Loading book details
Loading book details
The Founder’s Dilemmas cover

The Founder’s Dilemmas

Noam Wasserman•2012

  1. Chappy's Book Notes•332 books

The Founder’s Dilemmas

Noam Wasserman•2012

Length
13h 28m•~488 pages
Read
Sep 12th - 16th '23
EntrepreneurshipLeadership
•

Summary

Every founder faces a fundamental tension between wealth and control. Career imprints, motivations, and three forms of capital – human, social, financial – shape every decision from solo vs. team to equity splits and investor selection. Founding with coworkers beats friends or family. Handle the equity split upfront to test commitment and expectations. As startups scale, the CEO role transforms and founder-CEO succession becomes likely – only a third find replacements within a year. Know your core motivation: 57% of US founders choose control, 43% choose wealth.

Key Takeaways

  • 57% of US founders choose control, 43% wealth – know which you are
  • Raising capital dilutes control; bootstrapping limits growth
  • Benefits of initiating your own succession when the time comes
  • High-potential startups: 16% solo, 33% two founders, 25%+ three
  • Coworkers outperform friends and family – fewer avoided conversations
  • Complementary skills plus similar value systems is the winning formula
  • Idea premium: 10-15% more equity. Prior founding: +7-9%
  • Criteria → weighting → tasks/responsibilities framework
  • The split conversation tests commitment, expectations, and ability to disagree
  • More equality → more stability
  • Founding CEOs average 14-20% premium; CTOs 5-8%
  • Roles based on idea ownership, commitment, and three capitals
  • Only 2% raise debt financing; avoid friends and family money
  • Top investor role: sounding board and funding connections
  • Exits: 26% M&A, 9% IPO, 15% liquidated, 31% still private

Notes

1: Introduction

  • Wealth ↔ control
  • Tech, life sciences startups

2: Career Dilemmas

  • Tech founders: no age correlation
  • 14.0 yrs avg work experience, 9.8 SD
  • Early influences:
    • Family culture and values, role models
  • Motivations: power, autonomy, wealth
    • Also: altruism
  • Skills: human, social, financial capital
  • Career imprint:
    • Founder background informs operation
  • Prior experience > “fresh insight”
  • Building experience:
    • Sweet spot b/w small / large startup
  • To jump: career, personal, market factors
  • Idea validation:
    • Disruptive > sustaining
    • Ticking clock: fast advancing tech, network effects, economies of scale
  • Optimism: double edged sword
    • Study: 20-25% worse

3: Solo vs team

  • High-potential startups:
    • 16.1% solo
    • 33% two
    • 25%+ three
  • Consider 3 types of capital
    • What each founder contributes

4: Relationship dilemmas

  • Strong bias towards homogeneity
  • Assess soft traits: Risk tolerance, personality, time horizon, commitment level, value system
  • Complimentary skills + similar value system
  • Founding with coworkers > friends, family
  • Friendship → avoid sensitive discussions
  • Prepare for the worst case
  • Come up with a disaster plan

5: Role dilemmas

  • Roles based on:
    • Idea owner, commitment, 3 capitals
  • Has to be a dictatorship
  • But balance between ↑ and egalitarian

6: Reward dilemmas

  • Idea premium: 10-15% more equity
  • Prior founding experience: +7-9% equity
  • Criteria → weighting → tasks/responsibilities
  • Founders pay themselves less:
    • Agent stewardship theory
  • Parody reached later on + equity carve outs
  • Handle split upfront to gauge commitment, expectations, test disagreement

7: The 3 Rs system

  • Relationships ↔ roles ↔ rewards
  • Alignment and equilibrium
  • More equality → more stability
  • Founding CEOs: avg 14-20% premium
  • Founding CTOs: 5-8% premium

8: Hiring dilemmas

  • CEO’s network: source of 49% of exec hires
  • Shouldn’t have a COO early on
  • Before first round:
    • VP sales: 37%, marketing: 22%, technology: 20%, BD 20%, HR 19%
  • Exec leverage: 2.5 → 9
  • Large company execs: not proactive
    • Network → better hires
  • Average exec bonus: 28%
    • VP sales: 49%, CEO: 37%
  • With scale: meritocracy → bureaucracy
    • Eg. gender pay gap
  • 10% of execs receive performance vesting

9: Investor dilemmas

  • Only 2% raise debt financing
  • Friends and family: don’t do it
  • Angel investors: farm system
  • Exits:
    • Merged / acquired: 26%
    • Public: 9%
    • Liquidated / bankrupt: 15%
    • No returns: 19%
    • Still private: 31%
  • Top role: sounding board, funding connects
  • Boards:
    • Seed: 3.9
    • Series A: 4.8
    • After: 5.7 (5-8)
    • 7.9 meetings / yr (start monthly)
  • Down round: 7%
  • Liquidation preference:
    • 1x: 78%, 1-2x: 9%, 2-3x: 5%, 3+x: 8%
  • Board committees: 20-30% at first round

10: Founder-CEO succession

  • CEO role changes as startup scales
  • Middling growth minimizes replacement risk
  • Finding replacement within 1 year: <33%
  • Upsides of CEO replacement
  • Benefits of initiating your own succession

11: Wealth vs control

  • Inherent tension between wealth, control
  • Know your core motivation
  • US: 57% control, 43% wealth