trevorowens:

Congrats to our three winners at Lean Startup Machine San Francisco! These three teams rocked it and came up with awesome products. One even made money!

As a postmortem I thought I would go over some of the mistakes teams made as it’s our goal in future events to have every team perform at the…

Pros & cons of “going it alone” or as Bonnie and Clyde (by Jacques):

The Pros of having co-founders

• Co-founders bring more brains to the table
  Instead of just your own brain you now have two or possibly even more of those wonderful devices at your disposal (and so do they), this in theory increases the amount of experience, knowledge and brain cycles available to help solve the issues that your company faces.

  If your co-founders are as smart and capable (or even more so!) as you are then that alone should count as a gain, but chances are that they are not only that but in different directions, and that’s where the real advantage lies.

  One of the co-founders I worked with, Michael is a very smart cookie and he helped to steer our company in a direction that I would have never picked if I had been a ‘loner’, he made the case for giving away the software that we were selling quite eloquently and we made out pretty good on transforming from a license based business to a more service oriented model. To help with the transition we put a few usage restrictions on the free software and sold to the companies that wanted to use it for different purposes. This allowed us to have our cake (a huge audience for the free product and the bandwidth and server capacity to make it happen) and eat it too (a solid revenue stream from the sales of the ‘commercial’ licenses).

• Co-founders will tell you the truths that no one else will tell you
  When you are working on your projects on your own it is very easy to walk down some dead end street for a long time, or to simply be doing the wrong thing. For outsiders it can be very hard to ‘bring the bad news’, simply because they don’t have a stake in it and it’s your folly after all. Customers can tell you about your product - to some extent - but are not much use when it comes to strategy or dealing with adversity. A co-founder however, has a stake in the company, you and your co-founder(s) sink or swim together, if a co-founder has the feeling that you’re on the wrong track with something then you will be more likely to listen (ideally speaking) because you realize they are not saying that to make you feel bad or to hurt your business. Your fate and theirs are intertwined so that means that your goals in so far as the business is concerned are mostly aligned. The simple fact that co-founders can and will disagree with you gives room for plenty of opportunities to learn on both sides and for the company to benefit from the joint experience of all founders. Unless the disagreements become too strong (see ‘cons’).

  One of the co-founders of TrueTech, one with only a very small stake in the company saw trouble ahead with one one of the other partners, a person that I thought would work out well. We discussed it back and forth for a while and little by little I came to lean more and more towards their point of view. I decided to confront the other partner with this so that I could justify going forward with a clear conscience, much to my surprise the whole thing crashed down on the spot with him storming off with screeching tires never to be seen again. Sometimes you can be totally blind to something right under your nose and having co-founders that are not afraid to tell you the truth can help tremendously.

• Co-founders bring more man power
  Which translates roughly in to the more hands you’ve got the more work your company can do in the same amount of time. Some work can not be sped up by throwing people at it (having a baby for instance), but a large majority of the work that goes in to running a company can be done more quickly if there are more (well organized) people working on it. Some work even has a linear effect on the growth of your business (for instance, if you are selling software to mid sized businesses, having two sales people instead of one should automatically double your turn over, assuming the market is not saturated and the sales people are not fishing in each others ponds) so it can make good sense to have someone on board that has expertise in this direction.

  While I was working alone as a contractor there were plenty of times when I wished I could ‘clone’ myself so that I could work harder than I already did. Having co-founders made it possible to tackle jobs and projects of a scale that I would not have been able to do myself in the same time. For some of the projects we did that wasn’t too important, but there were quite a few where simply the fact that we could turn stuff around quickly made a huge difference in our competitive situation. Company ‘X’ would roll out a feature on Monday morning, by Thursday we’d have an equivalent up and running, so playing ‘catch-up’ or leap-frogging the competition is definitely easier when you are with multiple people.

• Co-founders can stand in for you
  Co-founders can go places and do things in a physically different location than the one where you currently reside. This has all kinds of practical benefits, co-founders can be sent out as emissaries of the company to multiply your presence in the physical world.

  They can give interviews, visit customers, approach prospects and do all kinds of business development activities in parallel to yours effectively they’re like having a body-double, and that in turn should lead to more exposure, more leads, more deals. If your company is mostly web oriented then this translates in to more online presence and the ability to serve more customers.

  It also means that occasionally you get to take a day off to spend time with family and friends, recover from illness and a whole pile of other things that can be very hard when you are a single founder. A co-founder is like having a co-pilot, if you are looking the other way you know that your back is covered, and of course that also goes the other way around.

  For a long time while growing the company it was ‘all hands on deck’, but once things quieted down a bit I felt ok with taking it easy every now and then, kicking back a notch or two in the knowledge that the phones were manned and the customers were kept satisfied even if I wasn’t there, conversely the partners in the company knew that if they needed to rely on me for some reason or other that I’d be there. This helped a lot in dealing with the day-to-day stress of a fast growing company (1 to 15 employees in a years time, offices on two continents).

• Co-founders have different (life) experience
  The fact that co-founder(s) as a rule have not led the exact same life that you did means they bring different experience to the table, a complimentary kind of experience, one that does not conflict with yours, but hopefully contrasts. One person working by themselves usually ends up in a virtual echo chamber, with little interaction with others that could change the dynamic. Some people think that just having a rubber duck on your desk is enough companion, but during a brain storm session the duck would be terribly quiet and it is also not very good at giving a second opinion or playing the devils advocate. For those roles a live human being is much preferred, for ‘cognitive dissonance’ you may rely on the duck.

  One of the partners in TrueTech, a guy called Bob had been a fund manager for Shell in the Netherlands. He brought a lot of experience with him in terms of how large companies look at the world, something that none of the others ever had dealt with. This helped tremendously when looking for funding and deals with larger corporations (Microsoft, AOL, Yahoo!, Phillips, Logitech and so on). He could see much further down the road to what it was that we should be doing in order to be a better partner to these giants.

• Co-founders have different skills
  Typically co-founders that work really well together when growing a company are not cut from the same cloth experience wise, neither do they have the same professional background. If one is a keyboard whiz it wouldn’t be bad to have the other be a sales and marketing type of person or something that more in the line of business development. Like that, between the two of you with a lot of discussion and learning back and forth you can achieve things that neither of you could do alone. The sum should be significantly larger than the parts.

  One of our minor partners had experience as an accountant and as a bookkeeper. That’s something that none of the younger techies and designers had any interest in or ambition to learn. But administrative skills are very important to have and I’m fairly sure that we would have gone under several times if not for having this particular skill on board with someone that we could trust.

• Co-founders are real people
  Unless you are a hermit by nature, the fact that a co-founder is a real person will help to mitigate the crises that you invariably face because you can share the burden, and it will help magnify the joy of success. That rubber duck mentioned elsewhere or your online buddies will not be able to share in the success of something that you both created in the same way.

  I clearly remember the day when Bob scored the MSN deal, which basically meant that there would be a segment of the MSN portal dedicated to live webcams, and that all that traffic would come to us. There was a ton of work done behind the scenes by Michael, Bianca and myself to be able to deal with the expected influx of traffic, Jonathan had made a landing page that was really nice. It felt really great to have a team like that firing on all pistons and landing the one of the largest fishes in the portal business at the time and delivering on time. It also marked the beginning of a period of lots of big partnership deals.

The Cons of having co-founders

• Co-founders can be a liability
  Ideally a co-founder has the same level of standards when it comes to ethics and making business decisions as you do, they won’t [normally, tx wccrawford] take risks that can affect the company in a negative way and they’ll do everything they can to stay on the right side of the law.

  That’s problematic if it turns out after the deal is inked that your co-founder is not like you in this respect. One of my co-founders in a company called TrueTech disappeared for a week all of a sudden, it turned out he’d gotten himself arrested by the dutch police for hacking parking meters. Not good. It got worse, I was advised not to leave the country but that we probably were in the clear, and the business would not be raided.

  It all ended reasonably good (for me, that is, he got a deferred sentencing) but that was pretty scary.

  Other possibilities are your co-founder making debts, going to the casino with the company credit card or the contents of the checking account, disappearing to Upper Volta, developing a $200 per day drug habit or bi-weekly drinking binges with 72 hour recovery periods.

  Vetting your co-founder thoroughly before you take them on board and spelling things out just in case they’re not clear can help a lot with stuff like this. Make sure that you’re on the same page when it comes to dealing with the law, to avoid surprise wake-up calls like that. And lay out the consequences for any transgressions beforehand.

  Vesting cliffs and corporate form may help with this as well but they come with their own sets of trade-offs.

• Co-founders complicate things
  Having one or more co-founders makes running your business more complicated. Instead of just doing stuff the way you want it you are now looking to build consensus and you’re trying to extract the good parts from every-bodies view on things and to suppress the bad parts. This can be quite a headache, the more opinionated people are and the more their views on subjects diverge the harder this can get. On the other hand, if all parties are on the ball great stuff can come out of this. Co-founders also complicate any exit, and it can create fiduciary responsibilities between the various share holders and officers of the company, which if you don’t take them serious can result in nasty stuff down the line (minority shareholder lawsuits for instance). These complications can cost a lot of time, money and energy.

• Co-founders have equity
  The clear disadvantage of that is that whatever the take is, it now has to be split. This can add up, especially if you have more than two co-founders, it’s a big difference if you take a 100K business, subtract your operating costs and you yourself have to live off the remainder or if that remainder has to be split two, three or even four ways. And if you thought that that problem is only there because the amount is so small wait until there is a million or more at stake. People tend - not everybody, but on average they seem to do this - to overestimate their contribution to the company, and invariably there will be one (or more) that see the rest as luggage to be carried along on their capable backs. This is also an endless source of trouble.

• Co-founders may disagree on important stuff, such as an exit strategy
  This can cause real trouble, if the co-founder is important enough to the company that may mean that they can block your planned exit. Maybe they think they ought to get more out of it, maybe they want to remain small. As many co-founders as there are as many opinions on things like this you’ll have to deal with and that can be a real problem.

  When we got a buy-out offer of 5M I was all for a sale, but because the shares were distributed unevenly the rest of the co-founders wanted to go for more, and in the end lost their chance at an exit on their terms all-together.

  They got very close to getting an exit done for double that amount but when that fell through the window of opportunity had closed (the dot com crash was in full swing) and any other option was for substantially less than the original offer. This left a lot of people feeling very bad.

• It’s easy to get in, very hard to get out
  It’s very easy (almost ridiculously easy) to get a co-founder on board of your company, all it takes is a transfer of a couple of shares, a visit to a lawyers office or a notary public and you are now ‘in business’ together. The reverse is very, no make that extremely hard to effect. You can’t just repossess a bunch of stock because someone turns out to be less good than you (or they, or you both) believed they were. Once someone has stock, normally speaking that stock is theirs to keep until a large number of conditions are met (or until they die, which might suggest alternative solutions to problems like these and no doubt plenty of people have contemplated such solutions but I would strongly advise against it, it isn’t worth it).

  Dissolving a partnership can be done in several ways (without it automatically resulting in the dissolution of the company), for instance:

  - one of the partners can agree to be bought out by the others

  - a third party can agree to buy out one or more of the partners

  - the company can go ‘dormant’ (effectively that’s the same as dissolution
  but you will still need to file taxes and maintain some other records)

  - one of the partners could sue the other and might confiscate the shares
  the other party has or force a buy-out at some (independent) valuation

  - one of the partners can become a ‘silent partner’, in other words they won’t
  show up on meetings they won’t interfere with the running of the company they
  have the status of a partner that is there just for the profits to be divided
  and a stake in a possible exit (which they can block if their share in the
  company is large enough).

  The exact possibilities are usually governed by the corporate documents, and that’s one reason why you want to make sure those documents don’t contain clauses that might come back to bite you later.

  We had a German partner that tried to pull a leveraging trick to use a small number of shares as a reason for a lawsuit to be compensated with a larger number of shares. It would have worked too if not for a very savvy German lawyer and some friends with more business experience than I had at the time.

• Co-Founders have a life too
  While initially that might seem to be an advantage, it may not always be so. For instance, the shares in your joint company might become a bone of contention between your co-founder and their spouse during divorce proceedings. Effectively this would mean that instead of with your co-founder you might end up with your co-founders ex-wife/ex-husband as a major shareholder in your company. This can lead to a large amount of trouble, and it is usually wise to make sure that the shares in your joint company are held in such a way that this is not a possible scenario. If you don’t anticipate that and deal with it before it becomes an issue you might find that any exit strategy you had has just evaporated without so much as a bit that you can do about it.

  Co-founders can go from single, motivated young can-do types to hen-pecked go-home-at-5 in a hurry, if you’re all single when you start your company make sure you discuss what will happen if one of you decides to have a spouse and have children because the impact could be significant.

  Just as co-founders have a life, they might also one day no longer have one, they might drive in to tram #9 on the way to work or die in their sleep. In that case you might find all of your co-founders heirs as your shareholders, and on top of that your co-founder will no longer be around to pull his weight. One more of those things you should think about beforehand and which the corporate documentation and shareholders agreement (and possibly the will of your co-founder (and yours!)) can mitigate to some extent.

  One of our co-founders was doing great until he got a girlfriend, and suddenly turned from go-getter to clockwatcher overnight. It also didn’t help that his s.o. only saw his salary as the pay-off and never the value in the equity.

• Co-founders may disagree violently on important issues
  And normally speaking, that’s a good thing too. But when the disagreements go over and beyond a normal working relationship it might lead to you or your co-founder walking out.

  This is a difficult situation in the best of times, and without a very capable mediator can get very messy, especially if the stakes are high. What starts out as a disagreement about the corporate direction could easily result in a corporate funeral or a forced sale.

  After finding that an exit at a valuation that would leave enough on the table to make everybody happy was no longer in the cards I sold my house and used the proceeds to buy out the other partners. (I’ve written about that before). This was because the disagreements about any new direction and the feelings that persisted after the failed exit attempts had gotten to the point that they were poisoning the atmosphere. The solution (to buy everybody out) was a difficult one for me because I ended up wiping out 10 years of savings in order to end up with a company that I had to run all by myself again (with some help from my spouse), but I’m still pretty happy that I did it that way. It solved a lot of issues that would have been very hard to solve in a nice way otherwise, nobody left with empty hands.

• Co-founders have standards of their own

  A co-founder that you bring on board may not do a job as perfect or in the exact same way as you would do it. How you deal with that can make a huge difference on the well-being of the company in the longer term. Some people turn in to control freaks, others learn to relax and mentor. If you can’t live with other people making mistakes that you all end up picking up the pieces for then life with co-founders can be hell.

  That doesn’t mean that sometimes you won’t be picking up the pieces after all though.

  One of the co-founders I worked with had a Japanese holiday planned, and delivered a large chunk of code the night before the flight out was due. This would have been fine if the project had been tested properly, but it turned out it wasn’t. We spent a couple of months to fix the trouble and to try to retain the customer for the company. To some extent that worked, fortunately, but leaving the rest of us to hold the bag was something that really didn’t help the relationship.

“Yesterday Fred made the trip from New York City to Toronto to present to a theatre packed full of entrepreneurs at Democamp. The topic of his talk was Ten Golden Principles for Building Successful Web Apps…”