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The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (The Kauffman Foundation Series on Innovation and Entrepreneurship)

Noam Wasserman · 1 HN points · 4 HN comments
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Amazon Summary
Often downplayed in the excitement of starting up a new business venture is one of the most important decisions entrepreneurs will face: should they go it alone, or bring in cofounders, hires, and investors to help build the business? More than just financial rewards are at stake. Friendships and relationships can suffer. Bad decisions at the inception of a promising venture lay the foundations for its eventual ruin. The Founder's Dilemmas is the first book to examine the early decisions by entrepreneurs that can make or break a startup and its team. Drawing on a decade of research, Noam Wasserman reveals the common pitfalls founders face and how to avoid them. He looks at whether it is a good idea to cofound with friends or relatives, how and when to split the equity within the founding team, and how to recognize when a successful founder-CEO should exit or be fired. Wasserman explains how to anticipate, avoid, or recover from disastrous mistakes that can splinter a founding team, strip founders of control, and leave founders without a financial payoff for their hard work and innovative ideas. He highlights the need at each step to strike a careful balance between controlling the startup and attracting the best resources to grow it, and demonstrates why the easy short-term choice is often the most perilous in the long term. The Founder's Dilemmas draws on the inside stories of founders like Evan Williams of Twitter and Tim Westergren of Pandora, while mining quantitative data on almost ten thousand founders. People problems are the leading cause of failure in startups. This book offers solutions.
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That's a lot of questions, and most of the answers are "it depends", or there's more than one right answer.

I'd suggest you consider reading The Art of the Start[1] by Guy Kawasaki, The Four Steps To The Epiphany[2] by Steve Blank, and High Tech Startup[3] by John Nesheim. Between those, they cover a big chunk of the basic stuff you need to know.

The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup[4] also has a good reputation, but I haven't had time to read it yet, so I can't give a personal endorsement. But it sounds like it might be worthwhile.

FWIW, though, I can tell you what we did at Fogbeam[5]: The company is organized as a legal entity, but we are an LLC right now, not a Corporation. I would not necessarily recommend doing that to anybody else though... while it is possible to build a big company as an LLC, practically speaking, if the intent is to build a scalable startup, the kind that's going to seek VC money and that you ultimately hope to IPO, you need to be a corporation. VC's essentially will never invest in an LLC (there are technical reasons why) and LLC's have serious limits if you need more than a hundred or so "shareholders" (I forget the exact number, but it's a pretty small number). The reason we are an LLC is a historical coincidence, rooted in weird shit that happened back when I was planning to start a consulting company, before deciding to do a product. Fortunately the prevailing wisdom is that it's fairly straightforward to convert from an LLC to a C Corporation. When they day comes that we need to do it, we'll switch.

As far as equity distribution, we have been operating on a handshake agreement between the founders. Technically speaking, I own 100% of the company "on paper" since I'm the only Member listed in the LLC operating papers. But that is, again, only a historical legacy. I created the company and worked alone for the first year before inviting the first co-founder onboard. It would be easy enough to amend the papers to update the equity split, but we've basically taken the approach that "well do that when we convert to a C corp, or there's a specific need to" (like, if we get an acquisition offer). So, yeah, we are operating on trust at the moment. A lot of people will recommend against doing that sort of thing for various reasons (see: The Social Network for example), and I have known friends who got screwed by co-founder disputes because things weren't put into writing up-front. If I had to advise somebody, I'd probably advise you to decide on the equity splits, intellectual property assignments, etc. up-front, and formalize everything from the beginning just to be on the safe side. The downside to that is, it costs a little bit of money and time. shrug

As for YC... nothing against them, but I'd never make a decision based on "what YC wants". But I look at all accelerators / incubators / etc. as "something that might be nice to do, but we'll succeed with or without them." Being that we are an East Coast startup with constraints that would limit out ability to move to CA in order to do YC, we've never even applied and probably never will. If doing YC is super important to you, then maybe you should treat this a bit differently. It's up to you.

Design document? Meh... I mean, yeah, but no. Not exactly. You need to know something about what you're building, but as a rule, you probably won't know exactly what you really need to build to achieve "product / market fit"[6] right away. So no sense spending months on an elaborate BDUF design doc. Sketch out the high level design, and IF you wind up subcontracting any work, then you'll have to formalize a spec for the contractor. But don't spend months and months designing something nobody wants. "Get out of the building" as they say, talk to customers, and iterate the design as you learn what people want/need.

[1]: http://www.amazon.com/Art-Start-Time-Tested-Battle-Hardened-...

[2]: http://www.amazon.com/Four-Steps-Epiphany-Steve-Blank/dp/098...

[3]: http://www.amazon.com/High-Tech-Start-Revised-Updated/dp/068...

[4]: http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Ent...

[5]: http://www.fogbeam.com

[6]: http://www.stanford.edu/class/ee204/ProductMarketFit.html

GrahamsNumber
Just ordered Guy's book. Thanks!
mindcrime
No prob. I enjoyed that book a lot. It covers a lot of the "nuts and bolts" stuff, especially in terms of the equity stuff, and some of the stuff around raising VC money. If you think you'll be looking for outside investment eventually, it's a very good book.

I really can't recommend @sgblank's book highly enough either. If you haven't read it, or aren't already familiar with the "Customer Development" methodology, I would definitely suggest you put that on your reading list. When I read it, my reaction was something like Keanu Reeves' in The Matrix - "Whooah". I felt like I saw the matrix. While you can never reduce something as complex as building a business down to a "paint by the numbers" process, TFSTTE is about as close to a "paint by the numbers" guide as you can find. It really lays things out in excruciating detail.

GrahamsNumber
Oh it's on my reading list. I'm just taking it one at a time. Thanks!
iamshs
I wanted to appreciate for writing this reply. Thank you.
Nov 18, 2012 · bsims on You can do it alone
Everyone commenting on this thread should read Founder's Dilemma to at least give some statistical information about success rates of founding teams.

http://www.amazon.com/Founders-Dilemmas-Anticipating-Foundat...

Regardless of one's opinion of solo vs team, statistically it is easier with co-founders. That doesn't mean it can't be done solo, but you have better odds. And YC makes investments so why wouldn't you play the odds?

It is fairly common to have vesting schedules as someone earns equity of usually 3 to 4 years. So if for example you were giving up 10% total on a 4 year vesting schedule, each year would earn 2.5% of the 10%. Some of these can also be met with milestones.

I think your approach of bringing him on slowly makes sense from what you wrote. I recommend reading "The Founder's Dilemma," before finalizing any of your actions.

http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Ent...

If you are interested in a take on this topic that is based on data, check out Noam Wasserman at BoS 2009 (his talk at BoS 2012 was very similar)

http://businessofsoftware.org/2009/05/professor-noam-wasserm...

He has been collecting data on start-ups and then looking at survival lengths and outcomes. He wrote a book on the topic

http://www.amazon.com/Founders-Dilemmas-Anticipating-Foundat...

Dec 07, 2011 · 1 points, 0 comments · submitted by fnazeeri
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