 I just finished reading The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup by Noam Wasserman. It was a helpful synopsis of many of the biggest decisions that founders need to make throughout the life of their startups. I enjoyed the various specific case study examples as well as the decision flow charts throughout the book. It was nice to hear what the stats/research say in terms of how various decisions affect various things and what the breakdown of results is, and I appreciated that it was evidence-based. At a high level, many of the dilemmas revolve around the rich vs. king tradeoff, and it was interesting to see how this affects decisions around founding, team (relationships, roles, rewards), investors, hires, and exits. Below are my main notes and takeaways from the book. Part 1 intro and pre-founding
1 intro Internal people problems kill many companies Trade off between control and wealth Passion, conflict avoidance Founding decisions should be made by design, not by default Prefounding and career dilemmas Founding team dilemmas Relationship, role dilemmas Reward dilemmas Hiring dilemmas Investor dilemmas Founder succession Short term vs long term consequences Path dependence, over optimism, biases Wealth vs control Resource dependence challenge Rich vs king Almost always in direct conflict 2 career dilemmas Motivations of founders differ from non and change a little as age Males and females differ too When to found Better prep vs handcuffs More human, social, financial capital as age Accumulation of various handcuffs if wait too long Some developments can release handcuffs Examine career, personal, market factors when deciding if to found Gray area problems Part 2 founding team dilemmas Intro Solo vs team Whom to bring on board and how to split pie 3 r’s: roles, relationships, rewards 3 solo vs team dilemma Few have solo founders Flowchart to decide when better to be solo founder Trade off if adding more cofounders Symbolic founder status vs hire 4 relationship dilemmas Where to pick cofounders: friends, indirect acquaintances, cold strangers Homogeneity vs diversity Trade offs both ways Prior social relationships obstacle to professional one Damage if relationship blows up and likelihood of addressing elephant in room vary with type of relationship (family, friends, acquaintances, former coworkers) Playing with fire gap Creating firewalls, forcing uncomfortable conversations Try before you buy Compartmentalize relationships Envision negative scenarios Create disaster plans and prenups/exit contracts Involve referee and impartial advisor Lowest risk is team of former coworkers Agree on conflict resolution procedure 5 Role dilemmas and decision making Executive titles Title inflation Top heaviness Idea people more likely to be ceo Pros and cons of overlapping roles vs division of labor Egalitarian vs hierarchical decision making Usually need to evolve to hierarchy at some point Roles and wealth vs control motivations 6 reward dilemmas: equity splits and cash comp When to split and how Criteria for equity splits Past contributions Idea premium 10-15% more Capital contribution Opportunity cost Future contributions Handshake or quick equal split symptom of weakness; usually better to do it right Static vs dynamic splits Changing equity grants over time Predraft buyout agreements Vesting by time or milestones What to do if time commitment drops Salary differences between founders Founder discount compared to employees 7 3 R’s system: alignment and equilibrium Relationships, roles, rewards all linked Part 3 beyond founding team: hires and investors Intro Hiring Investors Succession 8 hiring dilemmas: right hires at right time Recruitment, rewards, control Blueprint of choices on these dimensions Relationships of new hires to founders Casting wide net vs culture fit Playing with fire gap of hiring prior personal relationships Low structural leverage initially: number of non-execs to execs Whom to hire when Specialists vs generalists Small co vs big co backgrounds Level of experience of hire usually goes up as company matures Different stages have different hiring needs and comp packages 9 investor dilemmas: adding value, adding risks Self funding Dumb money Smart money Playing with fire gap Taking friends and family money is like burning the boats Formal committees on boards; comp, audit 10 founder CEO succession By C round, most don’t have founder CEO Product development phase of startup different from scaling and selling phase with multiple departments and metrics to track Hard to move people out of positions as company grows Solution to each phase of company creates problem for next phase Loss of control of board makes succession more likely Part 4 conclusion 11 wealth vs control dilemmas Cofounders Hires Investors Successors Value of equity highest when CEO gives up both title and control of board Serial entrepreneurs more likely to be rich and king Where to found Exit choices Consistent choices yield much higher chance of achieving goal Reasons to sell Different acquisition payout structures
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