While all employees should believe in the company, only a co-founder will share your conviction because their reward structure and the way they’ve structured their life will align with the success of the business.
Founders of start-ups carry a tremendous burden; all the responsibility, pressure, and decisions to make from day one. That same burden tempts many founders to bring on a co-founder to help shoulder it all.
Some founders need to free up time to focus on building their product, growing their customer base, or simply need a sounding board to help develop their ideas while others look to fill a skill gap.
Bringing on a co-founder is not a decision to be taken lightly as it can have serious consequences for the business. Only when all of the below are true, do we recommend bringing on a co-founder:
If you have a gap in expertise but can’t afford to pay a full-time hire or raise funds, an advisor or mentor may better suit you at this stage. If your business is dependent on a skill you don’t have and there’s nobody willing to advise you, learn it yourself and do it “good enough” until one of the other factors change.
There’s value in having a sounding board and partner in crime to hustle alongside you, however giving up a major equity stake in your business early for someone who only brings “time” or “ears” to the equation often doesn’t serve the best interests of the business.
Don’t confuse equity with control. You can use share classes to retain control while using equity as a financial instrument to defer risk and attract talent.
The value of equity for those who understand it is that they can potentially get a massive cash payout during some future exit event if things go well. In more risk-averse cultures such as Asia, there’s a greater burden to educate prospective employees, who may prefer a cash-heavy package and less risk. Creating alignment with them for the long-term through an equity-oriented compensation package means they are more likely to put their best into the business and stick around. Conversely though, if they don’t see enough progress and potential quickly, they may decide to cut their losses and move on quickly.
All co-founders, yourself included, should be granted equity with a one-year cliff and vesting over four years. This demonstrates commitment to the business and investors, and protects the business from bad actors or underperformers.
You can further add clauses to allow the business to execute buy-backs when staff exit the business under certain circumstances; this keeps the cap table clean for investors while also keeping equity in your toolbelt to attract talent.
If they still want a bigger cash package, take the time to understand their financial needs, and evaluate whether their cash ask is because they understand the risk of the opportunity and are willing to take it on in exchange for impact and large financial upside if it goes well, or whether they are more risk-averse and focused on cash compensation as their primary reward (if so, they’re probably not a co-founder). If they just don’t want a pay cut, they’re probably not thinking about the business as a co-founder/owner who is accountable for the success of the business (and subsequently would most benefit from its success).
Taking into account these factors, be careful with equity and differentiate between employees, long-term teammates, and true co-founders.
It’s easy to accidentally evaluate people on “preparedness” when they’re still looking to understand the business. They may not have a lot of time to prepare, and their capacity to spend hours scouring the internet and asking around to learn about your business is usually completely unrelated to their ability to do the work and add value, so give them all the information so you can have better conversations and make a better decision untainted by inherent bias.
Put together all the info about your industry, competitors, what you do, culture, team, objectives, needs, and high-level plans with as much detail as you can. Share it with people you speak to when there’s mutual interest in exploring working together.
Be wary of bringing on people you’re already friends with, it carries baggage. That doesn’t mean they’ll be bad hires, it just means you need to be careful that any shorthand you’ve developed through your friendship doesn’t alienate other teammates or lead to miscommunications that are harder to correct due to the personal relationship.
Friendship is a bonus that may come from working together over time, but it’s not a requisite for a successful hire / co-founder or for your business to thrive. Resist the urge to hire based on who you like best or feel the best rapport with, and focus on who has the right skills, work ethic, values, and cultural alignment with your business.
They may think differently and communicate differently, which sometimes feels jarring but shouldn’t deter you; different patterns of thought will enrich your leadership team as long as you’re able to collaborate and communicate effectively and there’s sound reasoning behind it.
Align on values and look for patterns of success DOING.
As a startup, you need people who have built things. Push them to explain what they did, get in the weeds.
People who only talk at a high level and can’t ideate on quick actions to deliver impact in your business are unlikely to thrive.
Everyone needs to bring a lot of value in the early stages when there are few people in the business and they’re all relying heavily on each other. It’s fair to expect a lot, but you need to define that and hold each other accountable.
It’s easy to work 100-hour weeks and get lost in the work, but clear objectives and measures of success also help you draw a line to take breaks, achieve balance, and maintain mental health. Building a successful start-up is a marathon, not a sprint.
Connect with us if you’re in a position to hire a leader in your start-up team, and we’d love to help you take your business to the next level.
ARTICLE by Phil Diamond, Partner, 20 February 2023