June 10th, 2020 | By: Wil Schroter | Tags: Strategy
The biggest challenge Founders face when finding a co-founder is determining how much value they will truly add. We have to realize that in the formative stages of a company, we are in a very leveraged and vulnerable state. We don't have the funds to pay people, no one is clamoring to work with us, and we're pretty much all alone.
This is where we make some of the most costly mistakes we could possibly endure. We place all of the value on someone based on who happens to be available right now and then give them the most valuable currency we will ever create.
We do this in the name of progress, but are we really asking the right questions?
The moment we take on a 50% co-founder the business needs to achieve 2x the outcome to generate our same return. If we have 2 co-founders (on an equal split) we need to get to 3x. We have to ask ourselves: "Is that one additional person worth me having to lose 50% or more of my upside for life?"
We can't think about "I'd be willing to split $100 million in an exit" because that is almost certainly not going to happen (statistically). We have to think about it more like this: "If this is a $3 million business throwing off $500K, do I want to cap out at $250K or $500K?" Those are two very different income brackets, with only one FTE standing between them.
When we first bring on a co-founder (or a few) we often have the same justification — we need help — and having others who are willing is a huge validation. However, the cost of that early help is tremendous.
Maybe we offer a technical co-founder half of the company to help us get started. Yes, we need the help, but can that person really deliver the value of 50% of our stock forever? That's one of hell of an employee. We need to make sure a co-founder is someone who can maintain their value contribution long term, not just this year because we're broke.
We should always ask ourselves: "If I could afford to pay the full salary for this person how much stock would I give them?" It's rarely half the company.
Everyone says they love the idea of someone to bounce decisions off of as a justification for having a co-founder, mentor, or investor. That sounds all well and good until we don't actually agree on those decisions. Then those spirited debates quickly turn into heated arguments, which becomes a total shit show.
Whether we believe it or not, having a co-founder is just another form of having a boss — someone else who drives decisions that isn't us. Some people thrive in a cooperative decision process and others really don't (namely, Founders). For those of us that find ourselves in the latter camp, a co-founder can be a major liability.
How do I fire a Co-Founder? Let's talk a little bit about what a "co-founder divorce" looks like, and what we can do to prepare if and when that time comes.
Treat Departing Employees Like Future Employees (podcast) Have you thought about the inevitability of an employee leaving your Startup? Listen in and learn how to encourage a happy send-off culture!
Does a 50/50 Co-Founder Split Make Sense? There are other ways to split stock in a "fair manner" that isn't down the middle. The most common split amongst startup Founders is the ol' "fair split." Who can argue with a fair split? You'd have to be a real jerk, right?
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.