The Right Co-Founder
Before the idea, the market, the funding or the opportunity, the most important tool in your survival kit is your co-founder. Increase your chance of survival by picking a co-founder that meets these four criteria:
- Mutual Admiration
- Mutual Respect
- Mutual Trust
- Charisma: Leadership potential.
On Charisma: This is how a co-founder will scale, being great at programming or great at sales / marketing, but with no leadership will not scale. I rather have an OK programmer / marketer and great charismatic leader than a super star programmer / marketer with no charisma and leadership skills.
It is that charisma and leadership ability that will help convince potential customers, investors and employees to go with you and not someone else.
Three of the four criteria require time to build the “mutual” aspect. In the life of a startups there’s ups and downs, more downs than ups and you need someone you can ride it out with for years to come. Partnering with a co-founder that you just met for a particular idea or opportunity is likely to increase your chance of failure, compared to working with someone that you’ve developed a relationship of admiration, trust and respect over time.
Now you can go and create a list of at least five people that meet all those criteria.
What if you can’t think of anyone? In Spanish there’s a saying: “Mejor solo que mal acompañado”, better to go it alone than in bad company. If you really can’t find someone that fits that criteria, think real hard into your days at school, at work, network of friends … nothing? then, consider going for it as a solo-founder.
How to convince a potential co-founder to join you
With your shortlist, you will now call or meet them up in person and run through the following steps with the goal of obtaining a yes in each one.
- Confirm personal motivations: Since you know this person well, you know what drives them, is it building something people want? changing the world? making a lot of money? disrupting a particular industry? Whatever it is, confirm their motivational driver to make sure you hook them in early in the conversation.
- Confirm interest in collaborating: There’s mutual admiration right? Then you should be able to confirm that it would be indeed great to work on something together, even if it fails, because you admire their work and they admire yours.
- Would it be within the realm of possibilities?: With their motivational driver and interest in working together on something confirmed, now you ask if it would be within the realm of possibilities that you team up to work on building a startup. If the trust, respect and admiration is mutual, it should be within the realm of possibilities that co-founding a startup together can indeed happen at some point.
- Invite to follow the discovery process. This is the closing argument, if you’ve confirmed their motivating drivers, they’ve confirmed an interest in working together, and it would be in the universe of possibilities of building a company together, invite them to go through the process of building something now. If it works then you build an amazing company around what motivates both of you, awesome! If it does not work, at least you worked together on something which should still be great.
If they can’t due to timing, financial situation, family etc., you can go down the line to the next person on the list.
Founder Equity Split
Alright so now you have your dream co-founder, how should you split your equity in the company? 50/50 if there’s two of you, 1/3 if there’s three, and if there’s four…you should really re-consider if you need a total of four co-founders to start this company, but if that’s your conclusion, then 25% each.
If there’s a disproportionate amount of equity of one founder versus another it signals one of two things:
- That co-founder is not at your level, so you have bad criteria at choosing co-founders, and they should not be a co-founder.
- The co-founder is indeed at your level, but badly incentivized, and you will have problems retaining that person, particularly when things go really bad or really well. They might be OK with a disparity today but they won’t be later on and they will leave.
Oh but what if…
- “It was my idea”: Execution is more important than ideas, the successful version of your company will probably look very different from the initial idea anyway.
- “I started first”: It takes a lot of years, often 7+ to build a successful company, if you started a months earlier it does not really have impact in the long road ahead.
- “I’m the business person”/””I’m the technical person”: Founders must wear all hats, great founders are able to build and sell, although not necessarily in equal capacity.
- I bring the capital: Providing capital or fundraising alone does not make you a founder. If you are full-life in the company then you are a founder, if you bring your own capital, invest it as a convertible note or SAFE but keep common stock equal among the founders.
Aligning Founder Incentives
Alright so now you have equal equity split, how do you prevent from a co-founder walking away after a few months with 50% of the company? These are the legal concepts you can use to protect founders from each other, the company from the founders and founders from a hostile board.
Let’s run an Example assuming I’ll be your co-founder and the company will grant me 48,000 shares for each of the legal concepts (The number 48,000 was chosen to simply math but does not reflect typical number of shares per founder):
- If founder stays less than 12 months, no equity. Example: In this case I receive 0 of my 48,000 shares.
- After 12 months 25% of stock is instantly vested. Example: In this case I receive 12,000 shares of my 48,000 shares.
- After the cliff, founder vests 1/36th of granted stock each month. Example: In this case I receive 1,000 shares a month, on top of my previously earned 12,000 shares after the cliff for a total of 48,000 shares over a total of four years. If I leave in month 24 my total number of shares is 24,000.
- Single trigger: all stock is vested upon change of control or sale of the company. Example: Let’s say Google buys our company in my month 24 of vesting, in order to prevent google from firing me right after the acquisition in order to stop my remaining 24,000 shares from vesting, all my shares accelerate are granted immediately, thus accelerating the vesting
- Double trigger: some stock is vested upon termination without just cause. Example: This provides a dis-incentive from investors, the board, or a co-founder from firing me if I am not done vesting, in order to free up equity to hire a lot more other people, if I am fired and it’s not due to committing a crime like fraud then I will earn some stock, normally 12 months, without having to remain at the company for 12 months.
Now that you have agreed on founder terms, at this stage an e-mail from one of the founders to the other and a response agreeing to those terms will suffice. Here’s a handy template to get you started:
Please confirm we agree to
- 3M Shares Steve J, 3M Shares Steve W
- 12 month cliff
- 36 month vesting
- Double-trigger acceleration of 12 months
For more info, I can’t recommend Venture Deals by Brad Feld enough, you MUST read this.
Tips for Technical Founders
These are some of the common objections I hear from programmers when it comes to building their first startup:
Excuse #1: “I need a CEO, since I’m not good or don’t have experience at management/fundraising/sales”
Management: You can be CEO just as well as a “business” co-founder. Great CEOs are made not born. Leadership != management. You can be a great leader without having to be a great manager, as a founder CEO you can eventually recruit better managers than you. Leadership is not the same as management. Don’t partner up with a “business” person just because they seem good at sales, management and fundraising, make sure they meet the four aforementioned criteria.
Fundraising: When it comes to fundraising, product-market-fit and traction trumps being a slick fundraiser or past experience with investors.
Sales: Programmers tend to have disdain for “sales people” because there is an association with the stereotype of the shady used car sales man. I like to think of it another way, using an engineering mentality: you first listen and define the problem, then break it apart into smaller pieces and provide a solution to each smaller part to solve the whole. That’s your sales pitch. You are basically helping people in companies or as consumers solve their problems, you are doing engineering.
Excuse #2: “I work on it on nights and weekends. I’ll go full time when It’s ready / have a paying customer / Raise money”
200% focus will get you customers and funding faster than waiting for “the right time” and you very well know that software is never “ready”.
If like 98% of people out there, you can’t raise money from “friends and family” on an idea because your friends and family don’t have excess cash, but you already get paid to write software, it is likely that you are in the top quartile income bracket in your geography anyway, then it is more possible for you to save three months of survival cash and cut your spending than entrepreneurs that don’t write software for money.
In the very likely event that you do fail, I am very confident you can fall back on a higher paying job having been a software developer with entrepreneurial experience. I have 80+ portfolio companies actively looking for people like you.
Tips for Non-Technical Founders
Don’t be the founder that has a world-changing idea and “just” needs someone to build it for them and funding to pay for the development of the idea. What sets you apart is your ability to execute so here are some tips of what to do and what not to do as a non-technical founder.
- The advise non-technical founders don’t want to hear: Learn how to “code” and by that I mean the world of programming is very broad, you don’t actually have to be particularly good at it, but you do need to learn what’s happening under the hood and hack together even with google spreadsheets, forms, macros, google scripts, APIs and heck, why not, wordpress plugins. Could you open up a bakery without knowing how to bake? You don’t have to be a master baker but knowing how to bake and how it all happens will decrease your chances of failure. It’s the same with software and startups.
- Recruit a technical founder that meets the aforementioned four criteria, not just because they can “code” and you can’t, but rather because they also meet those criteria. Recruiting a technical co-founder is way easier when you’ve made some effort yourself at building something first rather than “hey here’s an awesome idea, I just need you to build it!”
- Substitute a technical co-founder with a software development company, even if they are doing it exchange of some cash and equity or all equity. You need a person as a co-founder and the core intellectual property of your startup needs to be developed by people that are not only employed directly but that also have stock options or restricted stock with cliff and vesting.
- Partner with someone you don’t know well already. Remember, mutual trust and admiration takes time to build.
- Provide less equity to a technical co-founder (read above regarding equity split).
Feel free to reach out on twitter @andresbarreto (faster) or through here if you have comments or questions