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This is the third article in a series on how to start a company in 2020. See the previous article, Step 2, Form the Company

“You need three things to create a successful startup:to start with good people, to make something customers actually want, and to spend as little money as possible.” — Paul Graham

Most startup companies will rise and fall based on the quality of their teams. Few things cause a startup to implode faster than infighting among the founders or a dysfunctional team. Most venture capitalists invest more on the strength of the team than on any other factor. It is often said among investors, “We bet on the jockey, not on the horse.” If you have a great horse (idea), but you are not a skilled jockey (CEO), don’t be afraid to give up the reins and find a partner who can help you run the race.

How many founders should a startup team have? Studies show that two founders are ideal. Famous founder duos include Hewlett-Packard (HP), Gates-Allen (Microsoft), Lerner-Bosack (Cisco), and Jobs-Wozniak (Apple). With duos, one is usually good at business development and the other good at product development. There are many good examples of sole founders and triad founders, but precious few good examples of four or more founders. There is no magic number, but there is magic to building a great team around the founder(s).

If you’re a solo founder, that’s okay, but you are still going to need to recruit a great team. The notion of the entrepreneur as lone wolf or soaring eagle is a myth. Bill Gates, the iconic founder of Microsoft, once said that the secret to his success was that he hired people smarter than himself. Almost nothing you do from this point forward will be more important than assembling (and keeping) the core team — especially the people who will drive sales, product development and operations.

What does it mean to “form” the core team? It means the business must have a Founders Agreement, Shareholder Buy-Sell Agreement, Stock Vesting Agreement and Schedule, and other legal instruments that institutionalize the role, responsibilities and compensation of the core team. Many startups have failed or suffered serious setbacks because the founders and/or core team operated on a hand shake or weak organizational and management documents.

Your founder documents should clearly address what happens upon any of the three dreaded D’s: Death, Debt, and Divorce. What happens if a founder dies? What happens if a founder declares personal bankruptcy or incurs debt that forces him/her to sell his/her stock? What happens when a founder gets divorced, or if one founder wants to “separate” from the other?

Things to Think About and Decide

First, if you do not already have a co-founder, think long and hard about whether you really need one. Think about what experience and skills your co-founder(s) should have to compliment your experience and skills. It rarely works when both founders want to do the same type of work.

Second, think about how you will create a positive culture that matches your outlook and personality? A culture cannot be manufactured. It has to be an extension of the character of the leaders and their core values.

Third, if your startup has more than one founder, decide who will be the “boss”. A company needs a CEO. It rarely works for a company to have two CEOs who have equal decision-making authority.

Fourth, decide how much equity each founder will start with based on his or her contribution of (1) money or in-kind contributions (equipment, office, space, etc.), (2) expertise (know-how) or intellectual property (invention) and (3) deliverables (what they do for the business, not what they say they will do).

Fifth, decide over what period of time each founder will vest his or her shares. The industry standard is vesting over four (4) years, unless a company is sold before then. NEVER give any founder a significant number of shares upfront, just because he or she was present at the start. It is what each founder contributes to the success of the business in the long run that counts most.

Things to Do (or not)

  • Hire EVERYONE on contract for at least 90 days before hiring as W2 employee.
  • Have a Buy-Sell agreement among the founders. Do not simply issue shares to the founders. Vest shares over four years for performance and measurable metrics that are commensurate with each founder’s contribution to the business.
  • Never-EVER issue stock 50/50 among founders. Set clear milestones and expectations among all team members.
  • Have all founders and employees sign an Intellectual Property (IP) Assignment Agreement.
  • Don’t hire a professional CEO or head of sales right out of the gate. Be the CEO or find a co-founder capable of being CEO. The founder/CEO needs to be the head of sales until the company reaches breakeven, or until it has achieved key performance milestones that attracts ongoing customer accounts and/or outside financing.
  • Hire everyone based on the three-way test: 1) Can s/he do the job (competency)? 2) Will s/he do the job (capability)? 3) Can we stand to work with her or him as s/he does the job (chemistry)?
  • Research related job postings from similar companies and write job descriptions that include a compelling business vision, clear description of each role you need to hire, and list of critical skills. Do this for every key role you need now or in the future. Read them weekly, post them to friends and on job boards. This exercise keeps you focused on “who” you must have to eventually succeed.
  • Develop a thorough interview process for every key role that includes phone screening, face-to-face interviewing, interview questions, background checks, peer reviews, and test projects. (Read the book Who: The A Method for Hiring.)
  • Identify credible domain experts in your field or in one of the key areas of your product development, and invite three of them to meet you via Google Hangout or Skype. During the conversation, explain your vision and request if you can speak again to get feedback on your approach. Repeat this process until you find three or four domain experts willing to join your board of advisors.
  • Allocate about 15% of the company’s common stock to a stock option pool and issue key employees options which vest over 3-4 years.
  • Create a board of advisors and draft an equity compensation plan and meeting schedule for the advisors. Allocate and issue approximately 0.25% of company stock to each advisor, to be vested over a 2-3 year period.

Recommended Readings and Resources:

The 10 Most Serious Hiring Mistakes and How to Fix Them by Brad Smart

The Art of Recruiting by Guy Kawasaki

How to Pick a Co-Founder Venture Hacks

Stop Looking for a Co-Founder by Dave Lerner

The Perils of Founder Fighting by Mark Suster

Choosing a Co-Founder: Three Mistakes to Avoid, OpenView

TopGrading,by Bradford Smart

Entrepreneurial DNA by Bosi Profile

FounderDating

Search for a potential co-founder; review profiles of available people; attend matchmaking events.

Co-Founders Lab

Search for a potential co-founder; review profiles of available people; attend matchmaking events.

Co-Founders, Hiring and Firing Joel Serino, SproutCamp

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Post Author: Michael ODonnell