Monday, August 14, 2017

Unequal Cofounders

One of the big myths in Silicon Valley is that co-founders should be equal. However, if you look at the most successful tech startups of the last 50 years, almost all of them had a dominant co-founder for most of the life of the company. This includes[1]:
  • Amazon. Jeff Bezos.
  • Apple. Steve Jobs famously split equity unequally versus Wozniak. 
  • Facebook. While Zuck had multiple co-founders, the website used to be called "A Mark Zuckerberg production" and he had multiple times the equity and power of his co-founders.
  • Instagram. Kevin Systrom as dominant founder.
  • Intel. Robert Noyce for 7 years and then Gordon Moore for 12 years[2].
  • Intuit. Scott Cook as dominant founder.
  • LinkedIn. Reid Hoffman had multiple co-founders but was really dominant in terms of equity and control (despite hiring a CEO to take over pre-Jeff Weiner).
  • Microsoft. Paul Allen stepped down after a few years leaving Bill Gates as dominant founder.
  • Oracle. Larry Ellison as founder.
  • Pinterest. Ben Silberman has driven the success of the company.
  • Salesforce. Marc Benniof.
  • Uber. Travis Kalanick as primary force until recently.
  • WhatsApp. Jan as dominant founder and equity holder.
Apple, Facebook, Intuit, LinkedIn, Oracle, etc. are all also examples where both power and equity splits between founders were unequal. While people tend to fixate on equity ownership and equality, what really matter is whether there is equal power sharing between founders. In general equal power sharing yields worse outcomes than having an (eventually) dominate cofounder.

The limited set of counterexamples with more equal co-founding partnerships includes Google (confounded a bit by Eric Schmidt being hired as CEO early in its life). Having an equal co-founding relationship is not impossible, just rare for the most successful companies.

Harj Taggar has a great point on this - "Another interesting way of thinking about this is reversion to the mean. Startups need to be outliers in many ways to be an outlying success, one such vector where I think this helps is in product decisions. Any time you involve multiple stakeholders in these decisions (whether it's cofounders/customers/anyone else) you risk having your product revert to the mean (i.e. no one particularly hates it but no one loves it either). Having a product dictator is probably actually optimal for chasing outlying success."

Early Days Are Different
In the early days of a company, it may only be two or three co-founders working together for an extended of period of time before you know what to build. If you have two co-founders and no employees, it may feel natural to always get to consensus and make decisions together. Its just the two of you, and each of you has to be fully bought in due to the giant leap of faith you are taking. While some founding teams always have a clear CEO and decision maker, some do not. As you hire people and raising money, you will need to shift how you think of decision making.

As you grow, you need someone in charge
The two biggest reasons startups fail is running out of money, and co-founder conflicts. Co-founder conflicts tend to arise when there is a lack of clarity on decision making, product vision, and overlapping founder roles. For example, if more then one founder wants to be CEO, or make final decisions on product or other areas, conflict will be inevitable. Alternatively, if founders are willing to truly share power a startup may not be as aggressive due to the need to find compromises versus charge ahead. In these situations you may end up with a product or strategy designed by committee instead of making a single choice on what to build. 

Unequal co-founder relationships are a way to dampen future co-founder issues. By making it clear how decisions are made and who is in charge early, you decrease the likelihood of a founder blow up. This is separate from how you divide equity - ultimately you want to compensate someone for the tough times and many years of pain ahead that comes with starting a company.

This does not mean you will always agree. It is constructive for co-founders (and executives once you have them) to challenge the CEO and each other. There are bound to be lots of disagreements, and the non-CEO may often be right. As the CEO co-founder you need to pick your battles on when to make the final call and override everyone else. All else being equal, most specific decisions are often less important than actually making a decision. As the non-CEO co-founder, you need to understand the importance of falling in line and backing whatever decision is ultimately made.

As an investor, a clear warning sign of future co-founder conflicts is when the founders say they are "equal but own different areas". E.g. "I make all the calls on business, and my cofounder makes all the calls on engineering." But what if a business issue and a product or engineering issue overlap? A company needs a single person who is clearly in charge and can make a decision across all areas. The worst version of this is co-CEOs, which suggests an almost inevitable blow up.

Cofounders may claim "we make all decisions together, and have not fought before, so no need for a single decision maker." This is a recipe for disaster. Startups are hard and the right strategy is usually ambiguous. You can not defer organizational and decision making clarity for later. It is important to decide up front which co-founder is in charge (i.e. the CEO) and that person needs to be able to make decisions without being second guessed.

Making decisions
This is not meant to argue against making important decisions with your co-founders. You are working with them because they are smart, capable people. Their opinions are important and they may be right when you are wrong. They should own areas of the company and be able to make decisions on those areas without micromanagement. However, at some point there needs to be a clear owner who can make a final call if there is an impasse or lack of agreement. Once a decision is made, the non-CEO co-founders need to get behind the decision and make it successful.

Equity splits
As mentioned above many of the most successful companies of the last 20 years had unequal equity splits among co-founders (Facebook, LinkedIn, Twitter, etc.) while some have had equal splits (e.g Google[3], SnapChat). Equal equity does not need to be the default and in some of the most successful companies is not.

Sometimes this is counterintuitive - for example the CEO co-founder does not always get the most equity (e.g. look at the Twitter S1). The key is to be pragmatic and to think through the long term value each person brings to the table, the relative leverage each has, and investment made in different ways.

Other perceived value
One common point of co-founder jealousy and conflict is who gets to meet investors or talk to press. Usually this is the role of the CEO, and early on having multiple people involved in every conversation is not time efficient. As the company scales, there will be plenty of opportunities for multiple co-founders to have external exposure. As CEO, you should also watch out for your co-founders and make sure they also get some exposure if this is important to them.

Thanks to Harj Taggar for feedback on this post.

NOTES
[1] A number of private companies also do not have equal co-founding relationships or equity splits but since these companies are not yet public it is harder to talk openly about them.

[2] An underreported phenomenon is the number of times one co-founder is replaced by another as CEO. This happened at Intel, Logitech, and other companies.

[2] Google was in reality slightly unequal with Larry Page having slightly more equity when Google went public. It is unclear if this was due to share transfers by Sergey or if it was set up that way.

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