September 30, 2005

How to select your co-founders

Allen Morgan of Mayfield, has some great suggestions on how entrepreneurs should go about creating their start-up team - especially selecting co-founders.

He points out how VCs most often pass on interesting ideas because they don't like some of the co-founders.

..for a VC firm that is comfortable with early stage startups, an incomplete startup team is preferable to a team with the wrong team members.

First, VC’s pride themselves (some are even good at it) on being good at helping their companies recruit. If a startup has an attractive couple of founders and a terrific business idea, a VC can imagine how additional, world-class team members could be recruited to fill out the team.

...Second,.. it’s always hard to transition the “wrong” co-founder out of the Company – it’s also economically unattractive to the remaining co-founders.

Org-charts

We’ve all seen a “standard” organization chart. It has (1) the CEO at the top, (2) Four to eight Vice-presidents below, each in charge of a business function and reporting to the CEO, (3) Directors in the reporting chain below the Vice-presidents, and (4) a variety of folks with different (and non-standard) titles in the reporting chain below the Directors.

I would claim that this “standard” org chart is actually a good template to follow in organizing a startup through, say, the first 40 people. ..there is an interestingly strong correlation between (1) startups with org charts that were “contorted” in some way (compared to the “standard” one) and (2) startups that ended up with some kind of founder trouble. Thus, if there are “odd” lines of reporting, or if there are “odd” titles that don’t fit in a standard org chart, it usually raises a red flag. If you’re having trouble fitting one of your co-founders into a standard org chart, you should think about whether he’s the right person (or, at least, in the right role).

...Another thing founders often fail to realize: not every member of the founding team has to be a Vice-president (or higher). It’s OK to have “TBD” in a number of the Vice-president “boxes” in the org chart of a startup (and elsewhere). For example, don’t worry if you have a great Director of Engineering but no Vice-president of Engineering in your startup. Any Director worth his salt should be able to manage a startup engineering team through 6-8 people, particularly if the CEO has technical experience. In this situation, the VC’s question will be: will the combination of the CEO, the Director of Engineering and the company idea be attractive to a great Vice-president of Engineering when hiring one becomes appropriate.

..Almost guaranteed, any startup that has both a CEO and a President/COO has the wrong person in one or the other (or both) of those roles. This sort of title inflation and proliferation is almost always – like most other “contortions” of the standard org chart – a red flag to VC’s. Can easily be taken to indicate that some of the co-founders are more worried about titles (and ego’s) than success.

.. My advice, however, is to not be afraid of putting “Interim” in front of anyone’s title when it’s reasonable to assume that an early task of the startup is to recruit someone else to that role. This is particularly, but not exclusively, true of the CEO role. VC’s love entrepreneurs with the self-confidence and guts to start a company, as well as the wisdom to realize that they’ll need help.


UPDATE: Allen has followed-up with a very useful suggestions on how to avoid the problem of the "forgotten founder"

UPDATE 2: Jeff Cornwall provides the Why, What, How and Who of selecting your co-founder

Why:
My last set of start-up ventures worked well because my partners and I balanced each other's personalities. One of us was the aggressor; one was the worrier; one was the analyst. We always kept each other in check. This helped us to generally be fairly prudent in our decision making. Also work habits, personal goals and so forth are all important factors to consider.

What?
During the pre-venture stage of your business, one of the first challenges is to assess the specific needs of your new venture. Is there specific business expertise that you need in your particular start-up? If you will need access to a significant amount of capital, that is millions of dollars, then you will want to have someone on your team who has experience in securing such funding. I often see entrepreneurs suffer from either over kill in hiring or from under estimating the skill set needed on the team. If the venture is only going to need limited funding, say $200,000, it would be over kill to bring in a business person whose experience is in moving venture through multiple rounds of venture capital financing. On the other hand if you do need multiple rounds of VC money it is best to have that skill set somewhere in your team. Before you start adding people to your start-up, have a clear enough vision for the business to begin to know what you really need in terms of help.

How?
Just because you need help on your team does not mean the person needs to be a partner. You can often hire high level talent and offer them a limited equity stake in the deal that does not make them your equal in the venture.

Who

Here are some issues you need to explore before "tying the knot":
- Do your share the same vision for the business?
- Do you share the same aspirations for the business? Does one want to build an empire while the other create a simple lifestyle kind of business?
- What are your work habits and work ethic? Are they compatible enough to keep the partnership feeling fair to all the partners?
- How much time off to you plan to take each day, each week, each year?
- How much money will you put into the business?
- How much do you expect to get out of it?
- Who will be the President of the company? What roles will the other friends play?
- How will decisions be made?
- What is everyone's credit rating? Can all help to guarantee a loan, if necessary?
- What if one of you gets married and the new spouse gets a job offer in another city? Would you move away?
- What are your core values and how do you want to see them play out day-to-day in the business?
- How will employees, customers, suppliers, etc. all be treated?
- What will you consider to be real success in this business?

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.