August 14, 2005
More on "Tough Questions"
In my last post, I advised entrepreneurs seeking VC funding
to think carefully about choosing their co-founders. I claimed this decision is often gotten wrong
and that, not infrequently, one or more co-founders leave the company with an
amount of founder’s equity disproportionate to their contribution (in the eyes
of their co-founders). Finally, I noted
that, in this situation, the “remaining” co-founders almost always bear the
How to avoid this? I wish I had a crisp, clean and clear answer. Like a lot of other important questions in life, however, the answers are messy, ambiguous and highly context-dependent. All of us, VC’s and entrepreneurs alike, wish we could just call up “Central Casting” and order “the perfect startup team”. But, of course, we can’t. That said, there are some useful ways to think about this situation, and, below, I’ve set out some guidelines that a VC will likely use in evaluating this aspect of a startup. I hope these will be helpful to entrepreneurs as they’re building out their co-founding teams.
As I mentioned in my last post, founders don’t always pick
their co-founders with a beady, cold-eyed, calculating gaze, and with a
tough-minded focus on who can actually make the biggest contribution to the
Company over its lifetime. Instead, co-founders
are often picked because they are friends, or like-minded, or “great people,
the kind you’d pick if you were in a foxhole under fire”. For any entrepreneur contemplating starting a
company, there is an interesting and helpful analysis of this
“choosing-who-to-work-with” phenomenon in a June 2005 Harvard Business Review article
entitled “Competent Jerks, Lovable
Fools, and the Formation of Social Networks”. If you don’t have access to a hard copy, you
can purchase reprints online at:
Starting a company is an act of courage. It’s also tremendously complicated. Almost always, the elements that are “unique”
to a particular startup are as important as the elements that are “common”
across the universe of startups. As with
any set of simple guidelines, the ones below should be considered with a grain
of salt. When applying them to your
startup, keep your common sense hat on tight at all times.
1. Incomplete Team
vs. the Wrong Team Member?
A key question any founder seeking VC financing needs to
answer is “How complete does my team have to be?” On the one hand, experienced teams with
domain expertise covering the principal startup business functions (e.g.,
product development) are very attractive to VC’s. On the other hand (as I’ve previously
posted), teams with the “wrong” people on board are less attractive. A person can be “wrong” for a startup (in
this sense) either because (1) he has insufficient business experience, talent
or maturity for dealing with the swirling, chaotic world that surrounds every
startup, or (2) he is in charge of a business function that no startup needs
(e.g., a CFO). So, how should a founder
think about this quandary…….?
As I’ve previously posted (10 Commandments for Entrepreneurs), picking the right VC firm is critically
important for any entrepreneur seeking VC funding. VC firms (as well as the individual partners
within them) have investing passions for certain markets, as well as areas of market
expertise, that will affect their interest in, and appropriateness for, any
particular startup. In a similar way, VC
firms (and the individual partners within them) have different levels of
comfort in dealing with incomplete startup teams (and very early stage deals). When
making your list of VC firms to approach, do whatever it takes to find out whether
a particular VC firm has the right appetite for a startup at your stage of
As an example, at my firm, Mayfield, we are very comfortable
with early stage startups – which almost by definition have “incomplete” teams. Recently, we calculated that over 20% our investments
in the past 5 years were companies “incubated” at Mayfield, where the founding
team consisted of 1-2 people. Even at
Mayfield, however, comfort with incubations or seed financings varies among different
Managing Directors (as it will with any VC firm). It also varies – even among the Managing
Directors who are comfortable with “seed” stage companies -- according to their
workloads. Seed/incubations require lots
of work, and don’t always generate a commensurately greater return. So, do your homework.
I’ll end Guideline #1 with the following rule of thumb (NOT a commandment): for a VC firm that is comfortable with early
stage startups, an incomplete startup team is preferable to a team with the
wrong team members.
First, VC’s pride themselves (some are even good at it) on
being good at helping their companies recruit. If a startup has an attractive couple of founders and a terrific business
idea, a VC can imagine how additional, world-class team members could be
recruited to fill out the team (as you might expect, the more incomplete the
team is, the more important will be the judgment about how easy recruiting will
Second, as I wrote earlier, it’s always hard to transition the
“wrong” co-founder out of the Company – it’s also economically unattractive to
the remaining co-founders.
2. Is My Org Chart "Contorted"?
We’ve all seen a “standard” organization chart. It has (1) the CEO at the top, (2) Four to
eight Vice-presidents below, each in charge of a business function and
reporting to the CEO, (3) Directors in the reporting chain below the
Vice-presidents, and (4) a variety of folks with different (and non-standard)
titles in the reporting chain below the Directors.
I would claim that this “standard” org chart is actually a good
template to follow in organizing a startup through, say, the first 40
people. I’m not sure if the converse is
true, but I can say (without having done a rigorous study) that, in my 25 years
of working with startups, there is an interestingly strong correlation between (1)
startups with org charts that were “contorted” in some way (compared to the
“standard” one) and (2) startups that ended up with some kind of founder
trouble. Thus, if there are “odd” lines
of reporting, or if there are “odd” titles that don’t fit in a standard org
chart, it usually raises a red flag. If
you’re having trouble fitting one of your co-founders into a standard org
chart, you should think about whether he’s the right person (or, at least, in
the right role).
A few examples may make this clearer:
(1) almost no startup “needs”, and most startups don’t have,
a “Chairman”; the office has no real meaning in a setting where most of the
board members represent major stockholder interests (including holders of
founders’ stock); rarely, it might make sense to give the Chairman title to an
outside board member who brings particular prestige and gravitas to the
Company, and who is “active” in helping the Company in some way; otherwise,
it’s usually window dressing and no startup should have window dressing; so a
startup with one founder as the CEO and another as the “Chairman” feels to the
VC like window dressing intended to assuage an ego rather than a tough-minded
business decision. My advice to founders: avoid extraneous uses of Chairman.
(2) Almost no early-stage
startup seeking VC funding should ever have one founder as the “CEO” and
another as “President” or “Chief Operating Officer”. This is almost always a sign of title
inflation (usually to assuage someone’s ego). Almost guaranteed, any startup that has both a CEO and a President/COO has
the wrong person in one or the other (or both) of those roles. This sort of title inflation and proliferation
is almost always – like most other “contortions” of the standard org chart – a
red flag to VC’s. Can easily be taken to
indicate that some of the co-founders are more worried about titles (and ego’s)
(3) In case I haven’t
beaten the “excessive” Vice-presidents issue to death, here’s a final note: almost no startup seeking VC funding should ever
have anyone with the title of “Executive Vice-president” or “Senior
Vice-president”. Maybe when your startup
has 1,000 employees, but not when it’s just getting off the ground. In my 25 years of experience, both as a
lawyer representing startups, as well as a VC investing in them, this
particular kind of title inflation has almost always been a bad sign: either that someone (the one with the high
falutin’ title) is overly concerned with ego and resume-building instead of
rolling up his sleeves and actually working, or that “room” in the org chart is
being “cleared out” for someone else, who though not ready, nevertheless
Another thing founders often fail to realize: not every member of the founding team has to
be a Vice-president (or higher). It’s OK
to have “TBD” in a number of the Vice-president “boxes” in the org chart of a
startup (and elsewhere). For example,
don’t worry if you have a great Director of Engineering but no Vice-president
of Engineering in your startup. Any
Director worth his salt should be able to manage a startup engineering team
through 6-8 people, particularly if the CEO has technical experience. In this situation, the VC’s question will
be: will the combination of the CEO, the
Director of Engineering and the company idea be attractive to a great
Vice-president of Engineering when hiring one becomes appropriate.
Moreover, some Vice-president boxes in the “standard”
startup org chart should be empty. Example: almost never is it
appropriate for a startup to have a Vice-president of Finance/CFO.
We have, VC’s and entrepreneurs together, created a somewhat
“macho” culture around the act of starting a company. As part of this, entrepreneurs are expected
to have a “can-do” attitude, high levels of self-confidence, etc., etc. While some of this is actually productive and
helpful, it can also – like any ideology carried too far – be
counter-productive and unhelpful. A
small, but important, example of this is the concern entrepreneurs have about
ever putting “Interim” before their title on the org chart. It’s easy to see how an entrepreneur could
assume that a VC would view this as a lack of self-confidence, or as evidence
of some other “un-macho” attributes. My
advice, however, is to not be afraid of putting “Interim” in front of anyone’s
title when it’s reasonable to assume that an early task of the startup is to
recruit someone else to that role. This
is particularly, but not exclusively, true of the CEO role. VC’s love entrepreneurs with the
self-confidence and guts to start a company, as well as the wisdom to realize
that they’ll need help.
3. Can All My “Vice-President” Co-founders Recruit
In their early days, most technology startups don’t need more than one, maybe two, people in any business function other than Product Development/Engineering. Even in a startup, a principal (not the only) job of a Vice-president is to recruit. So, not infrequently, the only Vice-president a startup will need is a Vice-president of Product Development/Engineering (and, as noted above, not always even that).
If one has other co-founders with the title of “Vice-president”, one should be very comfortable that they will be able, when the time comes, to recruit high-quality talent to work for them. In this regard, there are two old, hackneyed maxims that founders should nevertheless repeat to themselves when considering their co-founding team: (1) “A” quality people only want to work for other “A” quality people, and (2) while “A” quality people hire other “A” quality people, “B” quality people hire “C” quality people. Given the difficulty (and economic consequences of) “transitioning” a co-founder out of the Company, make sure any co-founder you make a Vice-president is an “A” quality person. Otherwise, you could have a problem.
August 14, 2005 | Permalink
This is a very interesting post, Allen. Thanks for such detailed advice. I would really like to know more about why you do not think a startup needs a CFO. We put one of our founders in as CFO for the business I just started (my third) and I could not be happier.
You probably know that raising money can be a major distraction for a small startup, especially if you bring in investors. When we started this company, I asked one of our co-founders to be in charge of making sure we always have the cash on hand we need to do business. As President this frees me to focus on the whole business while leaving many of the details for the financing aspect to our CFO.
Of course, I'm still deeply involved in the financing process and this is certainly not his only job. But finance is one of the more involved parts of a business so it only makes sense to me that someone should be focused primarily on that aspect.
Am I missing something here? Why do you think that's not the right approach to take?
Sprout Systems - http://www.sproutit.com
Posted by: Charles Jolley | Aug 15, 2005 10:57:40 AM
Thank you, Allen, for posting your experience and advices regarding VC. I've been following up with your post for a while. And I just start planning my start-up, my area would be Finance. So having seen your comment about "No CFO" during the start-up period, I would like to know about your opinion about this. As Cahrles said, financing would be one of essential issues for starters. And plus, before the team meets VCs, team building, business plan and financial forecast, I think I can play a role for those.
I am just wondering if you could talk about it in more details.
Thanks a lot.
Posted by: Cherry | Aug 17, 2005 10:39:04 AM
Allen, your blog is a great resource for entrepreneurs... a bible to come back to, from time to tim. To that end, if I may, I'd like to propose an improvement: provide search box, either native Typepad or via Google, to easily locate articles you posted in the past.
Thanks a lot,
Posted by: Zoli Erdos | Aug 21, 2005 3:39:04 PM
Some friends I knew started a company together a while back. They were best friends at the time and had great respect for each other. They decided that they would be co-CEOs of their new venture. I told them that they really should decide who was going to be in charge, and the other person should probably take a lesser position with the company. Otherwise, it was likely that they would wind up having some major disagreements and one of them would be leaving the business. They listened, but were quite certain that they had enough trust and respect in each other that this would not be a problem. Six months later, one of them left the company and even years later was angry at his former partner. One does not want to be right on something like this. Their company suffered from the split and never recovered. It would have been a wonderful business if it had survived.
Another company I was involved in advising had two top-notch executives as founders (one was sales, the other bus-dev/marketing). They were both qualified senior people that had worked for me in the past when I was a CEO, and either one might have made a great CEO here. I told them to figure out between them which one should run the company (no co-CEO crap). After a while they still had not decided - perhaps because they were afraid of pushing the other one out if they pushed too hard at getting the job. Since we needed to move forward, I decided that the sales exec should run the company. He had also had some previous experience running a small firm. The other individual accepted this, and the two went on to do a terrific job building the business. I can't say how well things might have worked out if I had chosen the other person - it would probably have been a different business, but I think it would have also been successful. These guys knew that they needed to work as a team and follow a single vision. Hard to find people that are willing to put the company's fortunes ahead of their own ego.
Posted by: David A. Smith | Aug 21, 2005 9:18:11 PM
Egos, I do believe, are the #2 killer of startup companies.
What's #1? Why, lack of sales of course. =)
Posted by: Shanti | Aug 23, 2005 7:14:22 PM
As a VC, I wonder why you feel there shouldn't be a need for a CFO type person in the company? Do you fund by milestones or 100% up front at signing?
If you fund up front, as my fund does, I would think you want a strong CFO type of person that knows how to manage a large chunk of money?
Posted by: Don Bell | Sep 7, 2005 5:33:50 PM
I think the reason why Allen and most VCs don't want to deal with a VC is because it usually means that they'll have to deal with someone who knows how to negotiate value and understands that VCs today are a commodity. All they do is bring money. Other than that, all VCs offer to help "recruit" and make "sales contacts", etc...
The elephant in the room that VCs hate to discuss is that they are trying to get as much equity as they can for as little capital as they can get away with. (Don't believe me? Ask them about their liquidation preferences!!!) Having a sophisticated CFO makes that decision more difficult.
However I do have to give VCs props in their ability to get entreprenuers to follow their prescripted guidelines to getting their money. Do this! Don't do this!
Why not: Do what you will and we'll decide to give you money (or not)?
Posted by: Tech Trader | Oct 7, 2005 1:03:53 PM
i came about your blog through gobignetwork.com - through the forums. i've been writing our business plan for about 2 months now. it's an internet start up. i've done ALOT of the preliminary work to make the vision a reality. i discussed the plan and business with a friend of mine who does over 3 million in sales for a tech company he works for.
he's a "go getter", positive and an excellent speaker and also very good looking. we've discussed his role as VP of Sales. my question is, he is married to a beautiful woman...who can be "difficult".
what do you think about becoming involved with partners who brings alot to the table in terms of money to invest, great attitude and above average skills, but brings "baggage" in the form of a wife/marriage that may be questionable?
Posted by: Tom M. | Jan 24, 2007 7:54:49 PM
Posted by: sohbet | May 7, 2007 4:25:08 AM
Posted by: chat | May 7, 2007 4:51:20 AM