Excellent post, and I agree wholeheartedly there’s nothing wrong with creating a great lifestyle business.
Your comment on the realistic perspective rings the most true to me, and is an area where I see many people make mistakes. From the outside looking at a business it’s frequently easy to tell certain businesses have limits on their potential/scale, but at least with my own friends, I have seen many delude themselves into ideas of grandeur that are totally unrealistic. I think part of this is due to the against-all-odds nature of entrepreneurship to begin with, but intentionally sticking your head in the sand and ignoring the problem is a horrible solution. Getting that realistic view is absolutely the most important thing.
I also agree that once you have the realistic view, should you have a co-founder, it’s key to have aligned perspective there as well. I would, however, go a step further. While you and your co-founder may agree on the desired trajectory of the business today, desires change over time. It’s possible that down the road your goals will diverge, which could lead to problems. One suggestion that I have to avoid this potential: try to choose a co-founder with a similar risk tolerance as yourself. I’ve found that if there are radically different risk preferences, even with shared goals, problems can eventually arise. For instance, if one co-founder has a lot of personal wealth, and therefore is very risk tolerant, and another co-founder does not have the existing personal wealth, so is risk averse, things can go awry down the road as desires differ.
Excellent post. Structure clearly is critical at the scaling stage of a venture, but is also very hard to accomplish. I’d be curious to hear more on your thoughts regarding the people part of a restructuring. For example, we’ve covered at length how sometimes the people who are the right people to start a business are not the right people at later stages of the business’ life. That said, often times, particularly with the technical/engineering talent, the most talented employees are the ones most adverse to structure of almost any sort.
I’d be curious how you would suggest to handle such people, as firing them seems like it could be detrimental to the business if they really are the best technical talent out there, presumably whom you’ve worked so hard to recruit. That said, if you restructure the company but leave the engineers unstructured/free to do as they please, I could see how that would also create team problems.
Taking care of the people seems to be one of the hardest problems for any startup, and there is no clear-cut answer. As one of the guests in class recently stated, she felt as if the CEO really should be CPO for “Chief Psychology Officer.” I can imagine this would ring especially true during a major restructuring, where everyone surely has an opinion and few people will agree.
Excellent post Charles. Disagreements between founders can ultimately be poison to a startup, and result in failure whereas if they can be handled appropriately, perhaps can be navigated and the business can still succeed.
The topics you lay out here definitely ensure that some of that advanced planning is accomplished, which hopefully improves chances for outcomes. Flexibility in founders agreements for instance is critical, totally agree. I think another important thing to note with those agreements is that even establishing them with the flexibility in the first place changes the mental perspective of the parties involved. For instance, if there’s no vesting, each founder is likely to feel as if they fully own the business on day one, whereas if there is vesting they’re mentally in more of a state where they only will earn ownership of the business over time. This alone, I have found, can result in radical changes in the way people behave in the early stages of a business.
The point on acting quickly is also key. In the past I have personally had a founder dispute drag on for many months, and it sucks massive amounts of energy out of the business. Dealing with these issues quickly as they arise is, in my opinion, always wise. It’s also worth noting that sometimes dealing with the issues quickly means that you have to incur higher short term costs: for instance, both sides employing quality lawyers whom can quickly sort things out. I’ve found it’s worth the cost, as the long-term costs of not doing so far exceed the short term costs of doing so.
One more thing you could add to this plan in addition to a separation agreement is a buyout agreement. That can help down the road as well where perhaps the founder has earned significant equity in the business, even via vesting, but it’s times to part ways. Planning out in advance a fair and agreed upon method for valuing the business and buying out that founder can really help.