Team

A startup’s founding team is the number one determining factor of a startup’s success or failure.  That’s why investors look for great teams first and foremost.  The people behind the curtain are so important because the startup will encounter dozens of roadblocks and potholes.  When these setbacks happen, the founders make decisions that will determine the fate of the company.  Good decisions will lead to forward progress, but a few bad decisions can doom the company.

This chapter will help you understand why you should probably wait to partner, how to put together a powerhouse founding team, and best practices to make partnerships work.

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Who’s the Boss?

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When it comes to partnering with someone else, the only time a 50/50 equity split makes sense if when you can’t do it without the other guy.  If this isn’t the case, the person who’s bringing more to the table should get more equity.  Everything feels equal in a 50/50 startup, which can handicap you because it’s harder to make decisions.  You need a boss, which is usually determined by who owns more equity in the company.

There are a few ways to determine who should get more equity, but more is usually given to the person who came up with the idea, who has put in more time, and who brings more value to the table.  If you’re pursuing a biotech solution, and your partner invented the technology over the last five years, it probably makes sense that she would be the majority owner.  If you plan to quit your job and work on this full-time, while your partner can only commit 10 hours a week, you should get most of the equity.  Give this a lot of time and attention – misallocating equity because no one wanted to broach the topic can lead to resentment that festers over time.  It’s infinitely better to figure it out at the beginning.

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Form an Advisory Board

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You need an advisory board to hold you accountable and challenge you.  Forming a board actually isn’t that difficult once you know how they’re structured.  Your end goal is to load your board with four or five accomplished people, who have a mix of startup or industry experience.  Create a short list of potential advisors, and then get to know each person over a few meals.  Test the waters and probe to see if their experience would be valuable to your company, given its long-term direction.  You know you’ve got a good fit when they get excited about your business and the prospect of getting involved.

Once you have him on the hook, it’s time to reel him in.  Do this by putting some equity on the line.  Normally, an advisor gets 0.5-1.0% in exchange for advising you over a set period of time, usually two years.  In exchange for the equity, he agrees to meet at least once a month for an hour.  In these meetings, usually conference calls with your entire board, explain your most pressing issues.  After you explain the situation, stop talking and let them earn their equity.  If you’ve succeeded in putting together the right advisory board, the advice you get should be pure gold.

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Delegate, Don’t Abdicate

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The temptation of every overworked entrepreneur is to hand off responsibilities as quickly as possible.  Don’t delegate duties until you’ve done them yourself first.  To do otherwise is to abdicate, not delegate.  Whether it’s a lack of time or a low confidence, abdicating responsibility is irresponsible. Even if you’re a terrible salesperson, try to drum up a few sales before hiring anyone else to take over.

Proper delegation is essential. First of foremost, you’ll learn critical information by doing the job yourself.  By going on a few sales calls, for example, you might realize that a core feature of your product completely missed the mark.  Good luck discovering this insight through a game of telephone with your new salesperson, who barely knows the product, doesn’t understand customers’ needs, and probably doesn’t care about your company’s long-term success.

More than feedback, you need to know what it takes to get the job done. By doing it yourself first, you’ll know what to look for when hiring. Also, you will be able to tell when the person you just hired is cutting corners or trying to pull a fast one on you.

Don’t abdicate.  Do the job yourself first, then delegate.

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Sharing a Submarine

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Before you partner with anyone ask yourself, “Would I share a submarine with her?”  Given the long and hard hours you will spend together, this isn’t much of a stretch.  If this is impossible to imagine, proceed with caution.

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Mess with the Vest, Die Like the Rest

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Vesting is a way to make people earn their equity over time. Instead of giving 100% of an equity grant up front, vesting allows you to award it over time.  With a four-year vest, which is the usual amount of time to vest, equity would not be awarded in full until after four years have passed.

You can choose to award the prorated equity in monthly or yearly installments (known as “cliffs”).  After 18 months, a four-year vest of 10% with a monthly cliff results in 3.75% equity earned (18 months passed /48 month vest * 10% equity grant).  With an annual cliff, the same 18 month time period results in only 2.5% earned, since the second year hasn’t yet been reached (1/4 * 10%).

The benefit of vesting is that it creates a strong incentive for your employees and partners to stick around.  It also protects you if they decide to leave early, since they get to keep only the equity that they’ve earned.  Everyone in the company with equity should be subject to a vest, especially cofounders.  Without a vest, your 50% partner can leave after a few months and keep all 50%.

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Take a Timeout

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Starting a company is like having a baby.  You and your team are creating something special where there was nothing before. Because you and your team care so much about what you’re building, highly contentious conversations are inevitable. You will have disagreements about everything – from completely meaningless things like how you should answer the phones, to key decisions that will fundamentally affect the course of your startup.

The question is not whether you will have these conflicts – all founding teams do.  Instead, you have to figure out how to turn the lemons into lemonade, and these clashes result in positive and productive outcomes.  The best way to do this is to take a timeout.  Take a timeout when the conversation is counterproductive and spiraling downwards.

It’s even better to be proactive when you can.  If you need to make a contentious point, ask for a delayed reaction.  For example, if you want to give your partner important feedback, but have experienced negative, knee-jerk reactions in the past, start by saying, “I want to give you some feedback, but I don’t want you to react right now.” This delay will diffuse the emotion and give him time to think rationally before engaging emotionally.

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You Are Not Scalable

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When you first started out, you did everything yourself. You designed the brochures, you called on customers, and you responded to every e-mail.  Heck, you probably even built the website yourself. But in your quest to build a scalable startup you must realize that you are not scalable.  There are only so many hours in the day, and you cannot have your finger in every pie as the company grows. To continue to do everything yourself is not only impossible, it’s ridiculous.  More than just annoying your team, your reluctance to delegate will be a major bottleneck to your company’s continued growth.

Working with others requires trust and humility.  You have to trust your team with greater responsibilities, and you have to be humble enough to see that others can execute as well as you can.  Your time is better spent on things that only you can do – strategy, vision, partnerships, and morale.

Most entrepreneurs have trouble letting go of the details, so this might be hard for you.  Think of yourself as a movie producer.  Your purpose is not to execute every detail of the project, but to get the right people in place, who can execute your grand vision.  Show your team the vision, then help them execute.

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Fire Yourself

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Different modes of leadership are required to transition your company from inception to maturity.  Broadly, you can split a company’s lifecycle into two phases – search and growth. At inception, a visionary entrepreneur is needed, with all the expected characteristics: bold, risk-taking, thrives on uncertainty, action-oriented, short attention span, and so on. These characteristics, for better or worse, are what allow a company to discover a repeatable and sustainable way to make a profit.

However, the game changes drastically after you nail your business model.  Once this happens, the business enters a growth phase, which requires a manager instead of an entrepreneur.  While the entrepreneur searches, the manager refines. The growth mode is much more methodical, process oriented, and predictable.  The typical entrepreneur usually scores negatively in all of these areas, and can actually hurt the company’s prospects.

Rare is the founder who can lead effectively in both entrepreneur and manager modes.  They call for completely different skills and temperaments.  And the stakes are high – transitional mistakes are usually company killers.  Consequently, many experienced founders would rather hand over the reins to a professional management team and start over again with a new company. Isn’t that the fun part anyway?

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How to Get the Best People

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Getting top talent can require paying the highest salary, but not always.  Stock options are an obvious incentive to keep your employees invested in your company’s success. But salary and stock options are extrinsic motivators that will only get you so far.

Often, the best motivation doesn’t come from outside rewards, it comes from within.  Everybody has six basic human needs in life: certainty, variety, significance, connection, growth, or contribution.  Find out which of the needs get your prospective hire fired up, and then show how the job directly links to those needs.  You see this done all the time with social startups, which link their companies to some greater good, such as a BHAG (Big, Hairy, Audacious Goal) or an emotional social issue.

Beyond extrinsic and intrinsic motivators, there are a lot of startup perks that make you more attractive than corporate America, such as a flexible schedule, constant challenge and variety, and the feeling of accomplishment.

Look for people who thrive in the challenging startup environment, understand their motivations, and link their jobs to those motivators. You’ll be amazed at what you can pull off.