Archive for the ‘co-founders’ Category

The Quick Handshake: A Valuation Penalty?

When do co-founders split the equity equally, and does an equal split affect their venture’s later valuation? We are currently conducting our annual CompStudy survey. (I’ll soon be posting details about how to participate.) Over the last two years, I have enhanced the Founding Team section of the survey, so we can get a deeper view of various founding issues. The first issue I am revisiting is how founders split equity among themselves, an issue that I first surfaced in a series of posts over the last few years (e.g., Splitting the Pie: Founding Team Equity Splits, Equity-Split Results, Part 1: When Do Teams Split Equally?, Equity-Split Results, Part 2: Implications for Team Stability, The Idea Premium: How Much (Equity) is Your Idea Worth?, and New: “A Note on the Legal and Tax Implications of Founders’ Equity Splits”). For these new analyses, I have been collaborating with Prof. Thomas Hellman, and our initial paper has just been accepted for the annual summer-time conferences of both the Academy of Management and the National Bureau of Economic Research (NBER). In the paper, we take a detailed look at the drivers and the financing consequences of founder equity splits. Below I outline the core results in each of these two areas, and would love to get your input about them (especially about the financing consequences). Note: For these analyses, we combined the data from the 2008 and 2009 CompStudy surveys, including both Technology and Life Sciences ventures. Across the two years, we received complete survey submissions from a total of 576 multi-founder teams. Dropping 65 repeat respondents in 2009 gave us a full dataset of 511 ventures, which included 1,476 total founders. Part 1: Drivers of the Initial Split In the initial models, we examine whether the founders’ backgrounds affected whether they split […]

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Salary Inequality Among Co-Founders: How Common?

I have accumulated a backlog of interesting questions posed to me by founders and investors (and by my students!). For many of them, my quantitative CompStudy data should be able to provide some answers. In this post, I will tackle the first of those questions. In my past analyses of entrepreneurial compensation, I have focused on founder vs. non-founder salary differences (e.g., the Founder Discount), on founders’ equity splits (the Idea Premium, how teams split, when they split equally, and the potential implications for team stability), and on related issues (e.g., vesting and golden handcuffs). However, I recently got a question from a member of a founding team, asking how often co-founders are paid the same salary — i.e., founder-vs.-founder salary differences. To tackle this question, I combined my annual datasets from 2005-2009 (including both Tech and Life Sciences ventures), and focused on the ventures that still had at least 2 co-founders working as members of the venture’s executive team at the time of the survey. I ended up with a dataset comprised of 2,815 co-founders from 1,148 ventures. Across these ventures, 26.7% of the time, all remaining co-founders were being paid the same exact salary. However, this differed by 2 important dimensions: the number of rounds that had been raised by the venture, and the number of remaining founders. Number of Rounds Raised As shown in the chart below, the percentage of equal-salary co-founders was much higher when the venture had raised one or no rounds (37% equal salaries), than when it had raised multiple rounds (dropping to 27% after the B-round and 19% after the C-round). Note: Across the 1,148 ventures in these analyses, 43 ventures were pre-investment, 264 had raised one round, 367 had raised two rounds, 270 had raised three rounds, and 204 had raised four […]

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“Founders’ Dilemmas” Course: “Building the (Founding) Team” Case Studies

In prior posts about my “Founders’ Dilemmas” MBA course, I provided an overview of the course and details about its first three case studies (which include the Introductory case and the cases in the “When to Found” module). This post covers the four founding-team cases in the “Building the Team” module. (Another case in the module covers non-founder hiring issues, and will be described in my next post.) Collectively, these cases cover wide variations in prior relationships, in role allocations, and in approaches to equity splits. For each case, this post provides the official case description, a list of the case’s core issues, and a link to its full HBS Publishing entry. As mentioned before, case studies are often valuable for helping founders, employees, and investors understand the difficult issues they are facing or will be facing in the future (or even help them gain insights into their past experiences!), so if you want to see any of the full cases, you can get them from the HBS Publishing site via the HBSP links below. MODULE #2: “BUILDING THE TEAM” – Should I be a solo founder, or should I try to attract co-founders? If I attract co-founders, who should they be (e.g., my good friends?); how should we split the roles; and, how should we split the equity? Case #1: “Smartix: Swinging for the Fences” (HBSP link)Case description: “Vivek Khuller has built Smartix by attracting classmates to co-found it with him, learning how to pitch it to top VC firms and potential strategic partners, and honing the concept and business model by testing it in smaller venues. Now, he is facing the implications of the choices he has made in each of these areas and has to decide how to manage those implications.” Core issues: Founding with classmates, Attracting […]

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Introductory Case

As promised, this post outlines the first three cases of my “Founders’ Dilemmas” MBA course (see my previous post for the course overview). This post covers the Course Introduction case and the two cases from the “When to Found” module, and provides for each case the official case description, a list of the case’s core issues, and a link to the HBS Publishing entry for that case. As mentioned before, case studies are often invaluable for helping founders, employees, and investors understand the issues they are facing or will be facing in the future (or even help them gain insights into their past experiences!), so if you want to see any of the full cases, you can get them from the HBS Publishing site via the HBSP links below. COURSE INTRODUCTION – Provide an overview of key issues from across the course. Case: “Apple’s Core” (HBSP entry) Case description:“Steve Jobs and Steve Wozniak are best friends who enjoy pulling pranks together and talking about electronics. After several small collaborations, Jobs pitches Wozniak on starting a company together to sell computers based on Wozniak’s design for a personal computer. Wozniak faces decisions about whether to quit the job he loves at Hewlett-Packard to join Apple Computer, how to define his role within Apple, whether to take on Jobs as his co-founder, whether to accept a third co-founder proposed by Jobs, and how to split equity with his co-founders. Early on, they add an outside investor who changes the company’s trajectory and who brings in a new chief executive. Later, tensions rise between the two founders as their strategic visions diverge and as the company grows. Wozniak has now learned some disturbing news about his co-founder and has to decide whether that news will affect his continuing collaboration with Jobs.” Core issues:When […]

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The Idea Premium: How Much (Equity) is Your Idea Worth?

How much more equity do you receive if you are the founder who came up with the original idea for your venture? Last month I posted preliminary analyses (here and here) of how the initial titles/positions adopted by co-founders are affected by which founder had the original idea. In a long-ago post about equity splits, I also suggested that past contributions — including which co-founder(s) had been responsible for the Big Idea — should affect the founding team’s equity split. By how much does being the Idea Person actually affect the equity split? Preliminary analyses of the responses to our 2007 Information Technology Entrepreneurship and Compensation Survey show that Idea People do receive significantly more equity than do their co-founders. I took 2 cuts at the data. The first cut was a regression analysis examining the size of the Idea Premium, after controlling for the founders’ backgrounds and other founding-stage differences. Two control variables that had statistically significant effects on the amount of equity received by each founder were as follows: Serial entrepreneur – serial entrepreneurs receive almost 10% more equity than do non-serial entrepreneurs (e.g., 45% of the equity vs. 35% of it). Capital contributed (square-root transformed) — contribute more initial capital, you get more equity, other things being equal. Also significant (though much less interesting) was the number of founders (negative coefficient; the more founders, the less equity received by each founder). Years of prior work experience and experience in the same industry were not significant. Of central interest to this post, the variable for Idea Person was highly significant. Across multiple formulations of the model and its variables, the gap between the equity received by Idea People and the equity received by other founders — i.e., the “Idea Premium” — was consistently around 15.0 percentage points (e.g., […]

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A Second Look at “Idea People” as CEOs: Should vs. Do

In response to last week’s post showing raw data about the propensity of “idea people” to take the CEO position within their founding teams, Tadej commented: I don’t think having the idea should generally affect your position in the company (that should be determined by your abilities and motivations) – some people say that having an idea is worth 20 bucks, the rest is implementation. Tadej makes an excellent point about what teams “should” do. In practice, what do teams actually do? To give us some deeper data regarding this, I ran a quick regression analysis to assess the strongest factors affecting which founder takes the CEO position. The factors I included in the regression were as follows: Serial entrepreneur — Has this founder already founded a prior company? Industry experience — Has this founder worked in the same industry before? Years of experience — This founder’s # of years of prior work experience at time of founding Was idea person — Did this founder come up with the idea on which the venture was based? The first 3 are meant to capture the “abilities” factor mentioned by Tadej, with the fourth being the variable I described in the “Idea People” post. The dependent variable in the regression was whether the founder was the founder-CEO or not. Quick technical notes: The pseudo-R-squared of this basic logit model was .07, the Prob>chi2 was .0000, and I clustered the standard errors by venture. Regarding the 3 abilities metrics, 26% of the founders had prior founding experience, 31% had worked in the same industry before, and the average prior work experience was 15.9 years. Side note: Interestingly, the Idea Person variable was not significantly correlated with Serial Entrepreneur and with Years of Experience, but was significantly negatively correlated (r=-.22, p<.01) with Industry Experience. […]

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Idea People and Their Initial Roles Within Founding Teams

Does being your venture’s “idea person” affect your initial role within the venture and the size of your equity stake? Initial analyses of data from our 2007 Compensation Survey (the 2008 Survey is currently under way — see here to participate!) suggest that being the idea person can affect your role and the size of your equity stake. In this post, I delve into the impact on roles, and in the next post, I’ll delve into the equity-stake implications (IY”H). Note: The analyses I present below are only descriptive and preliminary, and will be followed by more detailed/definitive regression analyses (which will control for differences in years of prior work experience, prior founding experiences, and other factors). Please post your thoughts on any data or statements below — I look forward to incorporating those insights into the regression analyses. In the survey, we asked whether each founder had come up with the idea on which the venture was based. Within the IT survey, we received data on 324 founding teams encompassing 880 individual founders (for an average founding-team size of 2.7 people). Of those 880 founders, 412 were identified as being the “idea people” within the team, an average of 1.3 idea people per venture. As shown in the pie chart below, 81% of the ventures had a single idea person and 15% had 2 idea people. Of the 412 idea people, 232 (56%) of them took the CEO position at the time of founding, 50 took the CTO position, another 50 took a lower-level VP position, and 30 became Chairman. Sliced another way, what percentage of people in each initial position were identified as the idea people for their ventures? Almost 85% of founding CEOs had been the idea person, 65% of the founding Chairmen had been, and 42% […]

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Board problems: Even numbers? Multiple founders?

Question #1: Is it good to have a split board? Question #2: For the founder-CEO, is having another founder on the board a good thing or a big mistake? In the Vermeer case with which we introduce the semester, the founding team of Vermeer is faced with a term sheet proposing an even-numbered, split board: 2 people from Vermeer and 2 VCs. Similarly, in my Ockham case that we did in class this week, the initial board was 2 founders and 2 VCs. From my past experiences, this situation seems to be a transitional one, wherein the even-numbered board is a temporary situation until a fifth director (often an “independent” director) is brought in, as happened with Ockham a few months later. However, while the split structure is in place, it would seem to pose a danger of gridlock, among other things. Looking at the data from my “Mentoring and Monitoring” boards paper, this problem is predominantly an A-round problem. As shown in the chart below, among the 99 ventures in the dataset that had just raised their A-rounds, 4-person boards are even more common than 5-person boards (see the blue line). This pattern changes in B-rounds and after, as shown in the red and green lines below (representing, respectively, 180 ventures that had raised a second round, and all 524 ventures in the dataset): after those rounds, odd-numbered boards are the dominant model. Thus, some questions: Have you had to deal with an even-numbered board, especially one with a 50/50 split between founders and investors? Was it only a transitional state or was it a more sustained structure? (How long did it last?) What mechanisms were tried to avoid the problems inherent in such a structure? Note: In other posts, you can see more data on how board composition […]

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Neverland, or Dictatorship?

As a start-up grows, can the founding team continue to make decisions collectively, or does someone have to rise above the others and become the final decision maker? A couple of years ago at a panel discussion at HBS’s annual Entrepreneurship Conference, the 4 founders on the panel disagreed about almost every topic raised by the moderator. The one thing on which all 4 agreed was that “a start-up has to be a dictatorship.” Each of the founders had started a company with at least one co-founder, and had tried to make all decisions by “consensus.” However, in all 4 cases, this structure had caused major problems for the start-up. Therefore, summed up one of the founders, “Either I have to be making the final decisions, or I have to be working under my co-founder who is. ‘Co-CEOs’ just doesn’t work.” At the time, I had just finished writing my Ockham case, where this issue caused disruptive tension between the founders. On the other hand, back when I first started focusing on founders half a decade ago, one of the first companies I studied was iWon, which was run pretty successfully for a while by two co-founders and co-CEOs, Bill Daugherty and Jonas Steinman. In our Entrepreneurship MBA class, we refer to this as the “Neverland” approach (the Peter Pan one), after the place where there are no parents, only children. Here’s an excerpt from an old story about Bill and Jonas. It’s Bill response to the question, “Explain how you manage to both share the CEO title. Doesn’t one person have to make the final decisions?” Daugherty: Jonas and I met at Harvard, so we’ve been friends a long time. Even though we hadn’t worked together, we had a real good knowledge of each other’s strengths and weaknesses. We […]

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Founding with Friends, Founding with Strangers?

Is it better to start a company with someone you know well (friends, classmates, family members) or with strangers? In my next post, I’ll return to “Rich versus King” and show some data, results, and charts that shed light on the phenomenon. For this post, though, I want to take a brief detour to explore a different issue. (At the same time, the issue is related to scenario #1 in the “Rich versus King” post. Or maybe I’m just seeing R-vs.-K tradeoffs everywhere I look these days!) On Wednesday night, I moderated a Founders panel for the Boston chapter of TiE. Co-founder lessons ended up being a hot topic of discussion among the panelists. The topic is related to an upcoming research project of mine (see below), so I figured the timing was good to start getting some input on the project here, with the TiE discussion providing additional input and impetus. As was the case for all four of the panelists, people often find co-founders among their friends and co-workers. For instance, in my “Ockham” case, the three co-founders worked together at a sales consulting firm before deciding to start Ockham Technologies together. (Even more extreme, in three other cases we teach, spouses worked together to either found, or take over and run, ventures.) Broadly speaking, we can call this the “founding with friends” situation. In contrast, in our “Zipcar” case (and for at least one of the TiE panelists), the founders had never worked together or even interacted on a sustained/substantive level. (Call this the “founding with strangers” situation.) At Wednesday’s panel, the TiE panelist (who has founded multiple ventures) argued that his all-business relationship with a “relative stranger” co-founder was more effective than his friendship-based relationships with other co-founders, specifically because their relationship was “all business.” Merging […]

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