Review: The Founder's Dilemmas by Noam Wasserman

A nice overview of some of the key decisions that every entrepreneur has to make: decisions that are more important than most founders expect, decisions where the options available are not always obvious, and decisions where the implications can be surprising or even counter intuitive. Getting these decisions wrong can be catastrophic: “if entrepreneurship is a battle, most casualties stem from friendly fire or self-inflicted wounds.” These decisions include whether to be a solo founder or look for co-founders, whether to work with family and friends, how to split equity, how to define roles and titles, whether to hire more experienced or more junior people, whether to raise money, the types of investors to work with, and how to handle founder-CEO succession.

The book is based on quantitative data from a decade of surveys of thousands of companies, plus qualitative data from interviews with a few specific companies and founders (e.g., Evan Williams of Blogger, Medium, and Twitter and Dick Costolo of FeedBurner). It’s written in a dry academic / business style, and not all the content is especially helpful or actionable, but it’s still a useful read for every founder to be aware of the issues that every startup runs into.

A few of the key insights I got from this book:

(1) One of the key trade-offs every founder will have to make is whether they want to optimize for wealth or control. Do you want to end up “rich” or do you want to end up a “king?” It’s exceptionally rare to get both; founders like Bill Gates, who ended up immensely rich and managed to retain control of Microsoft for decades, are extreme outliers (that’s why you hear about them so much in the first place!). The vast majority of founders will need to pick one or the other. The book contains some compelling evidence that:

• Founders who optimize for wealth over control, make, on average, 50% more than those who optimize for control. However, these founders rarely end up in control of their companies (e.g., as the CEO), the companies evolve differently than those founders may have wanted, and those founders often find themselves ousted entirely.
• Founders who optimize for control over wealth end up with smaller, less valuable companies, but they are able to stay with those companies longer, and build companies that more closely resemble their vision.
• Founders who try to optimize for both are more likely to get neither. For example, if you mostly optimize for wealth, but toss in a few items here and there to retain control, the typical result is that, on average, you slightly decrease the odds of a rich outcome, slightly increase the odds of a king outcome, and significantly increase the odds of failing to achieve either one.

(2) To optimize for control, you might make the following decisions: be a solo founder or only work with “weaker” co-founders; keep as much equity for yourself as possible; hire solely from your personal network; hire primarily junior employees; structure the organization so that all important decisions go through you; hold on to the role of CEO as long as possible; avoid raising money if possible; if you do raise money, prefer raising from friends and family, angel investors, and other funding sources (e.g., debt) over venture capitalists, and minimize investor control (e.g., minimize equity, voting rights, board seats, etc).

(3) To optimize for wealth, you might make the following decisions: build a founding team with the strongest co-founders you can find; share equity to attract co-founders and employees; hire from as broad of a network as you can and minimize hiring of family and friends; hire senior, experienced employees; delegate decision making to appropriate experts; be open to giving up the CEO role and other high-level roles to the best candidate; raise money primarily from venture capitalists and be open to investory-friendly terms to attract the best investors (e.g., more equity, voting rights, control over the board, etc).

(4) According to the data in this book, entrepreneurs make 35% less, on average, than people who get jobs. This doesn’t surprise me too much, as founders often have to take no or low salaries when first starting a company, and many startups go out of business, so that probably brings the average down considerably. I’d love to see the variance on this data, as I bet founders have both the worst outcomes (no salary followed by bankruptcy) and the best outcomes (making millions from a huge exit), whereas employees probably land mostly in the middle (reasonable salary).

(5) Working with friends or family is usually a bad idea, as you’ll be making decisions according to what’s best for these personal relationships, rather than what’s best for the business. If you do work with friends, and especially family, it’s critical to set up “firewalls” in advance (a bit like a prenup for a marriage). That is, before starting to work together, come up with a written plan for how to handle conflicts or issues; if possible, try to have the family and friends report to someone else on your team; etc.

(6) When a founding team is deciding on an equity split, keep in mind that the vast majority of the work of a startup is in the future. Most teams decide on an equity split after working together for days or weeks, but it can take many years, even decades, to build a company, so don’t overweight the early work! E.g., If one founder has spent 3 months work on something, and another founder joins, it might make sense for the first founder to get a bit more equity, but don’t overdo it, for if the company is successful, it’ll likely take ~10 years, making those first 3 months only a tiny part of the overall success.

(7) Some of the key factors to consider when allocating equity to each founder:

• IP: Is this founder contributing IP they already have? How much of the IP of this company will this founder create in the future?
• Time: How much time has this founder already invested into the startup? How much time will they spend going forward (e.g., part time vs full time)?
• Skills: What skills does this founder bring to the team? Are these skills unique amongst the team? How critical are these skills to the success of the startup? Is there any other way to get these skills (e.g., outsourcing)?
• Networks: What sort of network does this founder bring to the startup? Could they bring in a ton of great employees? Investors? Customers?
• Cash: Will this founder be funding this company?

(8) Consider using dynamic equity splits rather than static ones. At the very least, every founder should be subject to a vesting schedule. However, you may want other dynamic terms based on specific situations: e.g., what happens to the equity if a founder gets sick; earning more equity based on achieving certain milestones; etc.

(9) Be thoughtful with titles:

• Typically, you want to pick a single CEO, and do so early on. It’s an awkward conversation to have amongst co-founders, but if you struggle with this conversation, you’ll struggle even more with all the other important decisions, so do it early.
• Be wary of handing too many C titles (e.g., CTO, COO, etc) out too early (e.g., just to attract great hires). If that person turns out not to be a good fit for that role when the company grows (e.g., they are a good CTO when the company has 3 engineers, but they don’t know how to handle a 300 person org), you won’t be able to place anyone above them (the C titles are always the highest in a company), so you’ll have to change their title or even fire them, which can be a very unpleasant situation.

Rating: 4 stars