I spoke at Stanford last year about starting a tech company. They really cleverly chopped the video up into small bite-sized segments.
So for anybody who reads my “This Week in VC” transcripts but doesn’t watch the video–this one’s for you! It’s only 3 minutes, 44 seconds.
I covered what I call “the co-founder mythology.” So embedded is this conventional wisdom in Silicon Valley that it feels like heresy to even question it. It’s a sacred cow, for sure.
So emotional is the topic that people often want to debate me based on the title before they’ve even heard my point of view. If you’re interested in the topic please watch the video by clicking on the image above.
Here is a quick summary of my POV:
- When you start a company a 50/50 partnership seems obvious. Either you’re not technical and you think you need a technical co-founder or vice-versa
- Conventional wisdom says that you gain far more in working as a team than you lose by diluted by half before you start.
- Conventional wisdom doesn’t account for all of the things that go wrong in partnerships over time; especially ones that are formed quickly and without a long gestation period.
- It is increasingly popular to have “founder dating” or “startup weekend hackathons” of some variety or the other. We get cast together with a team of people we barely know and if we win we gleefully announce we’re going to do a company together. We don’t even know whether they snore.
- You often have very limited perspective on whether this person will continue to be a great partner 2 years down the line, 4 years down the line, 8 years down the line
- Even if you *think* you know them, people change. One person gets more risk averse, the other has more risk appetite. One person gets married or has kids and starts to de-prioritize the business. One person loses the passion for what you do. Or you have disagreements about strategy, recruiting, funding, etc.
- 50/50 partnerships can be hugely unstable–even if you’ve been friends since high school.
- And all of the hard work is ahead of you. You’re only going to find out whether they’re TRULY a great partner after you’ve put in years of money, blood, sweat & tears.
- I think most people do 50/50 partnerships because they’re afraid to start alone. It’s scarier because if you fail it was only you and all your fault. Somehow it feels easier to leap together. I know. It’s what I did the first time.
- I say, “go ahead & take the leap” if you want to start a company (many people don’t want to–that’s OK, too.). Hire your co-founder. Give them a large sum of equity. 20%. 30%. Even 40%. Vested over 4 years. If you ever fall out of love you have a pre-nuptial agreement. I talk about that in more detail here.
- Truly treat them like a co-founder. Give them access to all confidential information. Involve them in fund raising, hiring, strategy, etc. Publicly call them a co-founder. Don’t rule like a dictator. But … if you have very big disagreements about funding, risk levels (e.g. like how much burn rate), whether to sell the company, etc. you won’t be backed into a corner or unable to make tough decisions.
Here’s the reality: most people don’t want to start a business. They don’t have an idea. They don’t want to come up with one from scratch. They don’t want the risk of the first 3-6 months with no salary and having to walk around with a tin-cup for funding. So most people join companies. That’s OK. It’s the more sane thing to do. Startups have high failure rates.
Most senior employees who join are given 2% if they join early. Maybe they get up to 10% if they joined REALLY early and were senior. Who gets 30%? Nobody. That’s who. So trust me when I tell you that you can hire incredibly talented people for 30% of your company. Or 20%. Let’s be honest–even 10%.
And here’s the thing–given that all of the hard work is IN FRONT of you (as in the next 8 years of your life)–why would you start out with an unstable position if you don’t have to?
I know many people reading this will violently disagree. And some of them will be from startups that are already very successful. If it’s working–no problem. I’m not saying it will never work. But many of the cases where it goes well are when the company hasn’t struggled. We’re all friends when things are moving up and to the right.
If you do decide to go down the 50/50 route, please at least consider:
- Make sure you have founder vesting for both of you. It is not uncommon to see startup founders walk before raising capital and take large pieces of equity with no vesting. That means that the people who stay get to work their arses off to try and make money for the person that walked. Why risk it?
- Make sure you have a very clearly established governance structure. None of this, “we’re co-founders, we just work well together. So we’re co-CEO’s” BS. Pick a leader. Have a clear path to resolving conflicts if they arise.
- Discuss up front how you’re going to resolve any conflicts. Discuss topics such as funding, risk orientation, how long each of you wants to be doing this business, what happens when one partner wants to leave or one isn’t performing?
- I wrote about many of the early-stage startup mistakes here.
OK. Now feel free to shoot the messenger.
Just please read one more message first: I promise you for as great as you feel about your current partnership agreement–I meet far more people who had problems with theirs than founders who didn’t have problems. People just don’t talk about it publicly or in blogs.
I meet far more second or third time entrepreneurs who wouldn’t do a 50/50 (or 33/33/33) partnership ever again than you would image.
I am one of them.
Update: Russell Fradin makes a great point. If you’re already “been to war with them” in a company and know their character I would consider it more. There are some people you trust like family. I have about 2 of those.
Reprinted from Both Sides of the Table
Mark Suster is a 2x entrepreneur who has gone to the Dark Side of VC. He joined GRP Partners in 2007 as a General Partner after selling his company to Salesforce.com. He focuses on early-stage technology companies. Follow him at twitter.com/msuster.