What exactly is a Co-Founder?

(This was my answer to a question on Quora)

Choosing a cofounder (1)

A co-founder is someone who has equal skin in the game. I.e. all of them are working full-time in the venture, all of them are making the same sacrifices (e.g. taking no or low salary.. unless all founders agree that one needs to take some/less/more salary because expenses like children’s school fee, EMIs, etc. have to be met).

A co-founder is someone who accepts the emotional and intellectual responsibility to convert the idea into a business, and who commits to live through the challenges that any entrepreneurial journey faces.

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What is the difference between a CEO and a Chairman of the board?

The board and the CEO have very different roles. The chairman is one of the board members who is elected by other members.

The CEO has the responsibility of running the day-to-day operations of the company.

The board’s responsibility is to provide overall direction; set vision & goals; oversee governance & integrity and take major strategy decisions [e.g. change of the business model], etc.

In addition to the founders and representatives of investors, it is prudent to have a few independent directors on the board. These are often senior folks with a lot more experience than the operating team and can be very very useful as a sounding board while taking tough decisions as well as for the motivation that would be required when the business is going through rough times.

In many ways a board member can provide ‘adult supervision’ to young founders and CEOs.

The CEO executes the vision and the direction set by the board.

Should startups fire under-performing employees? If yes, how?

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Irrespective of the reasons, asking an employee to leave is always a tough call, and almost always a stressful situation for all individuals involved.

Because it is tough to get people to work for a startup in the first place, often entrepreneurs hesitate to fire an employee even if he/she is a misfit in the organization. Also, they worry about the impact it will have on the other employees. And these are valid concerns.

People management is a critical role that entrepreneurs have to learn play, and play well. Founders should budget about a third of their time in people management, including thinking about the right team structure; roles & responsibilities; finding the right talent; interviewing; onboarding; engaging and nurturing the people in the organization.

When hiring a person for a startup, founders have to make sure that prospective team members understand the challenges and the dynamics of working in a startup. Often people who have not worked in startups have no idea about how different it is to work in a startup versus working in established companies.

In a startup, as the team is figuring out what works and what does not, often adjustments will be made in many different aspects of the business – on the business model; product/service; pricing; customer segments; markets; positioning, etc. To someone who does not understand that this is the way most startups figure out their ‘model’, it will appear as if the entrepreneurs are not focused or not clear or are a confused lot. This leads to frustration and discomfort for an employee who was not prepared for constant changes in the business. When hiring people for startups, entrepreneurs should make efforts to explain these dynamics.

They should also clarify that the startup is likely to be lean, resource starved and cannot be expected to be ‘a smaller version of a large company.’ A startup is fundamentally different from an established or larger organization.

But despite all this, there will be situations when entrepreneurs need to take the tough call of asking someone to leave.

Do remember however, that for startups, where the right model is yet to be discovered, it is important to hire people for their attitude and drive rather than for their competence on a particular aspect. Hire people with passion and enthusiasm. Hire people who are responsible and self-driven. If they are not, then even their competence for the role is not going to be effective in a startup.

When should an employee be asked to leave?

My view is that if an employee is a misfit for a startup, entrepreneurs should talk to the person at the earliest, see if there is a way of improving the situation, give the attempt appropriate time, assess the results and if the situation does not improve, then ask the person to move on at the earliest. You have to do it sensitively but swiftly. And very clearly, objectively and without hesitation.

There are three broad reasons why a person should be asked to leave:

  • Non-competence or lack of interest in the role
  • Value system, personality or culture misfit
  • Ethical issues or dishonesty

In a large team, a few non-performers do no make too much of a difference. However, in a startup, there are likely to be only one or two people driving any key function, and an under performer in small teams impacts the overall performance of the organization.

Also, tolerance of under performers by the management also has an adverse impact on other employees.

Hence, entrepreneurs have to be clear and swift about asking the person to leave in case you assess that the relationship is not working out.

Of course, if there are integrity issues, cheating, misappropriation of funds, or any other ethical issues, the person should be fired there and then.

Yes, there will also be situations when startups need to ask people to go (and sometimes ask good people to go) because the business can no longer afford them. These are tougher to handle. But in the interest of the others and the business, often entrepreneurs need to do this as well.

How should the firing process be handled?

An entrepreneur’s first priority should be to retain an employee that has been hired after ensuring that he is a good match for the organization.

As an entrepreneur, it is important to assess why an underperformer is not able to deliver, make attempts to address the core reasons, have a clear talk with the person, assist the person in overcoming the challenges and basically do everything you can to make the engagement work out well.

If after all this, it is still not working out entrepreneurs should be swift in asking the person to leave.

Below are some suggestions on how firing a person can be handled:

  • First, talk to all other key employees and explain to them the reasons for your views, ask for their thoughts and help them accept this as a collective decision taken in the best interest of the organization
  • Have a frank and transparent talk with the person being asked to leave – state the reasons clearly, explain that this is an objective call, explain why this is important for the organization
  • If possible, give adequate notice period to ensure that the person can find another job (of course, this should not apply in case of ethical & integrity issues or dishonesty)
  • Handle the announcement responsibly and with respect to the person. Often it is best to make a joint announcement (entrepreneur and the person leaving) to the rest of the team, saying that the person has decided to move on to pursue other opportunities.
  • There will be some skepticism within the team, there will be doubts on whether the business is in trouble or whether the organization has a ‘hire & fire’ culture.  Address these concerns one on one. Proactively. Speak to each employee if possible.

Of course, it is also important to do an exit interview with the employee to take feedback on the team, the leadership, the company, culture, etc. Often employees who are leaving can provide excellent and valuable insights to entrepreneurs.

Net: Firing someone is tough. But if it needs to be done, it should be done.

 

How do you decide who becomes the CEO from among the founders?

Well, there is no real logic that can be applied in addressing this question, but a person who understands the dynamics of business better, is good at sales, good at operations management and can be the face of the company to the outside world is a better choice and in the best interest of all, including other co-founders.

Of course, the person who is designated CEO should have what it takes to be a leader, and have the aptitude, the passion and the desire to steer the company in the direction agreed by everyone.

A co-founder who becomes the CEO needs to understand that he/she is NOT the boss who can have special privileges… and that he / she is merely the chief executive who has the responsibility to making critical decisions and making sure that the company is on track to meet/beat targets.

In a startup, a CEO should take up the ADDITIONAL responsibility as a CEO along with an area of the startups business that he/she should take ownership of. E.g. the CEO may take up the responsibility of handling the sales function or operations management or driving the technology piece, etc. But the responsibility of being the CEO is over and above that functional responsibility.

It is also important to designate one person as the CEO from among the founders, as the rest of the team as well as external stake-holders (investors, vendors, partners, etc.) need to know where the buck stops and who would be the decision maker when one needs to be made.

In most cases though, especially when a few friends get together to start a company, who will be the CEO is a tough decision. In such cases, it is best to have a healthy debate within the team and select a CEO. (Some startups, when faced with the task of deciding who the CEO should be have followed the strategy that the founder who will get to be the CEO will give 1% of his/her equity to the other founders i.e. if there are 4 founders, the equity structure will be 22% for the founder who becomes the CEO and 26% each for the other co-founder.

While it is a difficult question, often leading to stress among the team, it is critical to address that and take a decision. Especially if the startup is going to seek VC funding, there will have to be one CEO who is leading the team.

 

What can co-founders do for mutual protection?

(This was my response to a question on Quora.. which was qualified with the following additional comments by the person asking the question:

Hi,

We are 4 guys starting a new company, and we are looking to formalize an agreement that will:

1) Protect all of the co-founders from a non-performing co-founder.
2) Protect a co-founder from being kicked out by the majority of the co-founders without any justified reason.

We’re specifically talking about clauses like vesting, cliff, voting rights on how to fire one of us, etc.

What would be a good mechanism to achieve this?)

My response

Apart from legal contracts and vesting, which of course need to be there, my view is that entrepreneurs need to have a detailed discussion among themselves on a number of what-if scenarios.

I ask my startups to think and debate and discuss about some of the following scenarios and points:

  • Agree on what ‘success’ means- typically, when numbers are not discussed  and founders go on the basis of passion, the underlying understanding (even if not stated) is that this will be a ‘large’ business. I therefore ask the founders to write down separately what they see as their revenues in 5 years time. Often, there is a 5 – 10x difference between the numbers quoted by two different founders. One founder’s view of ‘large’ is USD 10 million, while the other aspires to be a USD 100mn brand in 5 years time. Obviously, with such differences, the founders satisfaction from the traction is likely to be different, and, in this particular example, even if the company were to be USD 30 mn in revenues in 5 years, we would end up with one disgruntled and dissatisfied founder.
  • What if someone were to buy you out for USD 10 mn in 1 year’s time? (often all founders say yes, we will sell)… then I ask what if that number was USD 2 million and not 10.. often at least one of them says he/she will sell out (this person is usually the one who has the least faith in the potential of the business, and hence as a mentor my goal is to help the person see the potential… or understand from him/her why he/she has that perception)
  • How much time can they go without a salary in case the story does not play out as planned. Different people will have different answers based on their circumstances… and that’s OK. Just that the rest need to be aware of the choices that the person will make in case of crunch situations.
  • How do you handle failure? Will you penalize a founder if he/she does not deliver? Will you be tolerant, supportive and inclusive in case one of them under performs? My view is that often someone will under deliver or fail in their deliverables… and that’s ok AS LONG AS THEIR COMMITMENT AND EFFORT WAS 100%. But that’s just my view. Founders have to decide how they will deal with incompetence or failure. In many cases, founders take on responsibilities based on their perceived areas of interest or what the situation needs them to take ownership of. In most cases where there is no prior experience or interest, this is stressful. My view is that founders need to give each other the space to fail, with adequate processes for early warning signs and course corrections. Of course, this applies if the commitment was 100%, the attempt was honest and there were no integrity issues.
  • What happens if one of the founder becomes incapable of performing his/her duties (accident, family circumstances which require him/her to shift to another city, if the startup changes the business model or the concept, etc.). Will he/she continue to get the same privileges, equity and salary as was originally agreed. (there is no right or wrong answer. Founders have to collectively take a philosophical call on these type of issues. Well, to push the point, they also should discuss what will happen to the person’s shares in case he/she were to die… would the shares go to the family or to the founders or go back into an ESOPs pool?)

There are a lot of things that founders should agree on BEFORE starting up. And often these things are not discussed. They should be. If there is prior understanding on who will make what choices under what circumstances, the friction & stress can be avoided (or at least reduced).

Additionally, the founders NEED to decide who the CEO will be (and why) in case the team gets funded. (Lack of agreement on this, and multiple founders with similar aspirations can be a sure shot disaster).

What’s typically done with un vested equity of a cofounder who leaves?

In cases where there is a vesting clause, the undistributed part of the equity of the leaving founder is available for distribution. How it is distributed and to whom depends on what the founder’s agreement (documented) says. In most cases, it will also be (or should be) captured in the Share Holders Agreement (SHA).
The following options are usually considered, and which of these options or combination of options are relevant for your company are dependent on the company’s individual circumstances :
  1. The shares could be kept aside to give to another individual who could come in to replace the leaving founder – usually done when the skill set that the leaving person had is not present in the team and needs to be added through a new person… and the function that the new person will drive is important enough to ensure longevity of the person
  2. The shares could be distributed to the remaining founders
  3. The shares could be distributed to all shareholders in the percentage of their shore-holding
  4. Part of the shares are distributed (in either of the three ways) and some shares are kept in an ESOPs pool

How should equity be split between founders?

How much equity each founder gets in a startups has to be decided after serious deliberations on a number of factors. This is especially true when two or more friends (and worse, relatives) are coming together to start a venture.

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Whatever the split, assuming that equity should be split equally between all founders is an incorrect starting point. 

Each team will have their own dynamics, and emotional as well as rational reasons to decide the split of equity between them. I would urge them to consider the following factors:

  • Importance of the person’s function to the team (e.g. technology, marketing, etc.)
  • Criticality of that person being in the team
  • Is he/she the only person with that skill set in the team
  • The seniority of that person in professional life
  • What is the person giving up to come to this venture (opportunity cost)

Here’s a link to a neat tool to help you decide on the equity split Co-Founder Equity Calculator