About 80% of all startups were created by an entrepreneur’s team and not by a solo founder. Surprisingly (or not), the team's personal bond was found to be a significant benefactor to a company's success. The major statistics show that about 8 out of 10 startups fail within 18 months of their creation, the personal segment stars as one of the major acceleration forces.
So what should a funder do in order to create the best founders team? What to take into account? How to manage it? And last but definitely not least, how to create an equal yet efficient distribution of ownership?
Remember the commonly repeated phrase that comes in every new commercial? “With three easy steps…” Well, this article will give you three important steps but be aware as they are not easy. Nonetheless, they must be made in order to build a perfect team that will set your startup on the way to success. Remember: everything is changeable and dynamic, from product to market but your founders' team will remain as you grow.
Buckle up, we’re about to team up:
Step One: Create your round table
Any great startup starts with a dreamer and a dream, in order to get things going the right partners should be handpicked. The selection should be set in a way that everyone brings their own uniqueness to the table, but at the same time share the overall vision as you see it.
PayPal's founder, Peter Thiel describes in his book “Zero to One” the most important aspects when looking for fellow owners. Most importantly, before any work-related concept, make sure you find people that enjoy spending time together. Only a cohesive co-founders team with a common interest and personal connection will stay stronger than any business-oriented dispute.
Theil probably knows what he’s talking about as the original PayPal team is known to this day as the “PayPal Mafia”. The entire team stayed in touch, helping each other prosper, and they all run highly successful companies such as Tesla, SpaceX, LinkedIn, Youtube, and Yelp.
Step Two: Manage your team effectively
You finally created a team made of the best and finest, now let’s try and answer the question that interested researchers for decades: what makes a team great? Google actually tried to answer that, in 2012 they created a special team called “The Aristotle Project”. Although they had basically unlimited resources, and the world’s greatest Data pool, they struggled to give a direct answer. Eventually, the researchers created an experiment, they divided about 700 people into groups and asked them to accomplish assignments together. Two main patterns were noticed for the team that excelled: the first, all team members had a similar talk ratio compared to the other teammates. The second showed higher social intelligence per person than the less successful teams. They understood that the best quality to nurture in every team should be Psychological confidence, or in other words: a shared belief that any mistake can be made without judgment or punishment within the team.
A study originated in Israel (one of the top 10 ecosystems for startups worldwide) and shared with MIT and Mellon Carnegie, showed two major processes needed for a great team: specialty & coordination. Specialty expresses each person’s unique input to the company, and coordination refers to one’s understanding of each person’s specialty and referring to them for a seamless flow.
Step three: Reverse cut the pie
Finally, you found the perfect co-founders to run alongside you, this is the part you try thinking about how to divide the ownership of the company. Deciding who owns what stock-wise might seem like the right step, but unexpected events may always happen, and drift apart is always possible.
It may happen that a partner that owns a decent amount of the company will leave before anything is going yet but will enjoy any future revenue as they still own a major part of the company.
Fortunately, there is a process made especially for this kind of partnership, and if you think about stock options, get ready for a surprise. Stock options will commonly require an exercising price. More than that, the quantity of stock option that can be allocated to a single person are limited, so a true owner won't grow out of this.
An intelligent road to take is a system called “Reverse Vesting”, which means the person will receive all of the stocks from day one but they will be subjected to his active role in the company. Essentially, if the co-founder chooses to leave the company, he will be obligated to deposit back a predetermined amount of the stocks given to him, at a set price (commonly without a price).
Bonus - Step four: see the best scenario
You might be ready to start building your co-founders team and go as big as you can, one thing is important so you can keep everything in check, the books. Knowing what belongs to whom and how it affects every other investor and owner is important every step of the way. Your cap table isn’t for equity management only, it can help you create scenario models for every situation so you can calculate how to cut the pie between founders and what deals you are aiming for in each investment round. ‘
If you use a spreadsheet cap table the scenario modeling takes time and effort or money if you outsource it, but if you save your data in an automated cap table, go crazy! Create every scenario you can think of and make sure you have every angle calculated.
Furthermore, make sure to access a designated data room so you can save and revisit any contract, financial report, 409A, or anything that might be needed someday in due diligence or a similar process. Planning for day one thousand should start at day one when you first get together with your new co-founders planning how to get there.
What’s your next step?
Now you probably understand where you stand and what your next move is, so if you are just now trying to find good team members remember to find people you connect with personally. If you already have a team and are on your way to building them properly, try creating a safe space to make mistakes and highlight each person’s unique value. Create a smart and calculated equity division, and use every tool at your disposal to walk forward with the road as bright as possible.
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