In class, we have frequently discussed the importance of alignment between cofounders. I wanted to expand upon one particular aspect of this – the necessity for each cofounder to have skin in the game. In other words, each needs to have an equivalent commitment level, or the venture is likely to be doomed from the start.
The culture around university campuses and tech companies these days is very enthusiastic about entrepreneurship – it’s undoubtedly pretty sexy to go start a company (for now). This is both positive and negative, as there are plenty of resources and potential cofounders, but probably a lot of “dabblers” as well. Unfortunately, it is not always clear up front who falls into the bucket of dabbler vs serious cofounder when everyone is proclaiming their love of startups at a networking event.
I got into a situation like this while trying to start a company in college. We had 5 cofounders (too many!!), each equally excited about the idea. The equity was split roughly equally, and we all promised to make the company a priority in order to determine if we could pursue the idea full time after school. Although it was a great learning experience, we ultimately failed and abandoned what I believe could have been a successful company.
There were many concerning moments in the initial months that should have indicated our need to reevaluate the cofounding team. These were indications that some of the cofounders were either resume padding or waiting to see if the idea gained traction before making any significant sacrifice of time, all while maintaining a sizable equity stake and vesting. If in that situation again, I would have recommended that any of the following red flags be disqualifying factors for continued cofounder status:
- Choosing a summer internship over working on the company full-time when the other cofounders are committed to the startup full-time.
- Prioritizing extracurricular activities over the company, especially during critical times. Who never shows up in an emergency?
- Participating aggressively in recruiting while being vague about post-graduation plans.
- Offering to work part-time on the company after school before coming on full-time in a year or two.
Dharmesh Shah, the cofounder of HubSpot, summarizes this thought well in a blog post articulating the difference between the “Involved” and the “Committed” cofounder . To figure out which category a cofounder falls into, you consider what he or she would lose if the startup were to die tomorrow. In order to be in alignment, each cofounder should experience a similar emotional (and possibly financial) impact.
Otherwise, one or more of the cofounders is not taking on the same risk as the committed cofounder(s). If someone is hedging their options significantly in a way that misaligns their commitment level with their partners, there should be a frank discussion about roles and equity stakes. Although potentially difficult, these are vital decisions to get right before graduation, getting too serious, or raising a substantial amount of capital.