In the original “Rich vs. King” post (thanks to everyone who participated in the dialogue there and helped flesh out additional pieces of the puzzle!), I argued that most founders will have to choose between building valuable companies in which they are minor players (being “Rich”) versus being major players in less-valuable companies (being “King”).
As promised, let’s get into some data to examine this “Rich versus King” tradeoff. I’ll present 3 data-graphs, then give my impression of the patterns in each one. Love to get your reactions / rebuttals!
Methodology Note #1: These charts are based on results from several multivariate regression models (using data from 460 private start-ups collected over 3 years) that control for such factors as company maturity, size, revenues, industry segment, and founder backgrounds. The patterns they present are statistically significant (at the p<.05 level or better in the full regression models) even after incorporating the effects of those other factors.
Methodology Note #2: “Company valuation” below refers to the venture’s pre-money valuation. The estimate of the value of the founder’s equity stake is a simple computation of the founder’s equity percentage X the company’s pre-money valuation. Note that these are “paper” valuations, given the illiquid nature of private-company equity, rather than the more realizable valuations possible in liquid public companies.
Graph #1: Value of Founder’s Stake vs. Founder Control
First up is a graph of the value of the founder’s stake (on the vertical axis) versus whether the founder still controls the CEO position and/or board (on the horizontal axis). Because it’s possible that this tradeoff changes as the company ages, I split the sample into a “younger” half (under 40 months old) and an “older” half (40 or more months old).
My impression: Founders trade off financial gains (here, a more valuable stake in the venture) versus control gains (here, keeping control of the CEO position and of the board). They can gain a more valuable stake by being willing to give up control, or they can keep control, not attract the best resources (people, capital) to the venture, and end up with less-valuable stakes. This is true in both older and younger start-ups.
My two cents: Each tradeoff is a valid one, as long as it’s consistent with the founder’s motivations. Founders who value control over equity value should be willing to give up financial gains for the benefits of control (i.e., to remain King). Founders who value equity over control should be willing to make the opposite tradeoff (to become Rich). The tough position is for founders who can’t decide what they want, or are equally motivated by economics and by control; they might tend to make inconsistent choices of co-founders, hires, and investors, and thus risk not achieving either economic or control success.
Graph #2: Company Valuation vs. “Equity Greed”
Next is a graph of company valuation (on the vertical axis) versus the equity percentage still held by the founder (on the horizontal axis). Once again, it is possible that founders only face the valuation-versus-control tradeoff during the earliest stages of company development, when they need to give up the most to attract key resources (people, capital) to their unproven ventures, but that the tradeoff will weaken in more mature ventures. The chart below therefore splits the companies into younger vs. older buckets again.
My impression: Founders who give up more equity to attract excellent co-founders, non-founding hires, investors, etc., are able to build companies that receive higher valuations. This tradeoff still exists (and is, in fact, statistically significant) in older companies, but is slightly less stark than in the youngest ventures.
Graph #3: Company Valuation vs. Founders Remaining
Third, less central to “Rich vs. King” but interesting to me nonetheless, is a graph of company valuation (on the vertical axis) versus the number of founders remaining in the company (on the horizontal axis). This is after controlling in the regression models for the number of original founders.
My impression: Having co-founders can be very good for helping build a valuable company. However, beyond a certain point, having too many chefs in the kitchen can be harmful (for some of the reasons covered here?) and ventures may actually benefit from losing a founder or two.
I see bigger-than-usual causality problems in explaining this factor — did founders stay/leave because the company was/wasn’t doing well, or did the company do better/worse because the founders stayed/left? — but still find the pattern, and the intermediate inflection point, interesting.
Academic aside: In a related finding, a recent working paper by European economists (using a sample of Cologne start-ups) found that, beyond an intermediate inflection point (there, 3 founders), the founding team’s “effort” dropped.
The mug below is one of the gifts I got from a section I taught in Spring 2005.
My impression: Now I just need a “No, It’s Good to be Rich” counter-mug to put alongside it, to make my “Rich versus King” shelf complete!