Video: Noam Wasserman – The Founder’s Dilemmas
In this Fireside Chat video, we hear from startup author, Noam Wasserman, who jumped to #1 of the Amazon Bestseller in Management with The Founder’s Dilemmas.
“I guarantee that the price of this book is approximately one-thousandth of what you’ll pay lawyers to clean up your mess if you don’t read it.”—Guy Kawasaki, former chief evangelist of Apple.
Jump straight to the section of interest on YouTube:
01:50 – Overcoming the lack of data that exists about startups
05:17 – What to consider when taking the leap to become a full-time entrepreneur
15:56 – Likelihood of success, based on data, of solo founders vs co-founders
19:07 – The decision founders must make – to be rich or to be king
31:18 – The three ‘R’s behind why high growth potential startups fail
39:57 – Relationships: The first of the three ‘R’s
48:44 – Responsibilities: The second ‘R’
57:04 – Rewards: The third ‘R’ of how to split the company pie
01:02:03 – The simple research-driven process for strategic planning
01:05:48 – Real life example of company equity split
01:16:29 – Types of investors to target at different stages of growth
01:20:47 – Research on founder succession
“If you’re starting a new company, you probably already know that a crazy variety of land mines await you. What if you had a map that showed exactly where they are and how to avoid them?” —Eric Ries, author of The Lean Startup.
Wasserman’s wealth of knowledge about what it takes to create a successful startup comes from a decade researching 10,000 founders (including Evan Williams (Twitter) and Tim Westergren (Pandora). He became the #1 Amazon bestseller in Management and has been in the Strategy bestseller list for half a decade because of his groundbreaking analysis on the decisions faced by a startup’s founding team, early hires, and investors.
The goal is to give entrepreneurs insights into the major decisions that will have to be made and the profound impact that the wrong decisions can have.
Full Video Transcript
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Roger Rappoport: So, by way of background, you were a founder, a VC, and then a successful professor. Maybe you can just start off by telling us how your collective experiences have really shaped your view on startups, and life in general.
Noam Wasserman: Sure. Small question.
Roger Rappoport: And we have only an hour and a half.
Noam Wasserman: In some ways, all those three levels that you were just talking about were very formative. They were the firsthand experiences that I had, getting to know a bunch of the things that founders face, but not realizing their importance at that time.
Noam Wasserman: As a founder, I thought, and I’ve found since then that a lot of founders think, “This is unique. I’m the only one facing this. This is not something that I am going to be able to go out and find universalisms, that I can go and find rules of thumb to go by.” Even what I’ve found since then is that a lot of the rules of thumb are misleading and wrong. That’s what a bit of the research is focused on, but essentially had some seeds planted when I was founding.
Noam Wasserman: Then I got a bit of a broader perspective on it when I was doing VC. At that point, that’s when it started hitting me about what I had experienced was actually much more universal. Having founding team after founding team come through, talking to them about their backstories, about the dilemmas they were grappling with, starting to see where those were connected to some outcomes. These kind of teams tend to be more shaky. These kinds of teams, how they came together, how they architected it, seems to impress me more, etc. And having reflections that told me that, wait, my experiences actually have much more representativeness within founding than what I had expected originally.
Noam Wasserman: Then when I was heading into academia, I went looking for answers to all of these things that I had grappled with. What do we know about all of these open questions that I had seen? Academia knew nothing about it. Nothing systematic, nothing that was rigorous. There had been essentially a bunch of case studies that had been written, and that was about it. There was no data.
Noam Wasserman: If anything, one of the things that I came to appreciate is that, because academics hadn’t experienced it themselves, they didn’t even know what the right questions to ask were. Right? For them to get data and test … You have to know what questions you want to go and test for, and they were making all sorts of assumptions that a startup is a small version of a Fortune 500 company. “We know everything we need to know about Fortune 500. That’s where the research has been, so let’s just go and extrapolate it down to a startup. A Founder-CEO is just an earlier stage of Fortune 500 CEO.”
Noam Wasserman: From my own experiences, and from talking to the teams, and things like that, I realized that some of the things were actually the opposite of what the assumptions were that they were making, the things that they had found within the large companies. I decided, if anyone is going to go and make those in-roads, I’m going to have to go and dive in and do that.
Noam Wasserman: As I was wading into it, I started seeing, how can I go and get my own data? How can I go and concretize all of the things that I’ve seen, that we should go and tackle with it? How can I go and work with founders to go and understand beyond my sample of it, and go and do a bunch of very deep case studies on them to go and do? All of those three levels that you’re highlighting, actually, are what culminated in my seeing the importance of it, what questions to ask to get at those pieces, and then how we can go and educate the next generation of founders about those answers.
Roger Rappoport: Your data is based on, what, about 10,000, 20,000 entrepreneurs, tops?
Noam Wasserman: Back when I did the first book, The Founder’s Dilemmas was based on the first 10,000 that I collected. Since then, it’s been a decade, and so I now have another 10,000. It’s just about every single thing that I wanted to know inside the startups, much of which had never been tackled before, around the team and its prior relationships, its prior experiences bringing to the venture, how they came together. How did they architect the team, the roles, the relationships, the rewards, the equity splits? How they financed it, if they did. How did the build the board of directors? All of these other pieces of it that all coalesce into whether the startup is going to be able to succeed or not.
Noam Wasserman: Focusing on a variety of different levels of analyses, and being able to go and see what leads teams to blow up versus be stable. What leads the founder to being fired as the parent of her baby, versus she can go and be sustained throughout it. What are the things that foster growth, versus what are the things that torpedo growth? If we can go and use a whole bunch of the very strong tools of econometrics, but then marry it with knowledge of the phenomenon, and being out there in the field, that’s where we can have the two of them come together to paint that full landscape.
Roger Rappoport: We’re just going to start at the beginning, and the question that I get all the time, I think, is something that you highlight in your book, and that is, I’ve got clients that are working for large corporations, and they have a startup on the side, or they are thinking about quitting their company to start their start-up. I think one of the things that I recall from your book, and reading it again in anticipation of this, you talk about deciding when to go is a really tough decision, and it’s probably one of the early, early stage dilemmas.
Roger Rappoport: You’ve got a great job, and you may not have enough experience to really tackle the rigours of a startup, on the one hand. But on the other hand, the longer you wait, and to get that skill and experience, to be the fearless leader, you may have too many handcuffs. Kids, and wives, and colleges. How do you know when it’s the right time, for those entrepreneurs that are working for big enterprise right now, when is it the right time to go? What are the things they should be thinking about as they consider making the leap?
Noam Wasserman: Mm-hmm (affirmative). No, in some ways, it’s a great universal question for us to go and kick off on, because it’s not just for founders. This is when you’re talking about the lessons that we can learn from founders for the rest of our lives, that applies any time that we are trying to go and shift gears at a key inflection point in life.
Noam Wasserman: Two of the key things that are in some ways opposite poles that are battling our going and being able to shift gears, one of them is passion, and the other one is the handcuffs that you were talking about. A lot of times, people get very passionate about an idea. Lightning strikes, you want to go and pursue it.
Noam Wasserman: Or you’ve had a lifelong dream, that’s getting out of the founding realm, more into the life as a startup kind of a realm. You’ve always dreamed of being able to do something in a non-profit space, that you want to go and have the social enterprise side of you contribute to the world, and things like that. That’s shifting gears in also a pretty dramatic way, into that new realm. A lot of times, your passion for shifting into the non-profit space, or going and doing founding, is going to lead you to go and make bad decisions about how you’re going to go and do it.
Noam Wasserman: To go in first within the founding realm, what I’ve found in general is that there are three areas that you have to go and consider when you are going, and unfortunately, you tend to only think about one of them when you are a founder. There’s the market circumstances. You get an idea, this great idea that you want to go and see brought to the world.
Noam Wasserman: One of the things you have to go and consider is the market circumstances. Are they favorable or not? Then there is the career circumstances. Are those favorable or not? Then there’s the personal circumstances. Are those favorable or not? A big problem with the passion is that you’re going to misread all three of those, potentially, at your peril.
Noam Wasserman: What you are going to do is you’re going to think that “Because I love this idea, because I would be willing to pay for it, there must be a vast market out there that also wants it.” You’re going to be skewing your decisions in the direction, the passion is going to be clouding your clear evaluation of that. That’s one of the key things over the last decade that, in a lot of ways, Lean Startup, Eric Reis has gone and done a great job at having us think in a more structured way about how to make sure that your passion isn’t clouding your looking at the market, and whether its favorable or not.
Noam Wasserman: But then, your passion is also going to mislead you about the other two pieces of it. You’ve never founded before. Do you even know what career experiences are critical to have a solid foundation for being able to go and found? Do you know what, six months in, the skills are going to be that you didn’t need at the beginning? As you’re painting this picture for yourself of how you are prepared for founding, you’ve got all sorts of uncertainties, and the passion is going to be skewing in the direction of, “Yeah, I can give a thumbs-up to those circumstances.”
Noam Wasserman: Then the same thing with the personal circumstances, going and pushing that aside, talking about “The stage of life, is it going to be favorable? Have I gone and taken on a bunch of things that are going to turn out to be those handcuffs you were talking about?” All of these decisions that make all the perfect sense in the world when we are making them.
Noam Wasserman: You’ve been a student, living the life of a starving student on ramen noodles. Now, finally, you are graduating. You are having a real job. You have a signing bonus for that job. Now we can start life. Well, it’s going to take that signing bonus and pay for the down payment on that mortgage. Let’s go and get the nanny to be able to go and help with the kids. Let’s go and pay for private schools for the kids.
Noam Wasserman: All of these things that you’re going and layer on as commitments that you’re making, to take a term out of the startup realm. You’re taking on a very high personal burn rate that is going to be what is the life that you’re going to be living, and yet, you’re going to be looking at this through your passion, and saying, “We can handle it. I can go and take no paycheck for a while. We can … ramen noodles. What we’re going to feed the baby is going to be a jar of that every day.”
Noam Wasserman: All sorts of ways in which the passion is going to be “I really want to pursue this idea,” and you’re going to dis the personal side of it. Unfortunately, when we go and, especially that last one, not consider what it’s going to do on the personal side, then that’s going to cause a whole bunch of problems when you just need to support the most from the most critical players in your life, the family side of it, that you will have gone and blown up the ability to go and have that as your support thing.
Noam Wasserman: The perils of passion that you’re going to misread each of those circumstances. The more you can have a clear picture of those, be able to see which ones of those aren’t favorable, and then even more so, that you’re not waiting until the last minute to go and evaluate this, because with the luxury of time, you can go and make each of these more favorable for yourself.
Noam Wasserman: If you go and you look at all of the things I’m missing on my career checklist, and actually I’m missing a couple of things that will be what I need to go and found, and succeed, with a couple of years worth, you can go and plot a path to going and reinforcing those. If it’s that your network is missing in some areas, you can go and start coming to events like this, and building your network to be able to get stronger in that.
Noam Wasserman: On the personal side, being able to go and maybe scale back a bit. Being able to go and have a lower personal burden rate, so you can save up some of that seed money that you’re going to need, some of that cushion that you’re going to need to be able to go and reduce the risks on the family side. Maybe you move into a smaller house, or give up the mortgage and start rent, etc.
Noam Wasserman: There are a bunch of ways in which you can go and live like a founder before you are founding, and then it’s going to be a much more favorable family situation. Not going to be a shock to the system to be going and scaling back right at that point. With the luxury of time, with the foresight, and with the clearer evaluation that what your passion is going to lead to, then you’re going to be able to do a much better side of being able to go and evaluate when is the right time to leap.
Noam Wasserman: The other danger, on the other side, is if you’re waiting for everything to line up, if you’re waiting for three out of three on all of those, it’s entirely possible you’re going to come to the end of your career never having had the perfect happen for you, and you’re going to regret never having impacted the world through that. You’re going to regret not going and testing yourself, and seeing whether you could push yourself in that realm. That’s where you have to think incrementally, as we’re making each of those decisions, about take on the mortgage, take on the nanny, take on the high personal burn rate, about whether those handcuffs over time are going to preclude me from taking a low-paying non-profit job, then being able to go and achieve my dream there, or becoming that founder who isn’t going to be able to go and get a paycheck on the other side of it.
Roger Rappoport: It was really interesting, I don’t know if any folks here came to the Fireside with David Gurle. He’s the CEO of Symphony. He had a really great job at Microsoft reporting to Ballmer and Gates. When I started reading Noam’s new book, this Life Is a Startup, how we can learn from startup founders, it was really interesting.
Roger Rappoport: David wanted to do a startup, and he came home one night, said to his wife, “I want to do a startup.” She said, “You’re crazy. You’ve got a great job at Microsoft. Why do you want to do this.” And he just said, “Look, I’m totally passionate about it.” He pulled out a spreadsheet, he’d basically had the whole thing outlined, for two years taking no money, paying for developers, what would the burn be in his life?
Roger Rappoport: He sold his house in Palo Alto, sold his cars, moved into a little place, just what you’re saying. I started thinking about that, as I was reading your new book. I mean, the guy was really pitching his wife. It was like pitching an investor. He had the deck. He had the spreadsheet. “This is what we need to do. This is how long we can go without salary.”
Roger Rappoport: It really is amazing, as you start thinking more and more about this, how what we do can really be influenced by how entrepreneurs deal with certain things.
Noam Wasserman: Mm-hmm (affirmative). Yeah, just to go and adjust a little bit, in terms of that, you’re exactly right, in terms of that fitting in perfectly to that. When you’re talking about “pitching the wife,” there’s a whole bunch of dangers with that, also. This is where that passion is also going to come back to haunt you. There are perils to it.
Noam Wasserman: Because if it is that you’re in pitch-mode, you’re going to be selling her on why you should be doing this, rather than educating, and that pitching is going to be looking at the rosy scenario. “Honey, when we go and conquer the world, then this is going to be glorious for us. When we go and raise that round, we won’t have to go and suffer with the ramen noodle baby jar.” All these other things that are going to be more in sell-mode, with the pitching.
Noam Wasserman: It’s at that point that you have to go and push your passion down, and head into education mode. Go and be educating her about, “Yes, there are pitfalls here. There are all sorts of risks. That you don’t know enough yet about it, because you’re not familiar with the entrepreneurial sector, and things like that. Let me go and tell you about some of the bumps in the road that I’m likely to face.”
Noam Wasserman: You have to go and take on the onus of the education to be able to go and have her buy into it, because if it’s all rosy that you’re painting for her … What are the chances that you’re going to hit a bump in the road? It’s a given. When you first hit that bump, she’s going to be coming back and saying, “What happened to that glorious picture that you were painting for me?” The entire support is going to come crashing down. You would have gone and created a very fragile set of support from her.
Noam Wasserman: If you’ve gone and educated her about the bumps, talked to her about, it sounds like he was going and mapping out the risks, and now “Here’s my solutions to it.” Then it’s far more effective at being able to go and build a whole bunch of the support, and forcing you to do some of your thinking. Hopefully, the spouse is going and pushing you on the things she’s not understanding, to make sure that you’re thinking as deeply about these from the fresh eyes perspective that the spouse can go and bring to it.
Noam Wasserman: The one piece of it, I would say, is hopefully not in “pitch-mode,” not in sell-mode, not in twist-arm-mode, but far more in the education mode to go and make that a much more solid foundation of support.
Roger Rappoport: In contrast to another founder, who called me up, just all terribly excited, at a big job, $500,000 a year, with bonus. Called me up and said, “Roger, I’m so excited to tell you, I quit my job.” I said, “Wow, that’s fantastic.” Because that’s a real commitment to a startup, when you’re going to quit a $500,000 a year job.
Roger Rappoport: I said, “What did your wife have to say?” He said, “I haven’t told her yet.” That’s the antithesis of that.
Noam Wasserman: The Procopio divorce attorneys were getting someone the next week.
Roger Rappoport: We encourage all of our founders not to talk to their wives. No, I’m kidding.
Roger Rappoport: A question I get asked a lot, as well, as you’re deciding to go in and do your startup, is whether or not someone should go in solo, start the company, get some validation of the hypothesis, maybe try and get some level of validation. Or should they go right away and start trying to attract other co-founders?
Roger Rappoport: Sometimes it can be an artificial decision, if you want to get into an accelerator, they don’t take very often solo founders. What’s your take on the likelihood of success, ultimately, based on your data, of companies that have got solo founders, as opposed to those that come together as a cohesive group in the beginning?
Noam Wasserman: Yeah, so on this one let me start with the data, and then we can back into a little bit of the intuition behind it. What my analyses of solo versus co-founded teams are, is that the solo have a lower average performance than the co-founded teams, but a higher variance of performance. What that means is that what you have is the solo founders who are armed for battle, they are able to get to about the performance, because the high end of the variance, they are able to get to about the performance of the co-founded teams. But the ones who should have co-founded, and go solo instead, they are much more likely to completely crater.
Noam Wasserman: That’s where a bit of that self-awareness, a bit of that knowledge about, “Am I armed for battle?” is a critical thing, not just for deciding whether you’re going to go and leap, but whether you should go and leap on your own, and be Superman, and take the weight of the world on your own broad shoulders, to be able to go and do it all on your own.
Noam Wasserman: If you have gone proactively done your checklist, go back to the checklist or the readiness part that we were talking about. If you’ve gone and mapped that out, and you’ve gone and proactively checked off all the key boxes there, you are suited to go and solo found. Then you can make glory happen on your own.
Noam Wasserman: You don’t have to take on a whole bunch of these tensions that we’ll probably get into around the things that blow up teams. It’s pretty easy to go and negotiate an equity split with yourself. It’s pretty easy to go and figure out who’s going to be CEO when you’re solo founding, and so you’re not going to have to go and wrestle with all of those pieces yourself. But if you’ve gone, in your passion, and misread about your readiness for it, or because you don’t have a roadmap of where things are likely to go, you don’t understand the challenges that you are not suited for, then it’s far more likely that you’re going to be cratering at the bottom end of that distribution.
Roger Rappoport: Great point. Great point.
Noam Wasserman: Just one thing to go ahead and adjust, also, so when we’re talking, it’s far easier to talk in terms of extremes. We’re talking about solo versus co-founded. That’s going to be a bunch of things that we’re going to talk about tonight. It’s going to be easier to go and talk about buckets like that. But there’s also a whole bunch of the in-betweens that we’re going to have to neglect because of it’s going to take a while to get into.
Noam Wasserman: But you’ve got quasi-founders. You’ve got early hires that are much more in the middle there. Those are sometimes some of the solutions to some of these pieces. If you have some of the unchecked boxes. It could be you get a co-founder, but maybe it’s that you start off, instead, with a very dedicated advisor, who then maybe becomes more involved over time, and things like that.
Noam Wasserman: We will be talking more in extremes, but this is one of the great cases of where there are in-betweens for that, also.
Roger Rappoport: One of the points that you raise in the book The Founder’s Dilemma is, it’s going to crush, I think, a lot of founders here tonight. You bring up this notion of being rich or being a king. I just want to read a quote from your book.
Roger Rappoport: It says, “Founders who consistently make decisions that build wealth are more likely to achieve what I call a ‘rich outcome,’ which is greater financial gains, and lesser control. While founders who consistently make decisions that enable them to maintain control of the startup are more likely to achieve what I call a ‘king outcome,’ which is greater control and lesser financial gains.”
Roger Rappoport: I think one of the premises in your book is that there are two main motivations for getting into a startup, and one is wealth, and the other is control. Obviously, there are the wanting to change the world-
Noam Wasserman: Yep, lots of others.
Roger Rappoport: … aspects, as well. But as I read your book again, it really struck me that at the very early stages, I think you have to decide are you going to be rich, or are you going to be king? That translates into so many things, in terms of giving up equity, the board, taking on investors.
Roger Rappoport: But I think where you come out in the book is that, for the most part, probably everyone here tonight is either going to be rich or king, but they’re not going to be rich and king. Maybe you could just speak to these concepts, and explain why for just about everybody here tonight, it’s going to be unattainable that dream of having control and having the wealth, as well.
Noam Wasserman: Okay. Yeah, let’s just take a poll here of everyone. How many of you want to be rich and king? Come on, don’t lie. Every single hand should be in the air here.
Noam Wasserman: Okay. This is one of the things that, as we’re going into founding, is the dream that we have. We want to go and create something big, something that is going to be earth-shattering and impactful on the world, and we want to be the ones to be bringing it to that, to be leading the charge across all of that. That’s very much the dream.
Noam Wasserman: We get mislead a bit by a lot of the role-models that we put up there on the pedestal, as we go and take a look at that. “I’m a first-time founder. I’m going to be the next Steve Jobs. I’m a first-time founder. I’m going to be the next Bill Gates.” Those guys were rich and king as first-time founders, as they’re going out and doing it. Those are the role-models that we go and take a look at, and see that, “Oh, it’s very common that people are able to get to that.
Noam Wasserman: First off, the data show that no, my most recent stuff, it’s actually much more advanced than what I had in the first book. The most recent analyses of it on 6,000 ventures, that I did, is that there is a very strong and clear trade off between the founder keeping control beyond a certain point and the value of the venture. It is a very significant hit that it does when the founder outstays essentially beyond the point where that person is suited for where the venture goes. Then we get into a bunch of the details around what that means.
Noam Wasserman: A key thing is, when we go and misread, and say we’re going to get to that box of rich and king, we actually heighten the chances we’re going to get to neither of those. That we’re going to end up in the flop category without being either rich or king. A key thing, as you were talking about there, it starts from the beginning of our journey all the way out through it, where we are having to, and often don’t realize it, having to wrestle with being able to make those kind of trade offs.
Noam Wasserman: Let me start off, first, with when you’ve decided to found, and then we can back up, even, to what to go and found. You’re making that first decision about, “Am I going to remain a solo founder, or am I going to go and get co-founders?” You go and get co-founders, you are sharing decision-making control. You are having to give up equity to attract them. You are going to be going and making a distinct decision to not go down the path of remaining on that throne, because you’re going to go and try to bring in people who are going to be able to go and row the kingdom a lot more. They’re going to be able to go and push with you in the direction of really realizing the potential a lot more.
Noam Wasserman: How are you going to go and finance it? Well, that first round, is that going to be bootstrapping? Or is that going to be that we’re going to go and get some outside money for that? You bootstrap, you still control all the decisions. But you haven’t brought in any of the resources that you need. You haven’t gotten any of the value added smart money, maybe, that could go and help you fill in a bunch of your holes.
Noam Wasserman: Versus you go and get a bunch of the outside money, you’re going to have to give up some of the equity for that. You’re going to have to give up decision-making control. You now have someone else on the board. There’s all sorts of ways in which you’ve, by going down that other path, are going very much into the direction of “Let me bring on a lot of resources and people to help me grow the potential,” but it’s going to be with sacrificing a bunch of the control that I have within it.
Noam Wasserman: Same with when you’re doing hires. You’re going to have the rock stars that you can go and attract, or the jacks-of-all-trades, the cheap ones. You don’t have to give much equity, if any, to them, and to be able to go down the other path of getting the best there, and attracting them.
Noam Wasserman: The next round of financing, etc. Each of these paths along the way. If you’re going, you’re solo founding, you’re bootstrapping, and you’re stretching with the cheap hires, you’re going to keep lots of control there, but it’s going to be, in class I talk about the metaphor of it, you could have wedding cake, and you’re going to end up with a cupcake. It’ll be all your cupcake, but it’ll be much less than what the whole potential is going to be. You go down the other path, it’s on the hopes that you’re going to be giving up control and risking having the ultimate giving up in control, but it’s on the hope that that slice of the wedding cake that is going to be able to grown a lot more will hopefully be more valuable than what the cupcake would have been.
Noam Wasserman: If you can go and make those decisions from the beginning, about “Which am I going to celebrate at the end of the day?” There’s some people that it’s going to be very attractive to them to have the cupcake that is all theirs. If they go down the path of co-founding, and then raising a bunch of big money, and going and getting the … They’re going to end up having given up the control that they wanted. They are going to give up not being able to be the visionary that could keep running this thing, as they’re going forward with it, and they’re going to regret, even if they got rich at the end there, they’re going to go and get bribed to go and give up what their dream was, and their motivation. They got a little richer for it, but they’re going to have all sorts of regrets.
Noam Wasserman: One of the core cases that I have in my course is about Lew Cirne, he’s now the Founder-CEO of New Relic, that some of you might be familiar with. Local entrepreneur here. But taking a look at Wily Technology, when Lew was going and founding that, and then got fired as CEO of Wily. When we were debuting the case, Lew had just exited. He had just become a very rich man, but his last words, essentially, were very telling in terms of what was motivating him.
Noam Wasserman: He said, “Next time I’m running this to a billion dollars, and I don’t care what any VC has to say about it.” Lots of regret, despite his having gotten rich, because he’s the visionary. He wants to be able to bring that impact and that product to the market, and it had very much been taken away from him.
Noam Wasserman: At in New Relic, we reflected on a whole bunch of the lessons he learned from that, and the path he should plot on the way to it. On all of these levels that we’re talking about, the team-building, the investing, the board. Then, the last piece of it, what he was even going and founding was very different than Wily, where he could go and structure it, and play to his strengths, and not have to go and give up a bunch of that control.
Noam Wasserman: That’s where if you can go and plot this path from the beginning, understanding ourselves. If you are going, and you want to keep control, and you’re looking at all of your opportunities to go. This is getting into the what to found. Number one on your list is something that’s going to be very resource-intensive. Number two on your list, not as attractive, is something you can go and bootstrap, and that is not going to need a lot of resources.
Noam Wasserman: Well, maybe if you’re in sync with what you want to go and celebrate at the end of the day, that you’re going to be much more keeping in control with the cupcake, is was you want to be able to go and do, then go for your number two thing on your list. Go for the one that’s going to be in sync with you, and not have you regretting it, like Lew was at the end of that journey. That’s where even backing up to “What am I going to found?” and then plotting a strategic path to go and reinforce getting to the outcome that you’re going to go and celebrate is why taking a conscious look through all of these stages is going to enable you to balance the rich and king pieces of it.
Roger Rappoport: Although a lot of founders will say, “Hey, I’m okay giving up control because I want the wedding cake,” but the reality is, if you don’t give up control in a controlled way, and in a smart way, ultimately you could end up with a cupcake anyway, and have less equity, less control, and a cupcake, which is really sad. We’ll get into some of those things in a few minutes.
Roger Rappoport: As you look at the entrepreneurs, maybe like Zuckerberg, the rare entrepreneurs that are both king and rich, are there any characteristics of the entrepreneur or the markets they’re addressing, anything that you could say, “I knew that he or she would probably be rich or a king.” Anything just on the human side that you’ve identified?
Noam Wasserman: Well, so we can get a little bit back into Lew’s story, because he got to rich and king in New Relic, with that. But let me go back up, you reminded me about one thing that we were talking about those two examples about Steve Jobs, Bill Gates, first time entrepreneur, “I’m going to be them.” In class, I use that to go and be able to see, how many of you guys want to be that as that first-time entrepreneur?
Noam Wasserman: There’s a reason why I am using those two names. They don’t even satisfy the test themselves. The first-time entrepreneur who became rich and king. Steve Jobs was not king of Apple for the first 20 years of its life. The first one who was the investor at Apple, Mike Markkula, he intentionally brought in Mike Scott to be the CEO with a mandate that Steve Jobs has to be kept in a box, because he could go and blow up this entire company himself. There’s all sorts of ways in which we have misnomers about, we should celebrate them for lots of other things, but not for this piece of it. He was not rich and king throughout even the beginning years of Apple.
Noam Wasserman: Bill Gates doesn’t satisfy it either. Microsoft was his third company. He was not a first-time founder when he did it. He and Paul Allen, dear Paul Allen, they founded Traf-O-Data before they even went, they learned a bunch of things from that. But neither of those guys that we were using as the ones that were up on the pedestal, that we all want to be like, were able to go and satisfy it.
Noam Wasserman: Zuckerberg definitely does. First-time founder, who is going and doing it. That is a bit of skill, a bit of luck, that is all coming together into those. As you go and take a look at a bunch of the things that were going on, and so as he emphasizes how, even in those glorious stories of the rare ones who get to rich and king, there’s lots of ways in which they were skating to a cliff, and just pulling themselves back right before they do. They are also facing a bunch of pitfalls, a bunch of dilemmas.
Noam Wasserman: Who has seen Social Network here? I assume this is everyone, about weekly, is having viewings around here on that. Why did that movie exist? Because he blew it on the equity split. He went and did a bad, and we’ll get into, I assume … I know it’s one of your favorite topics, the equity split side of it. But he went and did a bad job of splitting the equity, and that could have completely imperiled the company, because he went and did that.
Noam Wasserman: That movie would not exist if not for the fact that he was skating on very thin ice, making a typical equity split mistake at that point, and the fact that he survived out of it. The lesson that we take out of it isn’t that we should go and do bad equity splits. It’s that it does take a little bit of luck to go and get yourself through the typical problems there.
Noam Wasserman: I would very much assume on his next company, if there’s going to be one, that he’s far more educated about how he’s going to split the equity, and a bunch of other things that he took away from it. The skill and luck turned into a glorious company, but there’s all sorts of other ways in which it is very much a high-risk way to go, if you are not informed about the road ahead, and being able to go and make the better decisions there.
Roger Rappoport: We’re going to get into some of the founders, the true founders dilemmas, and your work was spurred on in large part by, I think it was Professor Sahlman, who was also at Harvard. From what I recall, he was looking at VCs and their portfolio companies, and trying to identify why high growth potential startups failed. One of his conclusions was that about 65% of the time, it really was to do with people problems. The interpersonal relationships and tensions between the team.
Roger Rappoport: You’ve broken it down into the Three Rs, which we’re going to talk about. The first is the relationship problems, the second are the roles, and the misalignment of the roles, and then the third is the inappropriate rewards, which is splitting the pie.
Roger Rappoport: Just before we get into that, one of the things that I also found a little counterintuitive, was let’s assume that we’ve now resigned ourselves that we’re not going to be rich and king, we’re going to just be rich, and so we’re going to take on co-founders, and have the right investors, and so forth.
Roger Rappoport: One of the things that you say is that people have this tendency, and I think that you’ve mentioned homophily, where people tend to congregate, or people that are like-minded, like themselves in so many different ways, they’re attracting people. One of the things you say, where it’s a background, and age, and experience, and that kind of thing. Those people that bring people together like themselves are going to be less successful. It seems to be counterintuitive. Maybe you can just speak to that a little bit.
Noam Wasserman: Sure. No. Just to go a little bit, it’s a horrible academic term that we need a new one for, a little bit more marketing, so we have to think about how to talk about it. It’s essentially “birds of a feather flocking together.” Now, we feel much more comfortable with people who share our background, share a similar way of looking at the world as we do. It’s a very powerful, magnetic pull that we have as humans.
Noam Wasserman: This also gets into it, it’s a little bit of a microcosm of that these issues that I was talking about, from the founding perspective, and first of all, they’re human issues that are preponderant in all sorts of other walks of our lives. For instance, just recently I did a Forbes column on political homophily. About how we all succumb to it.
Noam Wasserman: If you think about, and this is where, I don’t get political in anything, but this is the first time I’ve ever written something politically. This was at the heights of the Supreme Court hearings that we were just having here. It was pointing out how homophily is what we are all succumbing to politically.
Noam Wasserman: If you were on either side of where that was coming out, you probably had been in a process of going and shutting down all of the voices that were disagreeing with you. We have a tendency to go and only look at the sites that are going and agreeing with us, whichever side we are on. We are unfriending the people who are not of our similar thinking. We are only listening, we are creating our own echo chamber, and that is homophily in our personal lives, that we are only going and seeing that one side of it.
Noam Wasserman: In that column, I was pushing people that if you couldn’t imagine why either of those sides still has people who believe that that was the correct side in it, go and find at least one site from the other side, and go and start reading it, because you have gone and intentionally shut that off, because of that natural pull towards the people who agree with you. So go and inform yourself.
Noam Wasserman: We have elections coming up three weeks from now. Become a better voter by going right now, and whichever side of the spectrum you’re on, find something that’s on the other side that you can go and read, and be a lot more informed about what the other side is saying about it. You might find that you get even more dedicated to what you’re saying, or you might see that you’re going to see other pieces of it, where the homophily, the political homophily was leading you to miss them. Either way, you’re better for it, and we as a society are better for it.
Noam Wasserman: This is one of those microcosms of, Life Is a Startup, I go into a bunch of the data that we have from the 2016 election, on how people were only listening to the people who were on their side of the political spectrum, and it was almost exactly equal. That 75% of the Clinton voters, and about 75% of the Trump voters were only listening to people who were on that side of it, and di not listen to anyone who was on the other side of it.
Noam Wasserman: It’s a human thing. It’s not biased towards one political side or the other. It’s a human element, and that’s why we see it equally on both sides of that. And so-
Roger Rappoport: You would think in a startup that that would be a good thing, right? That people that are very similar in so many respects. But they’re less successful.
Noam Wasserman: When you go and take a look, let’s go back to that checklist. We were talking about “What are the things that I need to do to be able to go and succeed within this venture?”
Noam Wasserman: Let me go and take one example. Another one of my, [inaudible 00:36:11] is another one of the people I worked closely with, to go and study him, and then capture it in class, bring him in class and have him affect everyone.
Noam Wasserman: Tim Westergren, are people familiar with Tim? Founder-CEO of Pandora. The early days of Pandora, they were called Savage Beasts. It’s one of my favorite case names, to have Savage Beasts as the name of a case. Go into a whole bunch of the ways in which he was going and founding it.
Noam Wasserman: He was a musician. For a while, billed, he was the … YellowWood Junction was his band. That was the beginning part of his life, and that’s when he got the idea for the Music Genome. To be able to go and have struggling new bands, have people be able to find them who might like their music. Go and find, get a taste of the ones that people know that they like, and then try to match them to ones that have a similar genome, and then they’ll go and do it.
Noam Wasserman: He’s going and founding this online music company. Who’s the logical one that he would go and talk about this idea with, and go and maybe partner with? Who do you think would be a logical one to go and look at?
Noam Wasserman: Another musician. He’s going to go to his buddies, “Let’s go and co-found this together!”
Noam Wasserman: If you take a look at the checklist that Tim had, and this is in there, but an online music company. “Online,” we need someone tech. “Music,” we need someone music. “Company,” we need someone who knows the business side. If Tim would have gone and double-checked off the music box, and then not gone and filled in the other two boxes, would you even go and invest in that company? Is that anything that would be something attractive?
Noam Wasserman: If you go and join as a hire, to go and … This is a double-checked box, where he’s succumbing to the homophily. The people who are like me. The ones that I find … It’s a lot harder to go and even know where to look for the ones that aren’t like you, let alone be able to relate to them, and then to see “Are you going to fit?” and things like that.
Noam Wasserman: Tim, fortunately, implicitly had that checklist in his mind of, “I’ve checked off that box already. I’m not going to go and get someone else on board with that. What I’m looking for is where can I find a business person who’s going to be able to fill that in.?” Went and found Jon Kraft, tapped a second-order network of his, a “been there, done that” CEO who could go and fill that in.
Noam Wasserman: Then also had a little bit of the glue, because Jon had his own personal interest in music. He knew that he didn’t know music to the extent that Tim did, so he was giving Tim all of the music domain, to be able to go and make those decisions. Then they went and found the person to go and check off the techie box.
Noam Wasserman: That’s where, if they hadn’t gone, where you were talking about the homophilic teams, they’re going to be early on more kumbaya together. We know we speak the same language. We have the cultural fit. We feel much more comfortable together.
Noam Wasserman: But that’s going to lead to two problems. Double-checked boxes lead to a lot more tensions. Both of the musicians are going to want to make the music calls on which decisions they’re making there. Then the unchecked boxes on that checklist are going to leave gaping holes in the team that are also going to imperil it.
Noam Wasserman: There’s all sorts of ways in which you should go to the other end of the extreme. Diversity for just diversity’s sake, it’s going to be a lot more of the tensions that are going to be coming, but that mid-range of pushing ourselves out of homophily and being able to go and see “What are the big gaping holes that we haven’t filled?” That’s where you have to go and get yourself much more used to it.
Noam Wasserman: This is also one of the things you wouldn’t have seen in Founder’s Dilemmas, but now in Life Is a Startup, go tap some of the research on grumpy orchestras. A lot of times, if you go and think about that if these orchestra members are all getting along really well, kumbaya, within the orchestra, they’re going to play beautiful music. Actually no. The research shows that the orchestras that have at least a little bit of grumpiness to them, there is a little bit of the creative tension. There is a little bit of the diversity there that is going and not making it all kumbaya. They actually play better.
Noam Wasserman: We have to get comfortable, ourselves, in our personal lives and our founding lives, with a little bit of building those muscles around “How do we go and harness the creative tension, rather than run the other direction and have homophily become the rule within our teams.
Roger Rappoport: Let’s talk a little bit about the relationships. I think this is the first of your Three Rs. You say when people found companies, there’s essentially three camps that they can pull their co-founder pool from. One is the friends and family, close personal relationships. There’s the mere acquaintances, and then there are the former co-workers.
Roger Rappoport: Instinctively, you would think that the folks that you are friendly with, family, you would think that those are the folks that would be most likely to succeed, but your research has shown that it really is the opposite. Those are, the friends and family are the least likely to succeed. Could you maybe talk a little bit about the data, and which teams are most likely to succeed?
Noam Wasserman: Sure, no, absolutely. I should have stopped you as you were heading into that question and gone and taken a poll here. Forget what Roger just said about the research results. How many of you would have said, think about the teams, the friends and family versus the other teams, the teams that you don’t have that social relationship with, and which would be more stable. How many people would say that the friends and family teams, the people you know well, that you trust, that those are going to be more stable? How many people would say?
Noam Wasserman: Okay, good. We have a few hands here. Okay. How many people say, “No, it’s going to be the other teams.” Wow. A sea of hands.
Roger Rappoport: I gave it away.
Noam Wasserman: That’s what I actually get when I go and teach this, before I go and reveal, so no, that’s actually pretty universal. That’s not the surprising thing about it. We’ve all experienced a lot of the tensions around it, and all the challenges that you face when you have the friends and family teams. Let me ask you the second piece, that to me was the eye-opening part. Which is the more common source of co-founders? Friends and family, or all the rest?
Noam Wasserman: Friends and family. But wait, we are going and making the most perilous of decisions when we are going and founding, and that is the most common of them. There’s a disconnect there. There’s a real problem. When we’re going and following our gut, or we’re going and following what seems right, where we’re succumbing to the people who are near and dear to us, and who are compatible with it, that is the most perilous of the decisions, when we’re just going and doing it unthinkingly.
Noam Wasserman: When you’re going and breaking it down, that’s the real problem. That’s a microcosm for me of when we’re not thinking with our head. This gets into my favorite Steve Jobs quote. “Follow your heart, but check it with your head.” Unfortunately, when we are going and following our passion, when we’re going and following our gut … We celebrate the intuitive, the instinctive entrepreneur, the founder who is going and following the gut.
Noam Wasserman: When it comes to these people issues that we are taking about, we are often misled by the gut. What feels right when it comes to these people decisions, who to go and co-found with, how to split the roles and equity, all these other things there, what the research shows is that those are the most ill-fated of decisions.
Noam Wasserman: You were talking before about Bill Sahlman’s result that sparked my having an interest in this. Now, what Bill had gone and studied, and Bill’s an economist. Bill was going and trying to study VCs and what do they do. Also, fortunately, thought to ask, in this very long paper that he had, about “Tell us about the parts of your portfolio that we’ll never hear about again? The ones that failed?” The highest potential of ventures that attracted VC dollars, but they hit the dustbin of history for some reason.
Noam Wasserman: When Bill was taking a look at it, he was expecting things like what today, his paper was published 30 years ago, so he didn’t have the same lingo, but today we would call product-market fit issues, problems within the functions that have to coalesce as a team is coming together. He did find that 35% of the reasons for failure were those.
Noam Wasserman: That was swamped by the number one reason for failure. The number one reason for failure, 65% was the people problems. It was the frictions between the co-founders, the tensions between them and all the other people who came on board. It was those soft, squishy, subjective human issues that were the ones that were bringing down these highest-potential of companies.
Noam Wasserman: When we’re going “What is the reason that that is the highest reason for failure?” Well, to me, this is what motivated, for me, if we want to go and change that high rate of failure, where we can go and really move the needle is on the biggest reason for failure. The 65% slice of this pie. If we can go and understand all those people problems, and then reduce those risks to be able to go and have founders make better decisions when it comes to that, then it’s going to be far better.
Noam Wasserman: The problem is, when we follow our gut, that gut leads the highest risks of decisions. The friends and family founding, and then the other things that we might get into, with the roles, and the rewards, and things like that. That’s where we have to go and pull back on it, and realize that those are much shakier.
Noam Wasserman: To me, the most shocking piece of it, when I was doing those analyses around the types of teams, is that the friends and family teams were even less stable than the stranger teams, or the acquaintance teams. Then, the ones that I was expecting, that the prior co-worker teams, they had ironed out everything in the professional realm, and things like that, that that was the most stable of all the teams. But for me the shocker was that the people who trust and know each other so well, “Kumbaya is going to break out as we go and create this glorious team, co-founding with my best friend or my sister,” things along those lines. That turns out to be even worse than the teams that don’t know each other.
Noam Wasserman: Now, we can go and break down what are a bunch of the risks that they are taking on? Once we know those risks, then we can go and diagnose actions you should take. Some of the risks: how many people really look forward to having really tension-filled conversations with those that are closest to you? Lots of people, right? Very much so. We shy away from having those tension-filled conversations.
Noam Wasserman: Are you more likely to have that conversation with someone you know you don’t know. A stranger, or an acquaintance? Yeah. You know that I have to go and date that person. You know I have to go and feel my way through about whether we’re compatible, and things like that. You’re going to make a bold assumption with the people that are closest to you that we are compatible. We know each other. We have the trust. You’re not going to date them.
Noam Wasserman: It’s a little weird. This is one of the titles on one of the sections of Life Is a Startup. But Dating Mom. As you’re deciding whether you’re going to go and co-found with Mom. You have to go and step back to going and seeing whether, in this different realm of life, we’ve dealt with each other in our personal life. How many people have gone to work with one of their parents? Has anyone gone to Take Your Child to Work? How similar was Mom at home to how she is in the office? Was that the same person? I’m seeing a lot of heads, “No.”
Noam Wasserman: We go and make that bold assumption, that if we know them really well at home, it’s going to port to the office. It’s going to be the same person. It’s going to be the same dynamic, and things like that. Then we are going to get haunted by the most treasured assumption that we have, that we’re going to be a glorious team in the office together. When you realize it’s a very different compartment of life, has a very different person there. That’s one of the ways in which that trust, and that assumption that we know each other, is going to come crashing down and cause major problems for those friends and family teams.
Noam Wasserman: That’s just one example of diagnose a bunch of the risk. We’re not going to discuss the difficult issues as well with those types of people. When things blow up, the damage that it’s going to do to the personal relationship is going to be even more severe. That’s going to lead us even more so to not bring up the tough things.
Noam Wasserman: But each of those leads to actions you can go and take. Force a bunch of those difficult conversations. Inject a third-party in, who’s going to be able to tell you, “These are the perils that you’re not discussing right now, that you have to go and talk about.” Go and create firewalls to protect the personal side, when the business is blowing up.
Noam Wasserman: Equivalent of a prenup. Go and get Procopio to go and do a prenup that’s going to protect the venture or the home from the other one blowing up, and that’s something. I can go and take a show of hands. I don’t want to embarrass anyone here, or myself. Of the married people here, how many of you have a prenup agreement? Hasn’t everyone heard that 50% of marriages fail? “Oh, but we’re going to be the rosy marriages that are going to be able to go and avoid … The glorious marriages. We’re never going to be … “
Noam Wasserman: Well, the same thing that we do within teams. Back to Life is a Startup. The similarity, that we have all sorts of metaphors of home life and startup life. The Co-Founder of Life, the My Baby, and things along those lines. You have a high rate of failure within startups. You have the high rate of failure within marriages. We’re going to assume that away, because we’re going to be the rosy, glorious teams, that never have to go and deal with it.
Noam Wasserman: Those same human things that lead us to go and not have the conversations, not craft these firewalls. When we’re playing with fire by going and doing a friends and family co-founding team, we have to go and take a bunch of those actionable steps that we usually neglect, and that is going to be a lot more healthy for us to go and do that.
Roger Rappoport: It just goes against human nature, right? Because we typically, just human nature is, we don’t want to have confrontations. It’s people that we’re going to be close to, and sitting around the Thanksgiving table with. Great advice.
Roger Rappoport: I want to just switch gears a little bit and talk a little bit about roles and responsibilities. I think one of the things that I got from your book is that really finding the right division of labor in the founding team can be a really big source of tension. Especially when it comes to titles, whether there are overlapping roles and responsibilities. Is there going to be collective decision-making? Will that really end up in gridlock?
Roger Rappoport: Just a couple of questions now on roles and responsibilities. I get this question a lot. Who should be the CEO? Is it necessarily the idea guy or gal, or is it somebody else? Who, in your view, should be the CEO?
Noam Wasserman: Okay. Let’s see here, also, where people come out on the idea person, and CEO, and things like that. How many people say that the idea person right at the beginning should probably still be the CEO three years out? Do you all think that that would be, that there’s similarity between what is a good idea person and what’s going to be a good three-year CEO?
Noam Wasserman: Or more different?
Noam Wasserman: Okay, so it’s going to be pretty different down the road there. Yet, in the data, the idea person is four times as likely to have the CEO position as a non-idea person. Yet, there’s going to be all sorts of ways in which there’s going to be the inertia of that position. You go and have titles early on, people go and fall in love with that title. They fall in love with the position.
Noam Wasserman: There’s going to be all sorts of ways in which that human element of the social inertia of the prestige, the status, and things like that, is going to lead to down the road, if you didn’t have a difficult discussion with the idea person about why that isn’t the right person to be taking on that title for a little bit longer, or for the duration, and things like that, that’s going to cause major tensions later, when that person is not suited for it, but they’ve fallen in love with the time that they’ve been in there. They love that business card. It passes the Mom test. Mom loves bragging about her son the CEO, or her daughter the CEO.
Noam Wasserman: All sorts of ways in which there’s going to be tensions later on because of it. That idea person, early on, who has just taken the CEO title, and it’s not with the consideration of CEO is not the same thing as idea person, it’s going to cause tensions for the team as it’s going forward into it. Sometimes you do have the right person, had both the idea, and later on, but it’s a rare person who’s going to be that. It has to be much more with that consideration of it.
Noam Wasserman: Even if you do have that, that person’s taking it on initially, it has to be with a very strong and reiterated understanding that this is temporary. Not quite that you’re going and putting “Interim CEO” on the Founder-CEO’s card, but that effectively, there are the conversations with them over time, “Let’s re-evaluate. What are the things that are the next stages of what the CEO’s going to have to do well, and does this match the checklist that we created for you back in the beginning of our journey, about what you do well? Is there a disconnect between those two pieces of it?”
Noam Wasserman: That’s where you have to go and consistently have communication about it. Otherwise, that person is going to fall in love with it, and it’s going to be an assumption that “I’m going to be able to continue with that.”
Roger Rappoport: That’s hard, because people get attached to the title. You’re absolutely right.
Roger Rappoport: We’ve got the right CEO at the right time. I get this a lot, as well. What decisions should be made by the CEO, and especially we’re talking at the early stage? Which decisions should be made as a team? What’s your advice here?
Noam Wasserman: The most effective, so let’s get back to the hybrid approaches, and things like that, because you were talking about rich and king. Let’s go back to Tim Westergren as the example, also.
Noam Wasserman: Talk about king, another metaphor that we use is being Zeus at Mount Olympus. The person at the top of the mountain is very clearly making all of the decisions and those orders. Versus Living in Neverland, where “It’s only kids together here. It’s only peers. One founder, one vote. We make decisions by consensus.” Lots of metaphors that we use within the founding team of “We’re living in Neverland,” to be going and doing it.
Noam Wasserman: Neither of those is a great model to go with. Each of them has flaws, of the sole decision maker, and then the everyone on board in the decision-making. This one turns into gridlock. This one turns into a lot more tension, because you’ve punted on how are you going to break the gridlock, or make decisions? Then the other one, the Zeus at the Top of Mount Olympus, you’re betting on the monarch being infallible. That’s a very hazardous way to go and be doing it.
Noam Wasserman: In between, one of the best models that I’ve seen, and this is where you have to go and design that team by checklist, and then have it map to this. Tim Westergren was able to have mini-Zeuses. Essentially, Tim was the Zeus over the music part of the company, and Will was the techie who was the Zeus over the techie part of the company. John was the one who was going and making the purely business decisions that he would have to go and consult with the other two, because those are going to be very intertwined with the business decisions.
Noam Wasserman: But that’s where each of them could go, and be playing to their strengths, be making those decisions quickly, being able to go and make them, but even when you have a great mini-Zeus structure, like what they had there, there’s always going to be cross-cutting decisions. There’s always going to be one that are going to be a technical decision that depends on how you design the Music Genome, Tim, and vice-versa, across all of these. The ways in which you’re going to have to go and have everyone at the table there. That’s where you’re going to have to go and still deal with some decisions that are going to be there, but you’re going to take a lot of the decisions, have people play to their strengths, because they are specific to the different domains. Have the mini-Zeuses go and do that, and then you can go and be able to have the decisions that are going to be coalescing for everyone, they’re going to be the last things you’re going to go and take a look at.
Noam Wasserman: One of the other key things you have to do, and this is one of the things, we can get into a question about two-founder teams versus three-founder teams. In general, there are pros and cons to each of those, and a lot of it should be driven by the checklist. Like a two-founder team that leaves a gaping hole should have been a three-founder team. A three-founder team that has double-checked boxes, and they could have covered it with two, it should have been the opposite.
Noam Wasserman: You have to go and take a look at the specifics around it. My data show that each of those, the two and three, have relatively equal performance there. You have to go and choose it right, but it’s not that one is going to be determining each of those.
Noam Wasserman: But one of the key things that’s a minus with the two-founder teams is what happens when you have those collective decisions that you’re making, and it’s one-one? How are you going to go and break that tie-breaker? That’s one of the ones that leads to a lot of tension within those two, that duo, over there.
Noam Wasserman: Unless they’ve gone and figured out ahead of time, negotiated the process side … I think it was Daniel Patrick Moynihan who was talking about that every decision, when they’re in Congress, and they’re making decisions, if at that point they are deciding on the process to get to an answer, it’s all going to be driven by the political side of it. Each side is going to go and try to structure the process to get the answer that they want out of it.
Noam Wasserman: It has to be ahead of time, before there’s actual decisions to be made, that then you talk about the process. You design the one of how we’re going to break ties, and things like that. Ahead of time, those two-person teams have to figure out is there going to be a third leg on the stool that we’re going to introduce? Is there going to be a key mentor that we both respect, that is going to be enough in touch with the business, and has better vision about what is ahead, because they have a little bit more experience there, who can then weigh in and be able to be that tie-breaker vote? Or stuff like that. That’s just one of the examples of how to go and set it up ahead of time.
Noam Wasserman: Versus the three-founder team, they have Tim and Will and John, they can be a two-to-one vote that can go and break that tie, and have them move forward with it. That’s where you’re getting into the collective decisions, and the structure of the team. Mini-Zeuses who then have a process for being able to resolve any kind of ways in which there is gridlock at the top, with the other decisions.
Roger Rappoport: What was interesting, just to this point, in Life Is a Startup, you talked about the CEO of Segway. He gave up control. He wasn’t the CEO, but he still basically controlled everything and everyone, and went through, I think, nine CEOs-
Noam Wasserman: Nine in a decade.
Roger Rappoport: Yeah. I think if you’re going to give your co-founders the room for them to grow and make decisions, you have to let go a little bit.
Noam Wasserman: Yeah. I don’t know if we have to get into it, but there’s obvious mapping to the family life of how the-
Roger Rappoport: Yeah, definitely.
Noam Wasserman: The problems within the couple, when you have that kind of a person, is part of it.
Roger Rappoport: Yeah. This is something that I think I get virtually on a daily basis. This is the third of your Three Rs, which is the rewards. Splitting the pie. You’ve identified “We’re not going to be king, but we’re going to be rich.” We’ve made all of the right decisions in that regard. But probably one of the hardest things, and especially if it’s either strangers or people that you’ve worked with in the past, is splitting the pie. Because it really goes to the very essence as to why we’re actually getting involved in the startup. For the most part, it’s to create wealth, and hopefully multi-generational wealth.
Roger Rappoport: Let’s talk about some of the things that founders should be thinking about as they’re splitting the pie, or maybe they’ve split the pie, and they’ve found out that they didn’t do it quite right. What, in your mind, separates a good equity split from a bad one?
Noam Wasserman: Okay. Very complex domain. Let’s see if we can boil it down a bit. What should the equity split be going and doing? It should be doing a little bit of rewarding the past. It should dominantly be incenting the future, and it should be going and being robust to those potholes in the road, of the unexpected, that things are going to come up there.
Noam Wasserman: You could have it meet the first two tests, but if it is static, if it is just set in stone, and then it’s going to be a lot more like that fragile agreement that you pitched the spouse, and then it comes crashing down when you hit a bump in the road? Same thing with those equity splits.
Noam Wasserman: This gets back into Mark Zuckerberg. What was the problem? 70/30 split that was set in stone. Then, when he decides that Eduardo isn’t worth it, he’s going to go and grab it back from him, that static split came back to haunt him. It ended up in court. All sorts of ways in which that was problematic for him.
Noam Wasserman: That’s where you are missing, if you’re missing any one of those pieces, but in particular the robustness to those changes. It’s almost a given that something will be changing, and that during those rosy, early days, you’re going to be neglecting to look at those potholes. That’s where you’re going to go and do a split that is very much something you can get to right now, and is not going to last throughout the bumps in the road.
Noam Wasserman: If you can go and have one that goes, and there’s a fourth piece of it for, especially the non-idea founder, who’s having to attract people, that the equity split is also going to have the attraction side. But the rewarding the past, the incenting the future, and robust to the changes, along with the attraction piece of it, are the ones that I am looking at, and what the data show are the ones that are going to be much more robust equity splits.
Noam Wasserman: A key problem is, when we get into the human biases, when we get into the natural inclinations that we have, where you’re talking about the rosy perspective on it, you’re going to neglect to look at those potholes and plan around them, robustness test your equity split to see is it going to be robust to the potholes? Even if you go and think about the minuses, the pitfalls, and things like that, that’s going to be those difficult conversations that you’re going to avoid having.
Noam Wasserman: Those are going to be the tension-filled things of talking about, “Well, I’m worried that you’re going to drop out of this venture, because you’ve never founded before, and you’re not ready for the days when the world is going to be falling in on us.” Those doubts that you might have that you’re not going to go and bring that up with your co-founder.
Noam Wasserman: That’s the second of the inclinations. Look at the rosy, even when there’s the pitfalls along the way. You’re not going to go and discuss them. There’s not going to be the dialogue about the toughest pieces of it. Then, last piece of it is there’s this magnetic pull that we tend to have towards equal. Towards quote-unquote “fair,” with equal being a proxy for it.
Noam Wasserman: That’s the thing that leads to the most common of the equity splits. My data show that teams tend to punt on it by having the one-over-N rule, so the 50/50 split, or the third-a third-a third, if it’s three of them. And to do it statically. When you’re going and doing that, that’s when the rosy is ruling, the pitfalls are neglected, the robustness isn’t there. There’s all sorts of ways in which you are asking for it when you’re going and splitting the equity there.
Roger Rappoport: You mentioned biases. What rules of thumb or biases get in the way of founders splitting the equity well? What’s your take on that?
Noam Wasserman: Those are the three. The main ones. The rosiness, the avoidance of the conflict. This also echoes, this should be echoes of all of these pieces, because they’re human elements, of the going and founding with friends. You’re only going to look at it when we’re the kumbaya team. That’s rosiness. We’re not going to go and discuss the difficult pieces there, and it’s likely that we’re going to have succumbing to the magnetic pull of equality.
Noam Wasserman: That across all of the Rs, the relationships, the roles, Living in Neverland is the pull towards the equal, that we’re not going to discuss a bunch of the “I have doubts about whether you’re going to scale.” All sorts of other things that are going to cause problems with the roles, and not discussing the pitfalls there. And then the rewards. We’ve talked about all of those pieces of it.
Noam Wasserman: But what I’ve found, this is somewhat a very simple process, what I’ve found much more effective for teams to deal with across all of these is essentially about a half-dozen steps to go through, to go and collectively be able to go and decide on these things. What I tell my students, when they’re going co-founding, or when I have people coming to me who are already running into problems, and they want to know how to go with it. Not rocket science, or anything like that, but this is the process to go through.
Noam Wasserman: I tell them go and take a blank whiteboard. This is helpful from a strategic planning and from the people perspective also. On that whiteboard, go and brainstorm about “What are all the critical things that we need to go and succeed at this?” Usually, they’ll end up, sometimes they go a little bit too detailed. Some, say you’re only ending up with two or three things on the list, and things like that.
Noam Wasserman: Usually, there’s about 12-15 things that they’re going to come up with, of these are the critical skills, or contacts, the human capital, the social capital, even the financial capital, and things like that. What are the things that we need to go and succeed?
Noam Wasserman: Once you have that on the board, go and figure out “What is the horizon when we’re going to need this?” Is this right at the beginning? Is this six months from now, or so? What are the times that we’re going to go and need this?
Noam Wasserman: Then once you have those up there, then go and start having a dialogue about how critical are each of these to overall, the value that we’re going to go and be able to create. Then you’re putting, essentially, could be a high-medium-low, in terms of the criticality. Could be percentages that people could even go and do, if it’s engineers, that they have that attraction, doing something in that direction.
Noam Wasserman: But once you go and have those on there, then start going and checking off, and putting the names next to it, of “Who is already a given on this team who is able to go and cover that base?” Then start checking off all of those pieces of it. Then, once you have that, then you’re ready to have some of those difficult dialogues.
Noam Wasserman: First of all, where do we have double-checked boxes, and how are we going to deal with that homophily? How are we going to be able to go and structure it to not go and have that introduce tensions because we succumbed to it?
Noam Wasserman: For the unchecked boxes, what are the ways in which we have strategic plans to go and fill that check in? If you have something that was on your important list, and you don’t have a solution to it, you have to collectively go and be able to figure out “How are we going to be able to go and check that off?” This is where we get into some of the other options besides the extremes, when it comes to the co-founding ones. Maybe we get it through an advisor. Maybe we get it through outsourcing. Maybe we get it through having all sorts of other, mid-range solutions for that, but having some concrete way to go and check that box off.
Noam Wasserman: Then once you have those in place, that’s the roles pieces of it, you can go and be able to have the dialogue about all those things that are there. You have the homophily part of the rewards that’s coming out of that. You have the roles piece of how you’re going to be able to go and see who is doing what, and therefore what titles seem to make the most sense for them.
Noam Wasserman: Then on the rewards side, whoever’s name are next to these, you take, and so I started life as an engineer, that’s why I come into having this structured approach, unfortunately, to a lot of these things, but right there, the engineering approach to it is go and take the names and the percentages of the things that they are going and doing, and then go and add up how much does that lead to they are creating of this full pie of 100% of value? How much are they going to be creating if they come through at each of those stages with doing those things? That should be the starting point for your going and having a dialogue about what the equity split might be.
Noam Wasserman: You have to then go and robustness assess across scenarios. So “We are not scaling well. We’re going to have to bring someone else in. Therefore, it’s going to be a different amount of the percentage that we’re going to have there.” Or this is the most likely way in which a pivot might be effecting what this landscape is going to look like. Look at those different scenarios, see what robustness testing that is going to lead to, but it at least gives you a starting point for the dialogue around each of these three Rs, and a structured way to have at least an initial cut, before the fisticuffs start around the negotiations around who is doing what and how much they’re worth.
Roger Rappoport: I want to just bring in a practical example, and I got permission to do this. I’m not going to mention any names. But I’d like to get your take on this. I have certain views.
Roger Rappoport: Three founders of a software company, and they’re asking me for advice on splitting the pie. They’ve worked together for a while at a previous company, now they’ve worked together for a while at the startup, and they’re splitting the pie. This is what was suggested. The CEO, idea and partial money person, 44%. VP Engineering, 37%. And VP Ops, 19%.
Roger Rappoport: You’ve studied pie-splitting a lot, and people where there’s more success or failure. As you think through this split, what’s your gut feeling. Obviously, you don’t know the individuals. You don’t know everything that they’re bringing to the table. But I didn’t know, either, when I was asked the question. But what’s your take?
Noam Wasserman: Ad hoc, we’re going to do a case study right here, right?
Roger Rappoport: Well, we’ve got a professor here.
Noam Wasserman: I get to be cold called on this. What type of company is it?
Roger Rappoport: SaaS company. Software.
Noam Wasserman: Okay, so first off, you were saying that they’ve been working on this startup a little bit. This is-
Roger Rappoport: Probably about a year.
Noam Wasserman: Okay. One of the key things, that’s great to go and date each other in the real startup, to be able to go and learn about a bunch of those things. That’s one thing to the advantage of what they’re going and doing. But unfortunately, it also misleads you about, “Now we know each other, and now it’s all set for the future.” That’s going to lead them to underestimate a bunch of those pitfalls.
Noam Wasserman: One of them, very possibly, is going to have some personal issue that’s going to lead that person to go and drop out of the startup. There might be some of the tensions around, they have the high personal burn rate, still, and they can’t keep going without getting a paycheck, and other things like that.
Noam Wasserman: They’re going to be thinking, “We’re all set on the team.” This is going to continue with it, they’re going to be overconfident from that, so there’s a balance there. You have to make sure, you’ve gotten to know each other, but you’re not neglecting where this is likely to go.
Noam Wasserman: When you’re talking about a SaaS startup, this is not rocket science to be able to go and do that from a technical side. Not anymore. It was when SaaS was first coming up, and things like that. To go and have the techie have that huge a chunk of the company, we have to go and take a look at, when we’re looking at the percentages on the critical things for us to go and do there, have we overallocated to that? Because it’s not bleeding edge rocket science that we’re going to be doing there. Is that going to mean that we have less to be able to go and do some of the other things that are the critical parts of the unchecked boxes that we’re going to have there?
Noam Wasserman: Overallocating to one or more of those people. You’re talking about VP Operations, that’s, I don’t know what that person would be doing during the early days of a SaaS company that’s going to be different from what the CEO should be driving there, at that point. But when you’re going, talking about it, is that person really, is this where we have a co-founder who needed a title, and let’s just go and throw that at the person? Or is it a legitimate need within the company, to be going and doing that?
Roger Rappoport: Early stage startup, I mean, do they necessarily need a COO? I mean, what’s your experience in terms of having that kind of individual-
Noam Wasserman: A lot of times, it’s red flag for me, when I see A) that the founders all have C-level titles, a) there’s that title inflation that we were talking about a little bit before. What happens when the CFO, who has never done anything that is strategic on the financial side, they’ve been nothing more than a bookkeeper at most. They can balance their checkbook, and they can balance the company’s early checkbook, but it’s not going to scale. Suddenly, now, this person who is in love with having a C-level title is going to fight giving it up, so you’re going to go and hire an SCFO? A senior CFO to be above that person? There are all sorts of challenges that that’s going to go and introduce.
Noam Wasserman: Same thing if you go and over-title that person in the engineering side. Now you’re bringing in a true CTO above that person, well that person’s already CTO. How are you going to be able to go and do that? Being able to make sure that you’re not going to get hamstrung by, you’re talking about all of them are VPs or C-level, that could become an issue there.
Noam Wasserman: Another one of them from that founder’s perspective. Let’s see, you were talking about the idea person, with the 44%, is going to be the CEO. Also, I think there was also a funding element of it, that that person bringing funding to it. That’s a lot more than 44% probably. Without knowing that person, and the other things that are going on there, that person is wearing multiple hats in terms of the financing, and the CEO, and bringing the idea, all of those other things there. That person, essentially, has a minority stake right now.
Noam Wasserman: If you have, this is getting very Machiavellian, but you’ve seen, I’m sure, founding teams, I’ve seen them where that person is out-voted by the people who own the 56% of the company that that person doesn’t own. That’s going to be major problems for being able to have decisions made that are healthy for the company, and for the founder, and things like that.
Noam Wasserman: All of those are ones that are the initial things that I go and be able to see. Then the final one is, I assume this is set in stone? This is the 44%, and no matter what comes, the-
Roger Rappoport: No, we’ve been talking about it [crosstalk 01:10:59]-
Noam Wasserman: But what they would have done without you?
Roger Rappoport: Yeah.
Noam Wasserman: I assume it would have been a lot more of the static type of split that they would have done-
Roger Rappoport: I think so.
Noam Wasserman: … without the expert guidance.
Roger Rappoport: Yeah.
Noam Wasserman: Then they’re not planning around a whole bunch of those other problems that are going to be the unknowns that they should be able to anticipate with a little bit of guidance, and so it’s missing that big critical robustness piece that we were talking about.
Roger Rappoport: Yeah, I hate to always be bad guy, but I think that, ultimately, the wrong equity split doesn’t end up well, just because, I think it was Zynga, right before they went public, basically Pincus sent around a letter that said, “Give back your equity, or you’re fired.” I was just absolutely incensed.
Roger Rappoport: I went to our labor and employment people, and I said, “This is impossible. How can he do that?” They said, “California is an at-will state. You can fire someone for any reason or for no reason. ‘Give back your equity.’ ‘No.’ ‘You’re fired.'”
Roger Rappoport: Really, I think it was just a misallocation at the early stages. Going public, they couldn’t increase the pool for optionees, because they couldn’t dilute the investors, so it was the only way out, just because of a bad allocation at the very early stages.
Noam Wasserman: Mm-hmm (affirmative). That’s another rich and king founder who was skating on very thin ice because of a lot of early decisions that were not the head informing the heart as he’s going and making them.
Roger Rappoport: We’ve got so much to cover, and so little time. But I wanted to get your take on this, because I get this all the time, as well. A couple of founders, been in business a couple of years. Someone wants to come on as a co-founder. They want the title of co-founder. In reality, they really are an early employee.
Roger Rappoport: I’ve got a friend in Southern California who started ProFlowers. They sold for hundreds of millions of dollars to Liberty Media, and every time I would introduce him, Bill Strauss, the founder of ProFlowers, and he would say, “Actually, Roger, I was employee number one.” In his mind, it was Jared’s idea, and he really kept it real.
Noam Wasserman: That’s rare humility.
Roger Rappoport: Yeah.
Noam Wasserman: That he’s bringing to it.
Roger Rappoport: Yeah. But let’s say that you’re working at this, you want to attract someone, and they say, “We’ll come on, but we want the co-founder title.” They really are an early employee, but what’s your take on giving them that title?
Noam Wasserman: In some ways, I find that doing it in the right way, with the right framing, the right expectations, it can actually be a good thing to go and do. In some ways, you’re looking at the full package of “How do I attract this person?”
Noam Wasserman: If for them, this is where you also have to read some of the signals and understand the person. If for them it’s very attractive to have the co-founder title there, and that enables you to not have to give up a lot of the equity, as much of the equity. If it enables you to go and make it a sweetened package for them, they’ll give up a little more salary, and that way not go and kill your burn rate by going and bringing them on. If they’re a key member of the team, that they’re going to be adding something to it, then going, and as long as you are grappling yourself with “I’m not the only one who’s going to be listed as founder on the site,” and things like that, then that can be a way to go and sweeten the package.
Noam Wasserman: There’s a founder I know, who is very clearly the founder, but when I looked at the first ten of his employees, I think it was him as employee number one, and then three, seven, and ten were also listed as founders. When I look at the dates of their joining.
Noam Wasserman: I went and asked him about that. He said, “A) there was a bit of the sweetening the package for them.” And B) that for him, he also felt that when a person is helping start a new part of the company, that that person really is doing founder kind of work that he’s going and doing.
Noam Wasserman: The first sales person, who is going to be going to pioneering part of the company, maybe he’s employee number ten, but he’s going and founding a function. He is going and doing some real risk-taking that he’s taking on, and he’s going and creating the crank, rather than turning the crank that has already been created. There’s a lot of things that are really founder-ish about what that person is doing, and if going and having the founder title is going to be able to enable me to get that real person on board, then that’s one of the things that he was going and making as a trade-off there.
Noam Wasserman: That’s where it goes and has to have, with the eyes open, about, is this person going to be driven by the ego? Is this a little bit of a signal, this person loves the founder title, because of an ego reason, or is it because of some other thing that’s going on there? Is it that this person is expecting because he’s a co-founder, he’s going to have a bigger equity stake, rather than a lower equity stake, that I can save it for other people?
Noam Wasserman: Reading some of the other nuances there about whether there are minuses to it. As long as you’ve gone and done that, then overall, being able to sweeten the package with that, if your ego, as the initial founder, can go and handle it, can be a plus.
Roger Rappoport: Yeah. I think that’s part of the challenge in really setting the expectations properly. Because, especially in the Valley, having the status of co-founder, it’s great for the resume, if the company does well. But at the end of the day, I think some of the challenges are, if the company’s really deep into, by a couple of years, and giving someone the status of co-founder, but them now thinking that they’re co-equals, then it really may not be.
Roger Rappoport: I think this just goes to sometimes you have to have these hard conversations up front, and having the title doesn’t necessarily mean that now we’re all going to rule by consensus.
Noam Wasserman: Yeah. Up front, and then reiterating it, as we talked about. It can’t just be a one-time thing. It has to be a revisiting on a very regular basis.
Roger Rappoport: I definitely want to talk about some of these other dilemmas, and one is the investment dilemmas. For everybody in the room here, I would imagine at some point, if not now, they’re going to be looking for money. What type, in you mind, as you’ve looked at all of these startups, and the stats, what types of investors should the entrepreneurs be targeting, and at different stages of growth? In your experience, what challenges are these investors going to introduce into the company?
Noam Wasserman: Okay. We can go back to your original question about the rich versus king decisions that founders are going in making. Sometimes you don’t have any forks in the road to worry about. If you are trying to really go and raise money, and you’re not able to, then that’s going to go and lead you to one of those choices. You’re going to remain much more king on the throne than if you had gone and raised. We’re assuming there that you have the option to go in that direction.
Noam Wasserman: That’s where you have to go and have that self-awareness about my business, its needs, and my “What I’m going to celebrate at the end of the day, and the other decisions I’ve made,” of how they inform it. Because regardless of which of those you are, rich or a king, if you make the opposite decision than you should, it’s going to go and get you into trouble.
Noam Wasserman: The person who is more of the king, he goes out and raises outside money, that’s going to come back to bite him. If it’s someone who very much has the option to go and raise or not, and they’re rich-oriented, but they for whatever reason, go the king route, that’s going to have them ruing the day that they didn’t have the rocket fuel to go and grow a faster-growing company, to go and invest a lot more in the resources to be able to hit this market window.
Noam Wasserman: If they don’t go and take these resources, they have to bootstrap, it’s going to be a lot slower to develop. If they’re in some sectors where there is a race, where there is a current market opportunity, then making that financing decision is going to go and kill off the entire venture, because you missed that window there. Fitting it to that is going to be one piece of it.
Noam Wasserman: This is where you also have a bunch of those mid-range options. Are you going to go, and this also, let’s go back to the checklist part. Say that you have everything checked off except the money piece of it. Then you can go with the investors who, what they’re bringing to the table is just the green money, and they’re not, they don’t have contacts the industry. They don’t have the pattern recognition of where things are likely to go. You don’t need their mentorship. You’re armed to be able to go and do all of these things yourself, and it’s just the money that you need. Then, having that fit within the checklist happens to be a very good fit there.
Noam Wasserman: If you have critical holes that you’re missing, then an investor can be a great way to go and fill those holes, if it fits in with what they’re bringing to the table. If what you’re missing are a whole bunch of industry contacts, go and find someone who specializes in that industry, can leverage their contacts, and brings the money, and you’re leaving a lot of potential creation of real value on the table if you go with the person that doesn’t have any contacts, but they just bring the green dollar to it. It has to go back to the checklist view of it.
Roger Rappoport: Yeah, I think that’s one of the things that I see consistently that founders make a mistake on. That’s looking solely at pre-money valuation. Looking for the investors that will give them the highest pre-money valuation, as opposed to where they can get a reasonable pre-money valuation, and also really get the value add that comes along with a great investor.
Noam Wasserman: Yeah, the more solid checklist that they’re going to have, so a lot of times, you get that big pre-money valuation early on, from someone who’s not going to be able to help you fill out your checklist. A) you are going to not have as much value creation going forward to the next milestone, the next time you’re going to need money. It’ll be much harder for you to go and do it.
Noam Wasserman: Also, if you get that much higher valuation, you’re going to have very difficult conversations about why this is going to be a down-round for us. Because actually, it’s going to be a lot worse in terms of the terms, in terms of all of the other things that went into it, because you did a very …
Noam Wasserman: You got your dream, and of course, this gets into Life Is a Startup, I talk about the perils of success. That you go and succeed at raising that great round, this is in the entrepreneurial sector, but we have all sorts of other examples from personal life, of not planning for the success scenario, and what that’s going to introduce. You go and raise that great round at a high valuation, and it’s going to come back to haunt you the next round, if you have not brought on the right people, and you’re not able to get a valuation that’s going up from there.
Noam Wasserman: That’s where being able to understand the checklist, what it’s going to take to create the value, and the longer-term path down the road of how this is going to set the table, or cause problems for the table. Those are the things that have to go into that.
Roger Rappoport: I want to be able to give people an opportunity to ask questions, but I want to just ask you a question on something that’s a really touchy subject for founders in general. That deals with founder succession. One of the things that I think was counter-intuitive to me when I read your book initially, and re-reading it again now, was that founders that do really well at the early stages of the startup’s existence are more likely to be replaced than just average, mediocre founders.
Roger Rappoport: I’m sure that everyone sitting in the room here tonight is thinking, “I’m going to absolutely kill it. I’m going to get traction, traction, traction.” Based on the data, based on your research, they are more likely to be replaced as CEOs for doing an excellent job. Totally counterintuitive, and maybe you could just explain why this really is, based on the data.
Noam Wasserman: No, absolutely. This is a perfect example of what we talked about before, where, by my being out there in the field, and having experienced it myself also, that I realized that academia was asking exactly the wrong questions. What academia was looking at was succession within the Fortune 500. The core finding, the core result within that, is that success breeds entrenchment. There’s no way that person is going to be replaced as CEO unless they want to go and be replaced.
Noam Wasserman: What I was finding out there in the field was that some of the Founder-CEOs who I was most impressed with the job they had been doing until then, were the ones who were getting replaced the fastest. When I went and got the data on it, and did the analyses, pretty rocket scientist type of things, that’s what came right out of the data.
Noam Wasserman: A lot of the things that I had experienced, and then was seeing in the field, were a bunch of the answers to how can we go and see that? What I called that was the Paradox of Entrepreneurial Success. You go and you fail, you’re going to get replaced. You go and succeed, you’re going to get replaced. Succeed smashingly, like at that other end of it. And you’re right that in the mid-range, that it’s going to be less so.
Noam Wasserman: There’s several things that come from that. One of them is that how did you get that very fast success? A bit of it was with the rocket fuel that you went and raised. When you go and raise that rocket fuel from investors, the money that you need to go and grow a fast-growing company, invest in the development, and go and build the team, and other things along those lines, you’re giving up board seats.
Noam Wasserman: Let’s use as an example, that we’ve talked about already, Lew Cirne with Wily. Lew, by what was heading into the third round, had given up three out of the five board seats. It’s at that point that they said, “Lew, you’re out of here.” Lew no longer controlled that, because he had taken the rocket fuel. The way that had got him financed, and gotten him a whole bunch of that fast growth, was through bringing in the investors.
Noam Wasserman: The other side of it was Lew had a technical background, an ace techie, had worked for Hummingbird and Apple, had really honed his skills there. He was perfect for the technical stage of the company. Developed the product. Led them through even a pivot, like the key ways in which there’s really intense, even the fact that you realize, as a founder, that there’s a need to pivot is something, through your passion that you can go and be able to see that. Then to lead them to a version 2.0, and then be able to go and sell it from that point on. At that point, he has to go and build a company. At that point, you have to go and do a bunch of function building that you’ve never worked in that function.
Noam Wasserman: Anyone here ever interviewed sales people? To go and see if you’re going to hire them? Can you tell, especially if you’ve never worked in sales, those of you who are techies like Lew, how well do sales people interview? Has any sales person ever interviewed badly, even the worst of them? How well, as Lew, are you going to be able to tell whether this is the person you want to bring in to start building your sales team?
Noam Wasserman: Lew had to go and buy his first suit to go and make a customer call. That shows you how much he had not gone and done sales. This is just one function he hadn’t worked in, where he’s going to have real trouble being able to go and see, “Now, I have to go and build the sales team. Am I going to be able to go and do that well, or not?”
Noam Wasserman: Then you have all of the other functions they had not worked in. That’s where you have a qualitative change in the challenges that the company is facing, and therefore what the CEO is needing to go forward with it. So what I find, when it comes to the quantitative results, and also being out there in the field, each round of financing that they are going and raising, when the investors have the most say over who’s going to be able to remain CEO, you need their check, you’re running on fumes, that’s when they’re going to be able to go and have the most pull about going and changing it.
Noam Wasserman: And when you go and complete product development, and now have to do company building. Both of those, the chance is that the Founder-CEO is going to get replaced go up dramatically. Within our startups, we celebrate those. You’ve been going and living for 24/7, for a long time, on ramen noodles, not knowing if there’s any there there, whether this product’s ever going to be developed, and now we complete product development.
Noam Wasserman: What’s the first thing you go and do? Throw a party to celebrate. You go and raise a round of financing, and now we can actually go and buy something better than ramen. Now we actually can go and see the certification of having a stamp of approval that some objective person is putting on this venture.
Noam Wasserman: Yet, we go and celebrate those, what are we actually marking? That the chance that the Founder-CEO is going to get replaced are going to go up dramatically. That’s what the quantitative and also my field results show, from Lew and other examples of things like that. At each of those events that are the celebrations, that the chance, because you raised the rocket fuel, because you completed that stage that you were perfect for, and are now heading to a brand new stage, those successes breed the need for, at least from the investor perspective, for a new person there, and now they have the ability to go and make that change within the venture.
Roger Rappoport: Just, I want to get a pulse here. After the third round of financing, I looked at this percentage, and I found it hard to believe. What percentage of the CEOs have been replaced, do you think, after the third round of financing?
Roger Rappoport: 75%? I think, according to you, Noam, it was about 52%. After the first round, a quarter were replaced. Then after the third round, about more than half. Some of the things, and I just want to touch on this, because I think it really is important. About 73% of the removals were board-initiated, so it wasn’t voluntary.
Roger Rappoport: But one of the things that I found really interesting was when a CEO essentially puts in place a succession plan for themselves. I think they’re far more likely to be on the board, and they’re far more likely to have an executive position within the company.
Roger Rappoport: This is really hard for the fearless leader to be giving up their proverbial baby. But what words of advice can you give to the entrepreneurs here tonight. They’re taking the rocket fuel. Their skills may be outstripped by the pace. They may have to bring in Eric Schmidt at some point to really bring in that professional CEO.
Roger Rappoport: But how do you do this? When should you start thinking about it? And how do you do it in a way that isn’t going to be the end of the culture, or really disruptive to the company, when their fearless leader is put out to pasture?
Noam Wasserman: Mm-hmm (affirmative). Your question about what to do about it, there is when it is possibly in the range of happening, and then there’s what you can do way before. Let me tackle the first, and then I’ll get to the other piece of it.
Noam Wasserman: What are you going to do about it? You’re highlighting that data, that difference of who is pulling the trigger, and that it leads to a real difference in whether that parent of the baby is still going to be able to remain in some kind of real role with the baby.
Noam Wasserman: That’s where a bunch of that self-awareness, at two levels, is a critical thing to have. At A) there’s the self-awareness about the road ahead. Where are things likely to go? What are the changes going to be in what the CEO’s challenges are? And then the self-awareness about me, my strengths, my weaknesses, and whether they match each of those next stages of it. The ability to go and think through those.
Noam Wasserman: Having the map ahead, when you’re a first-time founder, or you’ve never gone that far in a venture, is one that you have to go and be able to get from being able to see, whether it’s a mentor is painting it for you, reading it in a book, or something like that. Being able to understand the road ahead, and then the self-awareness to be able to project yourself into there.
Noam Wasserman: There’s two elements to be able to watch within that. There’s the can, and there’s the want. The can is the skills, the capabilities. Do I have those? The want side, what do I like to go and do? The people who get in trouble is where you have a divergence between the two of them. “What I want to go and do is something I’m not good at.” Or, vice versa, that you have the disconnect between it in the other direction, in terms of the can and the want. Where you have the two of those line up, that “What I want to do is what fits what the company needs, then I can keep going with it.” The can, because I’m able to go an execute on it.
Noam Wasserman: But then, once the can isn’t there, even if I want it, that’s going to be problematic for my being able to have it come to its full potential. For my being able to play a key role within it. Then that’s where you have to go and get a little bit more of that self-awareness around it.
Noam Wasserman: Watching for “This job has a lot of painful parts that I didn’t anticipate. We’ve gone beyond the technical challenges that I loved, and now there’s a lot of those other company-building pieces that are really a drain on me. I can’t do any of the technical stuff that I love because of it.” That’s where you have to have a bit of that awareness. That “Let me go and refocus on the stuff I love.”
Noam Wasserman: Let me maybe go and step into what Lew ended up stepping into, the CTO role. Now the techie was able to go and be able to lead the visioning, and the product planning, and things like that. Hand off the painful parts to an experienced CEO, who the can and the want are right there for that person. That’s where it’s going to be a lot better for being able to go and have it be a smooth one.
Noam Wasserman: When you go and step back, this is where I’m wishing for the first time that I had my whiteboard here. You want me to go on? This is back to the very beginning of it?
Roger Rappoport: Excellent. Questions. Questions for Noam. Right here, Eli.
Audience: Let’s say your goal is to be the king, and being the rich isn’t a big concern. In a practical way, in order to avoid mistakes and future regrets, I think one part of it is, as a founder, to be educated. And you know what the hell you are doing. Would you recommend to talk to some attorneys, or legal firms, and tell them what are your priorities, and then have them advise you? Is that the best way to?
Noam Wasserman: In general, founder is the loneliest job in the world. There’s no peer support, if you’re going forward with … In a lot of ways, you have a bunch of people, if you’ve gone and built the board, or stuff like that, you’ve got a bunch of people above you. If you’ve built the team, you’ve got a bunch of people below you. You’re at the middle of that hourglass, all alone, and going and grappling with those things. Especially if you’re a solo founder, that you don’t have anyone to go to.
Noam Wasserman: You have to go and build that peer support network. One of the things we start with, in my center, within Founder Central, we, I do a bunch of Founder Boot Camps to educate founders about a whole bunch of these pitfalls along the way. And said, “We want to go and have a solution to your being alone when you’re grappling with things going forward.”
Noam Wasserman: We went and created Founder Forums, to be able to go and bring six to eight of them together on a monthly basis, to go and have that advice, go and have those outside eyes, to be able to go and bring the peer outside knowledge of being able to go and help each other in that realm. When you’re going and looking at what’s the checklist, where am I missing things? The peers might be able to give it to you. Sometimes they don’t have the knowledge of the road ahead, if they’re first-timers within that. Then you might have to go to professionals, or to your advisors. Build your own personal board of advisors, if you don’t have an official board.
Noam Wasserman: Go to them. Take a look at the missing pieces of my checklist, and now how can advisors fit into that? Who is someone who knows this domain? You can go and check that. By my having, “Let me treat you to lunch once a month. Let me go and have ways in which I can go and drink in your,” whatever’s going to be attractive to them, to go and spend some time with you, go and very actively take the unchecked boxes, and have that drive who is the missing pieces that I have to go and use to build my board, or bring to my peer group? Other ways that you’re going to be able to, as a solo founder, be able to get that outside experience for you.
Audience: Thank you.
Audience: Hi. Thank you. If I want to purchase one or both of your books for a number of my clients who are founders, CEOs, startups, should it be both? Should it be the first? Should it be the second?
Noam Wasserman: If they are purely founders, and they want to have this roadmap, and be able to reflect on a bunch of the things that Roger’s been talking about that founders go and face, just go with the first one. If it’s people who, they can benefit from learning lessons from founders for a bunch of other walks of life, or even founders who want to be able to have that inform the other things that they’re doing in life. Shifting gears at any of the inflection points, or going and crafting a much more solid relationship at home. Being able to go and have a bunch of those lessons, then that’s where the second book fits in there.
Noam Wasserman: One of the key things that I had realized is that, in a lot of ways, these human issues, the reasons we can go and learn lessons from founders, it’s not to say that every founder is infallible when it comes to his, far from that.
Noam Wasserman: But when it comes to these human issues, founders are facing them very often in a very intense situation. To the extent that they have to go and can’t bandaid over them. Can’t just go and find quick solutions, and it’ll last until a year from now, when they face the next one of these.
Noam Wasserman: They have to go and find some real solutions that often tend to be counterintuitive. A bunch of the things that we’ve talked about, where it’s the opposite of what the gut would tell you, and things like that. Those types of things, where we can see, “What are the best practices that they have honed?” That’s where we can then go and be able to learn it for the human issues that we face outside of founding.
Noam Wasserman: For the people who it’s the outside of founding that they can learn from founders, that’s where Life Is a Startup is meant for them. But if they’re purely founders, and they just want to know, at the startup, how they can go and do it better, then it’s from the first one.
Audience: Thank you.
Roger Rappoport: Actually, we had a question over here.
Audience: Congratulations. Great presentation and discussion. Quick questions, do you think there is little science or little academia behind startups, behind founders? Because what we say, “Okay, Larry Page did this.” We have a feeling that, this presentation here, that there’s a lot of hard science. That maybe it doesn’t come out in the magazines as it should be.
Noam Wasserman: We’re never going to be able to fully arm founders for everything they’re going to be able to go and face. That doesn’t mean that we should go and try to arm them with as much as we have been able to learn about where they are likely to go and heighten the risk, rather than heightening the potential of their ventures. The last 20 years worth of our being able to study these things have enabled us to take several things off the list, that we can go and arm people with.
Noam Wasserman: We don’t go and send a chemist into the lab, and say to that person, “Just mix chemicals, and you’ll figure out along the way what is the best way to go and do these things.” They’ve learned certain things about how to go, and have them avoid certain parts that they can then go, and be freed up to not worry about those blowing up on them, so that they can be a lot more creative in their experimentation.
Noam Wasserman: Same things here. If we can go and take a lot of this knowledge about how to go and do these things better, you won’t have that on your worry list. You’ll be able to go and be freed up to go and handle the things we can’t go and prepare them for.
Noam Wasserman: Along the way, also, so for instance, with all of these difficult conversations that we’ve been talking about, with all of these being able to look at the pitfalls and plan around them, those are muscles that we have to go and build. Difficult conversation muscles. The ability to go and take failure and not recoil from it. The ability to go and take negative feedback and be able to see it as a blessing, rather than a curse, and things like that. Those are muscles that we have to go and build.
Noam Wasserman: If we can go and do that in these arenas that we’ve learned how to go and train you how to do that, you’ll be much better suited of taking those muscles and applying them to other problems, that we can’t even anticipate right now, to be able to go and exercise those muscles when it’s really going to count. That’s why, let’s take the best cut at educating people.
Noam Wasserman: There’s a lot of a feeling founders, you have to dive in, you have to go and make mistakes. Making mistakes and failing is painful. We’re never going to be able to help you avoid all of it. Let’s go and take some of it off the table, and then how you go and deal with it will be much more productive for the things that we can’t go and prepare you for.
Roger Rappoport: The one thing I will just say, that over the thousands of startups that I’ve worked with, one of the things I always try and say is “Don’t be a slave to convention.” I think that very often, I see people really not looking at their own startup, and saying, “What’s appropriate for my company?”
Roger Rappoport: You’ve got all the data. You’ve got the statistics, and “Every company does this, therefore I have to do this.” It’s really hard to really look inside your own company and say, “What is appropriate for our team? For our company?” But its something I absolutely think you should do. Yeah.
Audience: Let’s say you get some co-founder. Let’s say you give them 40% or something. Then later on, you hate it, and you’re like, “Why?” Not only that, there’s maybe an investor that wants 30%. Do you have to convince him that, “I need you to give up 30% of your share, too?”
Noam Wasserman: No, this is one of those really tough things. Let’s splay it out, especially with the human issues. There are mistakes you’re going to make that you can hit the undo key on. Ones that you can go and reverse, it’s not that costly to go into it. There are other ones where hitting the undo key is going to be really costly. Those are the ones that you have to focus on the most at the beginning of the road. “How can I go and understand which are the ones that are going to be the stickiest, that are going to be the toughest to go and undo?”
Noam Wasserman: That equity split that you just talked about is one of those. Where you need to have a lot more of the foresight, you have to be going and structuring it to begin with. Otherwise, you will end up having a movie written about you going and raking your co-founder over the coals as you try to grow and grab back the 30% that he got.
Noam Wasserman: It fits right into that what we were talking about before, with the static split, and not understanding the perils around that. That is hard to undo. We’ve talked about a whole bunch of things. Give someone a CEO title, and they get in love with it, it’s going to be very hard to go and undo that.
Noam Wasserman: Several other things, this is also back to the Life Is a Startup piece of it. What are the things in life where I’m going to go and hit the undo key, and it’s going to be really hard to go undo it? Think a lot harder about those. Date those options a lot more before you go forward with it.
Noam Wasserman: Your mother-in-law wants to come and move across the country to go and be living in your basement. You’re going to go move her out of where she is right now, move her in to where you are. That’s a very different thing to go and hit the undo key on when you see that she actually thinks you’re not parenting your kids well, and she’s there daily to go and counter that, and there’s loads of tensions there.
Noam Wasserman: Compared to “Let’s go and date this a little bit. Mom, let’s keep your apartment there. Let’s have you come and visit us for two weeks, instead of the usual one week. Let’s go and ramp up on that.” A lot easier to hit the undo key if you have gone and waded into the waters, rather than took a dive into it, and got rid of the beach.
Noam Wasserman: There’s all sorts of ways in which you have to go and separate those out, in life and in founding. Whether you’re going and doing it as equity splits, or dramatic life inflection points, you have to go and be able to see that this is going to be an undoable thing that I should go and weigh it in a little bit better into it.
Roger Rappoport: I apologize, but Noam is flying on the red-eye back to Boston. I really, I want to thank you, Noam.
Noam Wasserman: No, thank you for organizing. Thank you, Michael, for helping with it. Thank you, everyone, for coming!
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