Wednesday, November 12, 2008

Questions for Cofounders

I'm in the middle of solving the highly nonlinear equation of idea, cofounder, and investment. I wrote about my cofounder search here (if you're interested, drop me a line).

Startups fail for many reasons: Running out of money, no product-market fit, and cofounder drama. Now is the time to protect against drama. I want to set reasonable expectations on both sides and have good conflict resolution mechanisms.

Below is the list of questions I want to address with potential cofounders, somewhat inspired by Dharmesh Shah's list (his list is more generally applicable - mine is more about personalities).

  1. What's your long term life goal? Some want to be the next Bill Gates, Larry Page, or David Filo. Others want to get rich and retire. How did they come up with their goal? How does this startup fit into that goal? If this fails, would they do another one?

  2. What kind of company do we want to build? Should it be a 37signals – a profitable thought leader? Or do we want to shoot for the moon and be a Google? Get a clear reading on your cofounder's ambitions and long-term commitment.

  3. What kind of work environment do we want to create? How are we going to treat employees? Lavish perks like Google? Strict hierarchies like GE? Think about what kind of employees you want to have, how open you want to be with them, and whether you want to hire fresh hotshots or experienced veterans.

  4. How are we going to split responsibilities? What will we be doing on a daily basis? The best situation is where founders all have clear ownership of one part of the product, or processes like fundraising and bizdev. Make sure you can trust the business guys. Avoid situations where cofounders with similar backgrounds all focus and battle about one part of the puzzle.

  5. How are we going to resolve conflicts? Is it enough if we have a one-on-one meeting every week where we discuss problems, or do we feel more comfortable with a written mechanism? A friend pointed out the book Under the Radar which described the Red Hat founders' protocol: A founder with a problem could write a one-page memo on letter paper. The others would have to respond in writing within the next 24 hours.

  6. What are our preferred work patterns? You'll have to be able to stand each other all day. Make sure you understand each other's work styles, hours and quirks.

  7. Who makes the final decision? I.e., who's the CEO? Multiple founders might want this this position. It seems prestigious but it's hard. Choose wisely.

  8. How much of the company will each of us own? A conversation that can easily get heated. Equal parts are probably wrong. Cofounders who contribute less to the equation should get less. Yet it's hard to measure contribution. Also, you should vest - agree on the parameters.

Once you get into the details, the list goes on endlessly. Are we going to sign emails "Founder" or "Co-founder"? Do we have full access to each other's calendars? Who's going to authorize payroll? Do we reimburse our cell phone bills? Most of these won't make a difference though.

Let me know if I'm forgetting something. I'd love to hear your thoughts and experiences from similar situations. What results did you get out of these conversations? Any sources of drama I forgot?

P.S.: I recommend keeping Dharmesh's questions and conflict lists bookmarked.

8 comments:

James Byers said...

Gabor, these are great questions. I think you've hit the major issues, especially in covering both life-level and work-level questions.

My only concern is with #8 when there are two founders. I believe 50/50 is strongly preferable to an uneven split. If we're talking about an early-stage company, future contributions will vastly outweigh what's already been done. (Note I'm assuming we're not in a situation where one founder contributes large amounts of capital to the startup.) If one founder brings much more to the table than the other, I worry that the imbalance will automatically set the pair up for more conflict down the road when expectations about founders' rights have to be overruled by ownership percentages. If the two founders will contribute differently going forward -- one founder is part-time, one founder is full-time, etc. -- there's yet more room for tension.

If not 50/50, consider making the second person a very well compensated employee.

Gabor said...

Thanks, James.

50/50 sometimes works. However, there are very few instances where two cofounders are exactly equal in contribution, relevant skills, and commitment.

You say that the imbalance sets you up for conflict, while I think that balance probably does so more. I'd love to hear from people who have experience with 50/50 splits - how did that work out down the road?

trevelyan said...

People who worry about the semantics of job titles don't tend to be ideal co-workers. Are these really your priorities?

Build your product, figure out who your team needs, and figure out how to bring them on board.

Gabor said...

trevelyan - I'm not worried about the semantics of job titles. Where do I even mention them?

IMHO, these are the things you need to figure out to have a long-term positive and productive relationship with a cofounder. If you ignore red flags here, you might still be successful if you do a quick build-and-flip. But those schemes seldom work, and the startup could sink long-term in the sea of drama.

Shafqat said...

Hi Gabor - great list. At NewsCred, we've done a 50/50 split, and it works out great. While I agree that in most situations, the two cofounders won't be contributing exactly 50% each, but I think it should be so close that its difficult to measure. In that case, 50/50 works well.

That said, it's usually one of the cofounders who come's up with the idea. While ideas are cheap (and execution pricelss), I do think that being the guy who has the original idea does deserve an equity bump. To balance that in our situation, the 2nd cofounder brought something extra to the table (a bit of extra capital).

Good luck with the cofounder hunt!

Michael Jolkovski said...

It's ALWAYS an important time to guard against drama. Being clear about the structure of the thing in the way you describe can go a long way toward keeping a partnership on track.

I especially like the point about having a method to address conflict. Tech startup people are susceptible to the notion that if things are set up rationally then conflict won't occur. This is wishful thinking given what we know about human beings. Cofounders can be blind-sided by serious, angry conflict if they don't anticipate it.

James Byers said...

I should have noted in my original post that Adam and I are equal partners in Wikispaces. It's worked out very well, and I wouldn't hesitate to recommend the same structure to others -- assuming they're in agreement about the other questions on your list.

Saïd Radhouani said...

Since it's very difficult to measure the contribution of each cofounder, I think there is no better way than 50/50. But it's not fair to have 50/50 if someone contributes significantly more than the other at the same level (i.e. technical, capital, etc.). In order to avoid this problem, one solution could be to avoid that cofounders have similar backgrounds. They should be complementary: the contribution of each one must be necessary for the company running, and must have a direct impact on the final result. For instance, one of them can manage the technical level, while the second manages the other levels (capital, marketing, etc.). This could also answer to the question " who makes the last decision?". Indeed, in this strategy, each cofounder has his own responsibilities at his own level(s).

The importance of this problem could be reduced when the cofounders have same ambitions, same energy, and same motivation to achieve the same goal!