Noam Wasserman: The Founder's Dilemmas [Entire Talk]

TL;DR

Only 16% of ventures are solo-founded while 84% take on co-founders, triggering three key decisions: relationships, roles, and rewards. The most common choices are often the most dangerous. Rigid equal equity splits like Zipcar's 50-50 handshake shatter when contributions diverge, while dynamic if-then-else agreements tied to real uncertainties protect the team.

Transcript

So here are founding team dilemmas. This is where we are assuming that the light bulb has gone off. You have evaluated it, you have gone through the thought process, hopefully avoided the passion becoming your downfall, the caution becoming the end of any of those aspirations and instead you have decided okay, now is the time to make that leap. A k... Read More

Key Insights

• Solo founding accounts for only 16% of ventures in Wasserman's dataset, while 84% choose to co-found, a decision that immediately triggers a cascade of further choices about the team.
• The three Rs of co-founding are relationships (who you pick), roles and decision-making, and rewards (how equity is split), which are the three factors most influential in where a founding team ends up.
• More than 50% of tech and life-sciences teams found with people they know socially but not professionally, choosing friends and family over prior professional relationships.
• The most common founding decisions are the most fraught with peril: social-side teams of friends and family are the least stable and most likely to lose a founder sooner, despite the expected glue.
• Splitting equity too early and locking it in stone, as a way to get the issue out of the way, can backfire badly when actual contributions diverge from the best-case assumptions behind the split.
• Zipcar's Robin Chase proposed a 50-50 equal split to avoid an equity negotiation derailing the venture, but after 18 months of doing nearly all the work while her co-founder kept her day job, she called it the stupidest handshake she ever made.
• The Ockham Technologies team, three prior co-workers, diverged from Zipcar by agreeing to an uneven 50-30-20 split reflecting that one founder would clearly contribute more than another who was seven years his junior.
• The most critical move a founding team can make is to zoom in on its biggest uncertainties and build scenario-based agreements, using if-then-else terms rather than punting on or avoiding the hardest risks.

Questions & Answers

Q: What percentage of startups are solo-founded versus co-founded?

In Noam Wasserman's dataset, only 16% of ventures are solo-founded, while 84% choose to go the co-founding route. Solo founding, described as taking the weight of the world onto your broad shoulders like Superman, is a valid choice if you have thought clearly about whether you have what it takes. But the vast majority head down the co-founding path, which then leads to a series of further ripple decisions about the team.

Q: What are the three Rs of founding a startup team?

The three Rs are the relationships, the roles and decision-making, and the rewards. Wasserman identifies these as the three decisions his data show are particularly influential in determining where a co-founding team is going to go. Relationships covers who you tap as co-founders (friends, family, or prior professional colleagues). Roles and decision-making covers how the team operates. Rewards covers how equity and compensation are split among the founders, which the talk explores in the deepest detail.

Q: Why are startups founded with friends and family less stable?

Wasserman's data show that social-side teams, those founded with friends and family, are the least stable of all team types and the most likely to lose a founder sooner, despite the glue you would expect to keep them together. Even within tech ventures and life sciences, where you would expect lower rates, more than 50% of teams still choose to found with people they know socially but not professionally. This most common decision is the most fraught with peril, like playing with fire that can burn you.

Q: What mistake did Robin Chase make when founding Zipcar?

Robin Chase, co-founder of Zipcar, had heard a horror story about a startup derailed by an equity split negotiation, so she proposed a 50-50 one-over-N split with a handshake to get it out of the way. Over the next year and a half she became the heart and soul of the venture, building the entire business model and partnerships, while her co-founder did not even quit her day job. She later called it the stupidest handshake she ever made, because all her hard work went equally to her co-founder.

Q: How did the Ockham Technologies team split equity differently than Zipcar?

The Ockham Technologies team was three prior co-workers who had worked together professionally. They diverged from Zipcar in two key ways. First, since it was evident one founder, seven years senior to another who had worked for him, would contribute more, they agreed to an uneven 50-30-20 split as their best estimate. Second and most critically, they zoomed in on their biggest uncertainties and built a scenario-based agreement rather than assuming the best case like Zipcar did.

Q: What is the if-then-else approach to founder equity agreements?

The Ockham team wrote a founder agreement structured like a series of if-then-else statements, reflecting Wasserman's computer engineering background. Their biggest uncertainty was whether idea guy Ken, a first-time father with a nice job, would join full time. So: if Ken is on board full time, then one equity split applies; else if he is on board only part time, another split applies; else if he is not on board at all, specific buyout terms let them reclaim his equity. It tackled the biggest risk directly.

Q: Why do founders focus on the best-case scenario when planning equity?

During the passionate early days when founders are brimming with confidence, the best-case scenario is the natural one to focus on. Founders assume everyone will be equally committed, contribute their skills, and lift the heavy rock together. This is the very inclination Robin Chase followed when laying her plans. Wasserman argues founders must fight this tendency and also think hard about the expected-case scenario and, hardest of all, the potential pitfalls and potholes, so a fragile agreement does not shatter when trouble arrives.

Q: When should co-founders decide how to split equity?

Wasserman warns against splitting equity too early and putting it in stone, believing you have taken care of the problem, because it can come back to bite you. The Zipcar 50-50 handshake shows how a rigid early split becomes a fragile agreement that shatters when contributions diverge. Instead, the Ockham approach shows the value of confronting your biggest uncertainties first and building flexible, scenario-based terms with if-then-else conditions and buyout provisions, so the agreement bends rather than breaks when real conditions differ from the best case.

Summary

This video explores the dilemmas faced by founding teams in startup ventures. It discusses the choice between going solo or finding co-founders, the importance of relationships, roles, decision-making, and rewards within the team, and the common pitfalls and challenges faced by founders. The video also highlights the high failure rate of startups and the role of people problems in these failures. It concludes by emphasizing the need for founders to address interpersonal tensions and uncertainties early on and make dynamic agreements to ensure the stability and success of their ventures.

Questions & Answers

Q: What percentage of ventures have solo founders?

Only 16% of ventures have solo founders.

Q: What percentage of ventures go the co-founding route?

84% of ventures decide to go the co-founding route.

Q: What are the three influential factors in co-founding?

The three influential factors are relationships, roles and decision-making, and rewards.

Q: What are the two types of relationships considered in co-founding?

The two types of relationships are founding with friends and founding with family.

Q: What percentage of teams in the dataset go with founding with friends and family?

More than 50% of teams in the dataset go with founding with friends and family.

Q: Is founding with friends and family a better choice for a stable team?

No, founding with friends and family tends to be the least stable of all team types.

Q: What was the founders' agreement in the Zipcar team?

The founders of Zipcar made a 50-50 split agreement.

Q: How did the unequal contributions affect the Zipcar team?

The unequal contributions led to resentment and frustration, causing tension and problems within the team.

Q: What alternative decisions did the Ockham Technologies team make?

The Ockham team made an uneven split agreement and designed scenarios based on uncertainties, such as the involvement of one founder and their potential replacements.

Q: Why is it important to tackle uncertainties and high-tension issues early on?

Tackling uncertainties and high-tension issues early on allows the team to build trust, address potential pitfalls, and avoid compatibility issues later.

Q: What is the most common reason for startup failures?

The most common reason for startup failures is people problems, accounting for 65% of the failures.

Q: What percentage of founder CEOs have been replaced by the time the venture reaches its third round of financing?

By the time the venture reaches its third round of financing, 52% of founder CEOs have been replaced.

Q: What is the paradox of entrepreneurial success?

The paradox of entrepreneurial success is that founders who achieve high-growth and success in product development often breed their own demise by outgrowing their skills and becoming resistant to being replaced as CEO.

Q: What challenges can arise when a founder is replaced as CEO?

Challenges such as morale issues, turnover, and resistance from the founder can arise when a founder is replaced as CEO.

Q: What is the significance of celebrating milestones and raising financing in relation to CEO replacements?

Celebrating milestones and raising financing can paradoxically increase the chances of a founder being replaced as CEO, as it signifies the success and growth of the venture that may require a different leadership approach.

Takeaways

Founding team dynamics play a critical role in the success or failure of a startup venture. Choosing the right co-founders, addressing interpersonal tensions, and being aware of uncertainties are fundamental to building a stable and productive team. Successful founders must be open to the possibility of being replaced as CEO and actively work to mitigate people problems within the team. Celebrating achievements and raising financing can sometimes inadvertently lead to founder replacements, emphasizing the need for founders to be proactive in navigating these challenges and making dynamic agreements.

Summary & Key Takeaways

• After deciding to launch, founders hit an early fork: go it alone or co-found. Only 16% found solo; 84% take co-founders. That single choice creates ripple decisions Wasserman groups as three Rs: relationships, roles and decision-making, and rewards.

• On relationships, over half of tech and life-sciences teams found with friends or family, people known socially but not professionally. Yet the data show these social teams are the least stable and most likely to lose a founder, making the most common decision the most perilous.

• Zipcar's Robin Chase locked in a 50-50 split via handshake, then did nearly all the work while her co-founder kept her day job. In contrast, the Ockham team used an uneven 50-30-20 split and if-then-else terms tied to their idea guy Ken's uncertain involvement.