Dealing with Co-Founders

 

These are my notes from a panel at SXSW 2012. Moderator: Mark Wachen

Panelists:

  • Jesse Pickard
  • Ray Grieselhuber
  • Mike Fisher

If you ask investors what they look for in a new company, the #1 item is always the team. Pedigree is one piece, but the other important piece is chemistry. Do you have a well balanced team? Do you get along well? From our standpoint, when a company is not successful it's usually because the team blows up for whatever reason. Hopefully you will avoid that and have a successful cofounder experience!

Jesse:

My company started two years ago with four cofounders, although each of us jumped in at different times. In my experience, usually cofounders don't all start at the same time. I started first as the business cofounder who could not get anything developed. I stalked out Carl on a programming forum and flew out and talked with him. We applied to Dream.it, got it, and a few others joined after that. Now we are at 13 people and it's much different than four guys crammed into a two bedroom apartment.

Ray:

I'm from Ginzametrics, an analytics company. I've been building marketing and advertising platforms for six years, and on a whim decided to move to Japan and started building my product there, targeting Japanese companies. I was just this weird foreign guy alone in Tokyo trying to sell my stuff. Got into yCombinator in the summer of 2010, went through all the BS of people saying "You're not going to succeed if you don't have a cofounder" and actually found a great co-founder. It worked out really well, and we've been at it now for two years altogether. So far we're up to eight people.

Mike:

Storymix is an automated video creation platform for events. My story is a little bit different: one of my cofounders is my wife, and she started a business first and asked me to come on. I became a cofounder, shelved her business and moved to a new model. We had a contractor doing our back-end code and that was a big problem for us. We got into Capital Factory's code last summer, which really helped us get connections and find a technical co-founder. Now we're up to six people.

Q: How do you find out if the technical cofounder has the right skill set?

If you don't know about coding it's really difficult to evaluate someone. I thought our original contractor knew his stuff, but it turns out, not really. We were able to ask someone in our accelerator program to interview people and see if they are top-notch. If you make a mistake with the first person you hire, how is he going to interview other people? The first hire is very important to spend a lot of time on.

Q: When it got to the point of having a good fit, how did that work out?

Personality fit is huge, you have to be able to talk with each other even when you are totally stressed out. You have to work with this person a lot. If you don't think you can do that, you'll have issues. Getting along right away is a big thing. Then, give them concrete things you can do, and gauge how long they take and what the quality of the result is.

You also need to make sure they know what their expected workload and share of the company is.

Q: How do you figure out how to split the pie up?

We were lucky because my co-founder had started a company and knew what it took. He didn't want to take on the baggage of starting a company, and he knew a realistic share to ask for. He originally asked for a percentage that aligned with what we wanted, and over time we actually bumped up his share based on performance. It also comes down to how much risk you've taken on, where the business is, and what milestones you have hit. If you are profitable, that changes the equation a lot. The personality matters a lot too.

Talking to other people is important to get a framework of what an appropriate amount of equity is. What should an early-stage engineer look like, equity-wise? There are mailing lists that can help with this. If you're looking for a technical co-founder, they are really in demand right now, so don't be stingy with the equity. We tried to be as generous as possible, and it worked out.

Q: What protections did you put into the contract?

If you're not doing a 4-year vesting period with a 1-year cliff, you are either a complete moron or an asshole. That totally protects your company. There are some cases like Youtube where there is a third co-founder who is very very rich right now because they didn't do that.

Q: What about decision making or other issues?

We didn't talk about that up front, but we probably should have. It could have gone really badly if our personalities didn't match as much as they do. How much are you going to work, will you work weekends, what's the culture like, etc.

I tend to think that people will do what you ask them to do, so I don't put down a lot of stuff that will get in the way, but it may be a good idea if you go beyond a cofounder. Trying to do too much legally... in the end, is it going to make things better? Probably not, aside from the vesting.

It's much more important that you find someone you can work well with together and you want to build a great company.

Q: How much did you discuss expectations? If somebody wanted to buy the company for $10M next year would you do it?

We did talk about the end game, the goal, are you going to be Google or try to get acquired? It's important to lay it out, so that somebody doesn't have an idea of working on a project for two years and then walk away. In your pitch to the co-founder, you want to see if they are getting excited with the dream that you have. There's a distinction between bringing someone on who is a CTO and bringing on a coder. You need to understand what they want and it's aligned. Our cofounder is our CTO but also doing some of the dirty coding. All those things need to be understood up front.

Q: Any horror stories?

When every decision needs to be put to a vote. I heard a company behind us spend two hours arguing what font to put on their business cards. It's really related to how committed the founders to stay with the company no matter what. Paul Graham looks to see if the co-founders will be in the company for the long haul.

Just because you're a co-founder, doesn't mean you have the same responsibilities. Ultimately, I have to make most of the decisions. If you have two people with co-CEO responsibilities, that can be difficult. One company argued for three months over what the business model should be, and finally one left. They had two people with the exact same responsibilities and they couldn't agree.

Q: As your companies have grown, how has the relationship changed?

We're 13 people up from 5 a year ago. All the co-founders sat in a room and decided that none of us enjoyed managing, so we decided to bake it into our hiring process to make sure that everyone we bring on is self-sufficient. It's worked really well. It's empowering the people we bring on because we give them a lot of responsibility from day one. I think you can hire around it if you want to run your business that way.

One of the things we have seen, is that our technical co-founder has become involved more in setting the direction of the company, because we need his input.

Q: How do you manage conflicts?

We hired our CTO's wife, but we probably put her in the wrong role, and now we're in a pickle because it's his wife, he's going to defer to her, so how do we get her into the right role or tell her that she's not the right person? You have to be very people when you start bringing on people outside the co-founders.

We churned through a few people, luckily we didn't have a huge amount of drama. We built a profile of the type of people we are probably not going to hire in the future. We have a lot of discussions about how much we expect them to work, what kind of values we want them to have, full stack vs specialized. You probably won't realize how much they'll matter until you've been through a couple of those.

Q: What would you do differently?

If I had to do it over again, I wouldn't start a business with a friend. I think it creates another point where things could go wrong.

Q: How do you mentally make the leap to a low accelerator salary?

The fact that they give you very little money is a good thing; it tests how committed you are to the project. If I was with a cofounder and they received that much, and they were motivated by building a stable life around a stable job, you're going to know very quickly whether or not it's going to work out. You want somebody who will be there in the lean times.

You won't find companies accepted to an incubator with full-time technical co-founders. You're going to be working 100 hours a week for three months, solid. That's when things will fall apart and you'll find out very quickly.

Q: What's the difference between a mentorship and an advisor that takes a stake in the company?

It's a matter of how much we sought them out. We were badgering our mentors non-stop for three months for every ounce of advice we could. After the program ended, you talk to your mentors every 2-3 months. We took a couple on as advisors and gave them 0.1% stake, and they signed on to spend X hours a month talking to you. Their shares vest also. It's a much different relationship.

I would say that it's a red flag if an advisor is asking you to be cut in. I think the best advisors are the ones that have worked with you for a few months for no money, and it's up to you to offer them a stake. Actually we had the opposite situation, where somebody approached us and he didn't spend as much time as we wanted him to, and we "fired" him. Normally they vest over 2 years.

Q: How do you decide between hiring for now vs in the 6 months?

I always hire for now. Definitely hire builders. I'm not a fan of hiring managers when the company is 13 people. We make sure everyone we can hire can really crank out some stuff. It's worked out for us.

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