Editorial Reviews. Review. "Winner of the Entrepreneurship Practice Award , The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can. 1 Sequence of Founding Dilemmas Wealth-versus-Control Dilemmas Principal 1 Relationship Dilemmas, in the Context of the Broader Set of Founding. The Founder's. Dilemma by Noam Wasserman. Included with this full-text Harvard Business Review article: The Idea in Brief—the core idea. The Idea in.
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The founder's dilemmas: anticipating and avoiding the pitfalls that can sink a startup /. Noam Wasserman. p. cm. — (The Kauffman foundation series on. The Founder's Dilemma. The Founder's Dilemma. magazine article. Noam Wasserman. Save; Share. Save; Share. Most entrepreneurs want to make a lot of money and to run the show. New research shows that it's tough to do both. If you don't figure out which matters more to.
If they choose the right investors, their financial gains will soar.
The Founder's Dilemmas
My research shows that a founder who gives up more equity to attract cofounders, nonfounding hires, and investors builds a more valuable company than one who parts with less equity.
The founder ends up with a more valuable slice, too. On the other hand, in order to attract investors and executives, entrepreneurs have to give up control over most decision making. Choosing money: A founder who gives up more equity to attract investors builds a more valuable company than one who parts with less—and ends up with a more valuable slice, too. Soon, he had several suitors wooing him, including an inexperienced angel investor and a well-known venture capital firm.
If he accepted the other offer,though, he would control just two of five seats on the board. Triandiflou felt that Ockham would grow bigger if he roped in the venture capital firm rather than the angel investor.
After much soul-searching, he decided to take a risk, and he sold an equity stake to the venture firm.
Similarly, at Wily Technology, a Silicon Valley enterprise software company, founder Lew Cirne gave up control of the board and the company in exchange for financial backing from Greylock Partners and other venture capital firms. As a result, CA bought Wily two years later for far more money than it would have if Cirne had tried to go it alone.
On the other side of the coin are founders who bootstrap their ventures in order to remain in control. Having set up nine stores, he has repeatedly rejected offers of funding that would enable the company to grow faster, fearing that would lead him to lose control. Most founder-CEOs start out by wanting both wealth and power. Their past decisions regarding cofounders, hires, and investors will usually tell them which they truly favor. Once they know, they will find it easier to tackle transitions.
Founders who understand that they are motivated more by wealth than by control will themselves bring in new CEOs. For example, at one health care—focused internet venture based in California, the founder-CEO held a series of discussions with potential investors, which helped him uncover his own motivations. Such founders are also likely to work with their boards to develop post-succession roles for themselves. Ideally, a board should keep the founder involved in some way, often as a board member, and use his or her relationships and knowledge to help the new CEO succeed.
Founders can act, sometimes unconsciously, as negative forces. They can resist the changes suggested by new CEOs and encourage their loyalists to leave. Some boards and CEOs try to manage those risks by taking half-measures, relegating the founder to a cosmetic role, but that can backfire. His successor also wanted Cirne to give up his position as board chairman. Boards can sometimes help founders find new roles.
The more concrete value the new CEO adds, the easier it will be for the founder to accept the transition. Founders who want to be CEO for a longer time in their next venture need to learn new skills.
The Founder's Dilemmas [Entire Talk]
Accordingly, boards can encourage founders to take on new roles in their companies that will enable them to do so. If they do, founders may even become accomplished enough to regain control. By contrast, founders who understand that they are motivated by control are more prone to making decisions that enable them to lead the business at the expense of increasing its value.
They are more likely to remain sole founders, to use their own capital instead of taking money from investors, to resist deals that affect their management control, and to attract executives who will not threaten their desire to run the company.
During negotiations with potential investors, he realized that all of them would insist on bringing in a professional CEO.
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Choosing power: Founders motivated by control will make decisions that enable them to lead the business at the expense of increasing its value. Some venture capitalists implicitly use the trade-off between money and control to judge whether they should invest in founder-led companies.
Even these firms, though, have to replace as many as a quarter of the founder-CEOs in the companies they fund. Rich-or-king choices can also crop up in established companies. One of my favorite examples comes from history. In , Henry Royce was pushed to merge Rolls-Royce with Vickers, a large armaments manufacturer, in order to form a stronger British company. This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading.
Why do people start businesses? For the money and the chance to control their own companies, certainly. But new research from Harvard Business School professor Wasserman shows that those goals are largely incompatible.
The author's studies indicate that a founder who gives up more equity to attract cofounders, new hires, and investors builds a more valuable company than one who parts with less equity. More often than not, however, those superior returns come from replacing the founder with a professional CEO more experienced with the needs of a growing company.
This fundamental tension requires founders to make "rich" versus "king" trade-offs to maximize either their wealth or their control over the company.
They may also want to wait until late in their careers, after they have developed broader management skills, before setting up shop. Entrepreneurs who focus on wealth, such as Jim Triandiflou, who founded Ockham Technologies, can make the leap sooner because they won't mind taking money from investors or depending on executives to manage their ventures. Such founders will often bring in new CEOs themselves and be more likely to work with their boards to develop new, post-succession roles for themselves.
Choosing between money and power allows entrepreneurs to come to grips with what success means to them.
Founders who want to manage empires will not believe they are successes if they lose control, even if they end up rich. Conversely, founders who understand that their goal is to amass wealth will not view themselves as failures when they step down from the top job.
To download this product after your download, simply sign-in to hbr. Register as a Premium Educator at hbsp. Tell your instructors about the savings at hbsp. Quantity pricing discounts will be reflected at Checkout, prior to submitting your order. Address rewards after relationships and roles.
Do not spell out equity until you know who is committed to your team and their contribution. Some members of your founding team will be motivated by decision-making power and control, perhaps a lasting seat on the board.
Others will care more about their equity stake and increasing the value of the company as quickly as possible. Having significant equity stakes available for new hires can sweeten the deal for an experienced hand to join your team.
Vesting has its place. It is not always a sign of mistrust if you include vesting in the equity agreement.
Dynamic forms of equity arrangements can account for unexpected loss of a team member, a dispute, or the ever-changing market. If the timing is right, put the agreement in writing to keep communication clear and avoid further dispute. Any way you slice it, equity splits are dangerous but necessary. Decide too late, and you might lose valuable employees and founding team members.
Acknowledge that rewards are a common source of conflict, and the least tense agreements will be aligned with the aforementioned knowledge of relationships and roles. Wealth and Control Wasserman posits that there are two main motivations for founders: wealth and control.
Control-motivated founders need to assess carefully their solicitation and acceptance of money from family and friends, angel investors, and venture capitalists. They should expect to grow the company slowly in order to maintain control, whether that be control of product, hiring, or outside cash flow.
Wealth-motivated founders should realize that the ultimate goal is increased value of the company, and that may mean losing control of the board, attracting top-flight hires with excellent experience and corresponding equity loss , and, eventually, helping the board find your replacement.
Wasserman makes a clear point that the reason that Gates and Roddick are so unique is because they are both King and Rich. It is an incredibly unlikely outcome, and any founder needs to be ready to pick which outcome they truly want to achieve.
Grade: A Wasserman does a masterful job of explaining relational conflict in an understandable way. His concepts are simple enough to grasp and deep enough to encompass a wide variety of dynamic and stressful dilemmas.
PDF - The Founder's Dilemmas
For those new to investor capital, he explains the structure well enough for context without unnecessary complication.The Founder's Dilemma magazine article Noam Wasserman. Founders can act, sometimes unconsciously, as negative forces.
But, paradoxically, the need for a change at the top becomes even greater when a founder has delivered results. Investors dole out money in stages. I recently consulted with a successful Virginia-based nonprofit whose founder-CEO had faced two coup attempts. If he accepted the other offer,though, he would control just two of five seats on the board.