These are some of the most frequent questions about co-founders that I have heard from entrepreneurs over the years. In this post, I’ll try to answer these, and a few other important related questions.
Do I need a co-founder?
The entrepreneurial journey, though exciting and romanticized with stories of huge successes, is actually really lonely. It is a place where the buck starts and stops with you. You have a great idea to start a new venture and the theory goes that if you can’t convince at least one other person to join the venture with you, how will you convince customers to buy into your vision and product/service. The bottom line is that you do need someone else to bounce your ideas off of, someone who offers a different perspective at least sometimes, someone who also feels that his/her success is tied to the venture just as yours is.
How many co-founders should I have?
There is really no right or wrong answer here. I have seen many successful companies with as few as 2 and as many of 11 co-founders. For every company there are critical skill sets that are needed to get it going. It could be an engineer and a business person, or it may need two different sets of engineering skills and a business person. For most companies, two to three people are sufficient as co-founders. Two co-founders is the most ideal from management perspective. Three, though okay in many cases, can become a crowd when new management is brought in and founders start taking sides.
What are the criteria for selecting a co-founder?
I have seen many companies with spouses as co-founders succeed, but as an employee I have stayed away from joining these type of companies and advise my friends to do the same. Often co-founders are friends, but is that the best way to select co-founders? I have seen many good friendships ruined after a startup venture goes south.
Every business needs some technical skill and some business acumen. A good engineer can design something fancy but that doesn’t mean there’s a market for it or that it will sell. A good business person may know what will sell but if he or she can’t get someone to produce the right product, what good does it do? Co-founding teams should bring in complimentary, not overlapping, skills.
Should co-founders have the same equity stake?
If you asked me this question before my first startup, I would have said why not? Now that I have launched some startups, I would say there is no reason to have co-founders have the same equity stake. Most co-founders decide on the equity structure in a very arbitrary way. If you’re interested in more details about this topic, I recommend a very good book called The Founder’s Dilemmas.
I came up with a formula to make determining equity stakes easier:
Let us say founder A and B both start at the same time with similar value-add. Founder A is going to be the long term CEO while Founder B is going to be the VP of Engineering.
There are two parts to the equity:
- Founder’s Part
- Skills Part
Founder’s Part – This should be the same for both. If they started at different times or brought different contributions, that should be adjusted accordingly. But in our example, they’re even.
Skills Part – A CEO in a high-tech may get about 6-10% of the equity post Series A (when a VC or some accredited investor puts the money into company) while a VP of Engineering may only get 2%. So take this to pre-money level and assuming 50% dilution, it will be 12-20% (assume 16%) for the CEO and 4% for VP of Engineering.
Therefore 20% is based on skills and 80% is based on founding status. Founder A will get 16+40 = 56% while Founder B will get 4+40=44%
This is not the only way to do it, but it is something I have seen justifiable.
Can I fire a co-founder?
A company is a separate entity from the founder, and that relationship becomes even more separate when outside money is raised. If one of the co-founders is not performing or is being disruptive or unethical, you should definitely consider getting rid of him or her. However, never ever do this for wrong reasons, like depriving co-founders of their equity. Also, if and when you end up firing a co-founder, please do it with dignity. Everyone should be able to maintain their dignity in the process.
Deciding how many co-founders you need, who to bring aboard, and how to distribute equity all depend on your individual skills and the gaps you need filled. Whatever choice you make, be sure everyone is clear about their roles and agrees on the overall goals for the company.
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