t do some preventative maintenance in the first place. You can always adjust an agreement if things go super well, but you can never go back in time and create that agreement in the first place.