Currently, I'm a single founder with an idea for an initiative. It's not exactly a startup yet but might become one in its later stages. On what basis should I select co-founders, and if I might need them?
Character (integrity, drive to learn & improve) and skills that you respect or admire. Then shared values and life situation: the startup should be the #1 priority for everyone on the core (full-time) founding team. Missing any of those requirements increases the risk of failure.
Unfortunately for those without a wide/deep network of college friends, former colleagues, etc. it's hard to judge character and skills without a previous friendship or shared work environment, etc. If you're forced to evaluate a potential co-founder in the absence of shared history, work on something small together for a few days/weeks and see how it goes.
Another thing to do in all cases is to discuss downside/failure scenarios right up-front, and see if there's a sense of openness and fairness. Check out the books The Founder's Dilemmas and Slicing Pie for structuring the conversations, as they give vital ideas and precedents around formalizing the founders' relationships. It's much easier to chat about failure and equity before real work starts, and I've seen many times that it flushes out assumptions and behaviors that you won't want on your team (assuming you're the reasonable and fair one :-).
Here's my best tip: Make sure they are in a similar life situation. ie. Wealth, kids, family, etc.
If one of you has three years of life savings and one of you needs money in three months, that will affect your decision making.
If one of you wants to take weekends off to go to the kid's soccer games and the other one wants to go out and drink on Friday afternoon, you had better figure that out ahead of time and make sure you're both ok with that.
Is it important for both people to sign a vesting schedule from day one?
This seems like a surprisingly common scenario: The initial agreement is a 50/50 split, and then a few months down the road one or both founders feel that 50/50 is no longer fair. If a vesting schedule is signed, you never have to think about this or revisit it.
The point of a one year cliff is that you can say "Ok" without worrying whether the other person is ineffective. If they are, you part ways.
This usually kills the company, of course, but squabbling over scraps of equity seems to do at least as much damage. Enough that YC wrote https://blog.ycombinator.com/splitting-equity-among-founders... about it. And it seems especially dangerous if you can't both agree to sign from day one, before doing any significant work.
But perhaps that's that's too inflexible. I don't know.
My thoughts on equity boil down to these two rules:
1) Always split evenly amongst cofounders
2) Always have a vesting schedule with no cliff.
Reasoning: For number 1, there is no need to start off with a battle about "who is more important" or "who contributed more". These things don't and won't matter down the line. There are basically three ways a startup ends:
1) Total failure, in which case the equity split doesn't mean anything.
2) Great success, in which case the equity split doesn't really mean much, because does it matter that you got 10 million and your cofounder for 12 million? Or
3) A meh exit. This is the only place where the equity split might matter, because maybe you'd get $750,000 to and your cofounder would get $1M. But even then, chances are since you aren't retiring off of that exit, you'll probably do it again, and do you really want to have that lingering "she got more than me" feeling, especially if you might work together again?
As for number two, the reasons for vesting schedules are covered elsewhere (in case someone leaves for any reason) but as for the no cliff -- I don't really like cliffs in general. You did the work, you should get the equity. The main reason to have a cliff for an employee is because it's a legal hassle to have a lot of small equity holders, so you want to prevent the folks who didn't work out from holding any equity. But that doesn't apply to a cofounder. You will already need them for a bunch of other legal stuff anyway, and having one or two extra shareholders really won't make much difference. And besides, even if they leave after two months, at least if they have shares they have a vested interest in your continued success.
Yes. Never enter a business relationship with someone without setting those terms, in writing, before you begin. Likewise, don't dilly-dally around with starting as a "side project" with the real, secret intention of starting a business. If you suddenly think a project is a business, then from this day forward, you set the terms in writing, then proceed. Nothing from before the decision point matters, even if you've kinda-sorta worked on the "side-project" in various capacities for years. Just make a decision, divide the equity, set the vest, write it down, and move forward with confidence.
You don't necessarily need to have a full "legal document" at this point (unless actual money is involved -- then get a lawyer or service and do it correctly), but you do need to have the terms of the agreement clearly documented from the start. If you can't handle this conversation, you can't handle business. There are going to be far more stressful conversations in your future, and this stuff is table stakes.
The good news is that this is all so standard now that you shouldn't spend more than 30 seconds on vesting: "standard 4-year vest, 1 year cliff, starting from today." Anything more complicated or deviating from this is a strong sign that you're Doing It Wrong. In certain situations (i.e. you didn't follow this advice and worked for a while before formalizing the agreement) you might set the vest start date to something other than "today", but again, it's a warning sign. Try as hard as you can to be boring.
I don’t think a 50/50 split is necessary, but whatever split you end up with has to make sense. Just because one person has a bigger personality isn’t a strong reason. If one person is quitting their day job first, or brings in partnerships on day one, etc, then it’s worth talking out. I’ve seen lots of great founder relations not 50/50, so don’t rule it out.
But ALWAYS HAVE VESTING. Repeat after me: always have vesting. I personally think cliffs always make sense because it takes time to make sure that a relationship is meant for the ages and that the other guys are as dedicated as you, but I’ve heard sound arguments for no cliff. Either way, always have vesting. It makes separations sooooooooo much cleaner and easier if the unfortunate happens.
I guess even with equal ownership it would be beneficial to decide who has the final say on things. "A pirate ship has to have a captain." Rather have the business die because of bad choices than the inability to make choices.
Generally 1 year cliff is just for employees. Usually no cliff for founders but reverse vesting. The difference is more about taxes than anything else.
I have good friends who I love to spend time with, but I never want to work with them.
I had colleagues in other teams I loved to work with, who I never wanted to have in my team (e.g. development vs operations. Really cool for problem solving and interacting on a project basis, but too different in daily habits).
I had colleagues in my team I loved to work with daily, who I never want to start a company with.
Even when you already know a lot about people that doesn't mean they'd be a good fit for a cofounder. But then I've never started a startup, I'm happily employed and don't plan on going back to be my own boss.
Ive gone through this a few times. The best approach I took was to look at myself and assess my strengths and weaknesses. Knowing that made finding people with other complimentary strengths easier, and also results in (hopefully) a better product, solution or what have you.
Choose people you work well with, who just won't give up, and share similar values. If one of you wants to build a long term company, and the other wants to cash out as soon as possible and go work for Hooli that could become a serious issue down the line.
It’s almost impossible to reduce the criteria in finding the right cofounder. Likely the ideal candidate will also look at other person with an equally critical eye as well. I’d say serendipity and chance occurrence that the business is something you both want to work on and find regular intervals of success are probably determinants in deciding (retrospectively) if the cofounder was right.
You really need to know how they are going to hold up under adversity (you will face adversity). I have always thought the idea of going on some sort of difficult adventure (long trek through harsh terrain) is a good way to see how they will hold up.
Each co-founder relationship is different, but there may be some items below of use to you.
1) Find someone who can be on the same wave length as you for 1-3 years, at least in terms of what you both want, how hard you can work at it, etc. A co-founder relationship is harder than marriage. A lot of it due to getting on the same page, and staying on the same page for 3-5-8 years isn't always easy. My marriage is much easier because of all I learnt about having and being the best partner I can be and always improving.
2) Date before you go steady, before you get married. If you meet someone interesting, try a practice project together. Too many hackathons are about making a baby over a one night stand and putting on rose coloured glasses.. Still, would you open a bank account, move in with, and get married to someone you speed dated over a weekend?
3) Focus on short-term and healthy partnerships on small projects at first. They will become long term on their own.
4) If it's all going to hell, it's going to go to hell no matter what you do, or don't have in writing.
5) Make sure your work ethic and philosophy is the same. Being effective is critical as is delivering results, being responsive, available. A startup is a baby. Don't feed it, it won't grow.
6) Don't make co-founders out of loneliness or to add people to the mix. The potential 1+1 should always equal 11 with cofounders.
7) Success in startups (and business) is about discipline, execution, focus, and doing what needs to be done, not just what's shiny or interesting. If the average maturity of co-founders is not high or strong enough, it will be hard.
8) If your potential co-founder has shiny object ADD, take that into consideration.
9) Hang out with people you can develop fierce trust and loyalty with. You can go much faster, then.
10) Vesting for shares is good. It's OK to tie it to a Harvest timesheet in the beginning. All shares are worthless unless anyways they make them valuable.
11) If you have a business development (sales) co-founder, it's not unusual to have their top line sales vest/convert to a certain percentage of equity. As a technical founder, I know I can build and deliver. I expect the sales guy to be able to deliver sales, or the only thing of value that's created (IP), falls back to the people who built it.
12) Some people will say partnership is about leverage, ultimately. This is true to some extent, however, I wonder if it should be about partners leveraging and exploiting an opportunity, instead of each other.
13) Partnerships like marriage are not measured in the good times. They are truly shown in challenging times. Being able to communicate in tough times is really critical.
14) Despite the above, learning to work with others is an invaluable skill. Just don't bank too much on others. You'll do good, and meet others who are doing good. Ignore talkers, only pay attention to doers.
I really liked this blog post from Leo Polovets for measuring the overall risk of a startup.[0]
Maybe in the same vein you could do it for cofounders? De-risk yourself by picking a cofounder that you know well and will be helpful. It's definitely not perfect but maybe this will help...
If you pick someone that you know well, you'll be a better judge of whether you'll have work conflicts later. I'm not a fan of working on a project together to test your chemistry. It's still a big gamble if you do that. People are too nice.
Your cofounder judgment ability:
- random person
- acquaintance
- previous co-worker
- friend
- family
You could draw up the major roles that you'll need to take on for the early stage part of the startup (UX, sales, engineering, design, marketing, management, fund raising, etc.). When picking a partner try to optimize for filling as many of the roles as possible. It helps if they have a different background but I think proven skills are more important.
Cofounder skill balance:
- they're me and we do all the same stuff
- same skills but different background
- they know some other skills but together there are still many gaps
- together you cover most skill gaps and have different backgrounds
- they know enough of what you don't that together you'll cover all the skill gaps
From the roles you laid out, how much experience do they have with each? Add up the points 1-5 for each job to get an idea of how likely they are to be good at their tasks.
Cofounder job experience:
- never done work like this before
- worked a bit in the industry but not this role
- worked in this role in a different industry
- worked in this role in this industry
- excelled previously working in this industry doing this job (really know the ropes)
Take these three criteria and weight them properly for a clunky formula that sorta helps with cofounder picking, e.g.
5 * chemistry + 3 * skills + (total_experience / # jobs)
non-starters:
- can't do it full time
- squabble over equity or other founding stuff
- don't want to do work (after you agree on tasks)
- talk past each other often/can't work together
I'd second what other people in this thread have said about reading The Founder's Dilemma. It's well worth the time if you haven't read it.
Unfortunately for those without a wide/deep network of college friends, former colleagues, etc. it's hard to judge character and skills without a previous friendship or shared work environment, etc. If you're forced to evaluate a potential co-founder in the absence of shared history, work on something small together for a few days/weeks and see how it goes.
Another thing to do in all cases is to discuss downside/failure scenarios right up-front, and see if there's a sense of openness and fairness. Check out the books The Founder's Dilemmas and Slicing Pie for structuring the conversations, as they give vital ideas and precedents around formalizing the founders' relationships. It's much easier to chat about failure and equity before real work starts, and I've seen many times that it flushes out assumptions and behaviors that you won't want on your team (assuming you're the reasonable and fair one :-).