The initial step in any startup is to form a team of founders. Startups that have two or more founders are usually more successful than those startups that only have one founder. This is because the team has greater planning, execution and problem-solving capabilities as well as complementary experiences, backgrounds and business networks. Successful startups such as Airbnb have 3 founders Brian Chesky, Nathan Blecharczyk and Joe Gebbia; Robinhood has 2 founders Vladimir Tenev and Baiju Bhatt; and Nubank has 3 founders David Velez, Cristina Junqueira and Edward Wible.
When founders come together they try to better understand and define their goals, the skills and resources required to develop the startup over time. The question most people have at that point is: Is this a good fit for me? Most people quickly recognize the advantages and disadvantages of being associated as a member of a particular team and make an implicit decision about how committed they should be.
Although expectations are always positive, the outcome is not always what one estimates. For example, in 2012 Brian Armstrong left Airbnb to found Coinbase along with Ben Reeves, however, just before Y Combinator’s funding they split due to differences in the operation of the Coinbase wallet. Some time later Fred Ehrsam, a former Goldman Sachs trader, joined as a co-founder. Disagreements between the co-founding team are more common than one might imagine, which is why they signed a founders’ agreement early on.
The founders’ agreement lays the groundwork for the creation of the startup; it is the product of the difficult conversations that founders should have in the early rather than later stages of the startup. The goal of these conversations is to have open and honest discussions about individual attitudes, fears and aspirations about the startup and to minimize the likelihood of surprises that could weaken the startup as it evolves.
The first element to consider is strategy. The first question to ask relates to the goals that each founder has for the startup and the individual goals. In addition to the time to achieve these goals. Each founder has his own circumstances to consider, for example, his current job, his development potential, the stage of life he is in and his medium and long term priorities. The decision of a recent college graduate will probably not be the same as that of someone who is in mid-career or that of a senior executive of an organization. It is probably easier to found a startup if you come from another startup than if you are working in the corporate world. The opportunity cost of leaving the corporate world is probably higher than leaving a startup. Such was the case of Cristina Junqueira who after working in consulting and being for more than 5 years in Itaú, one of the largest banks in Brazil, decided to risk it all and found her own company. Fortunately in this case the story is one of success as the company Cristina founded is today known as Nubank.
The second element to consider is the shareholding structure. What percentage of shareholding each one receives in the company is one of the most complex questions that the founding team has to solve. This relates to the contribution that each of the founders brings to the startup. For example, tasks, work activity, hours commitment, roles and responsibilities. Another consideration relevant to the shareholding structure is the capital that each of the founders contributes to the startup and the purpose of that capital contribution.
In many occasions the percentage of equity participation is subject to vesting, this to ensure the continued participation of the founders in the business. In the initial stages, the commitment of the founders may vary over time due to their personal circumstances, which is why it is important that each one of them earns equity over time. This does not imply that initially there must be a distribution of capital, since this is the starting point for setting up a company.
The third major element to consider is administrative issues. The founders must agree on how relevant business and day-to-day decisions are made. This can be by majority vote, unanimous vote or some decisions exclusive to the CEO.
Founders, like any other person, require a salary to cover their expenses, so it is important to think about what the size of the salary will be and how it can be modified. Probably the best practice is to have salaries that match the sector and geography in which you are located. In addition to setting up a compensation committee that dictates the salaries and bonuses that the management team should receive.
Just as in marriages there are dissolutions, in startups there are founders who may intend to retire, so it is important to reflect on what would happen if one of the founders leaves. Also, the possibility of the other founder or the company doing a share buyback at a certain value or with a pre-established formula. Strictly speaking, the team would also have to think about the possibility of one of the partners dying or becoming incapacitated.
Running a startup takes time so it is important to think about what would happen if it took longer than expected or what would happen if a founder had an idea to create another startup while working on the project.
A startup is a business that seeks growth and profitability, so if one of the founders does not fulfill his part, he could be removed. However, mechanisms need to be established to resolve these types of differences, as well as the potential termination of the business, future capital raises and overall management of the business.
Very few startups manage to reach unicorn status, most die trying. That is why founders must have strong discussions and reach agreements before launching a startup. Each party must act ethically and professionally by abiding by the terms set otherwise negotiations will be of no use even if there is a signed agreement.
“Whether you are a founder, a leader, or an individual contributor, building a strong team is critical to your success” — Julia Hartz
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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