Thoughts on team

Team. The old VC adage “I’d rather invest in an A+ team with a B+ idea than an B+ team with an A+ idea” is definitely true. Your people are the most important asset in a new venture. I suggest that you to look at three different areas of people: founders, advisors and directors. They are all very important at the early stages of a startup, but they are also very different.

Founders. The king of identifying founders’ issues is Noam Wasserman, PhD, Harvard professor, blogger (Founder’s Dilemmas) and author of “The Founder’s Dilemmas, anticipating and avoiding the pitfalls that can sink a startup.” Noam is the leading researcher about founders in the world. Over a 10-year period, he studied approximately 9900 founders, 3607 startups, 19K executives in total. Pretty impressive. I won’t summarize his book here; I strongly urge you to read it if you are thinking about starting a new venture or if you are still in the startup phase.

Noam has a lot to say about founders’ issues that crop up over and over. His number one point is that “founding decisions need to be made by design, not by default – like a prenuptial agreement. As entrepreneurs, we naturally have a healthy dose of optimism, what I call the pathological optimism of the entrepreneur. Other natural inclinations of most entrepreneurs include passion, conflict avoidance and enthusiasm. While these are essential qualities for an entrepreneur, they can lead to shortsighted decisions that can come back to bite you down the road. I sometimes use an analogy of Piglet and Pooh, from the children’s series of books by A.A. Milne.

“What day is it?“ asks Pooh.
It’s today,” squeaked Piglet.
My favorite day,” said Pooh.”

It doesn’t matter what day it is for Pooh; they are all his favorite day. As an entrepreneur who initiates a startup based on drive, passion, energy and chutzpah, you have to use objective reasoning and realism to make many of the decisions that affect your ability to survive and thrive. Having to think like this presents a dichotomy for entrepreneurs. As Noam puts it, “founders need to see past their instincts and their natural propensity for wishful thinking to grasp the full range of options and consequences.” I call this brutal prioritization. An entrepreneur needs to do what is right for the company.

In my video for this session I mention that the number one mistake that founders make is founding a startup with their best friend. This often results in a nasty breakup, where both the friendship and the startup are lost. Even if only one is lost, it’s one too many.

Another big area of contention is splitting the pie. I have seen many startups fail to get out of the gate because they can’t agree on the equity split, on who gets what. As mentioned in my video, Frank Demmler’s Founder’s pie calculator, was designed to assist with this thorny issue. The calculator uses a simple algorithm to calculate a person’s stake based on their past contribution, future commitment and the value of their area of involvement and expertise.

I highly recommend that you use restricted stock for all of your founders. I have made this mistake once, and never again. Restricted stock is the perfect vehicle for tying founders’ equity to their commitment.

Some additional things you might want to consider as you start and/or grow a new venture include:

• Idea then team or team then idea? I’ve seen both work so there is no absolute right way.
• When/how/who should I recruit for my team? You have to assess your needs and then use your network and other mechanisms to fill the gaps in your team. It’s a red flag to investors if you are going it alone because you have been unable to recruit someone else to your team. If you can’t find a fellow entrepreneurially-inclined individual to join you, then you are unlikely to be able to recruit an investor to believe in you.
• Who is a co-founder? If I already formed my legal entity but want to bring in a partner, can s/he still be a co-founder? The answer is yes, in that you can consider people who receive founders’ common stock co-founders.
• Title inflation. If everyone is a C-level executive at the early stage, how will you grow the company? Will you have to demote your team members or fire them in order to bring in experienced C-level executives?
• Defining roles. Startups eschew job descriptions but how do you differentiate between roles? Too many co-CEO issues have stemmed from the lack of clarifying early on who does what.
• Hiring employees. I got a call not too long ago that a former student who had just gotten funded announced, “Now that I’m funded I can get paid! Except that I can’t because I literally don’t know how to pay myself?” Hiring is not a casual process but has legal realities and logistics.
• Rewards. How do you reward an outstanding team member? More money? Stock? Promotion? How does this affect the morale of others? You probably have to develop clear guidelines that everyone follows to get their rewards.
• Try before buy. One method I have used very successfully is to hire potential partners or employees as consultants for a period of time. That way you get to know them and vice versa. You can move from a consultant to an employee a lot easier than having to fire an employee who didn’t work out.
• Assume things will change. Startups rarely bring to market the first product that they envision. Usually they pivot through several iterations of products before they get the product/market/timing fit right.