Solo founders and co-founders each face their own hidden risks

2022-10-08 original Startups

Actually, this isn’t something that can be answered easily, and several angles need to be considered. As a starting point, let me lay out the common objections on each side.

【Solo-founder camp, objection ①】

An entrepreneur is alone. You cannot start a business without being prepared to bear absolute responsibility for it.

【Solo-founder camp, objection ②】

Decision-making is simpler with one person, which lets you run the business more effectively. Especially when trying to move fast in the early stage, “too many cooks” should be avoided.

【Multi-founder camp, objection ①】

There is a limit to what one person can think up alone. To draw out new perspectives, you need an equal partner who will clash with you in argument and sometimes offer harsh criticism.

【Multi-founder camp, objection ②】

Historically, many startups were founded by co-founders and went on to great success. Apple’s Jobs and Wozniak, Google’s Larry and Sergey — the examples are endless.

I said “several angles” at the start, but the objections above really boil down to just one main angle: “how to run the business.” Each of them sounds reasonably correct. But there’s another hidden angle here.

That is “how it looks from the outside.”

Take investors, for example. This might get me some pushback, but investors hate risk. This isn’t a snide counter-argument — I mean it as a sign that they’re sufficiently smart. The ability to see through risk is exactly where they show their skill. If they made investment decisions just because something had novelty, technical edge, and a catchy market, and were dumb enough to fund anything like that, no amount of money would ever be enough.

It has long been said that “a company without a co-founder finds it hard to raise investment.” There are certainly cases where this doesn’t hold, but there was a period when I was convinced it was a reasonably accurate tendency.

The logic, crudely put, goes something like this: something one person came up with alone is hard to assess for risk, but something two people came up with together is probably somewhat better. And if it’s three people, or four people, it’s probably a bit better still.

Someone just running off alone on their own logic shouldn’t be able to bring a prototype in front of investors accompanied by multiple people. At best, the thing would fall apart mid-process.

There is also the angle of governance risk. Co-founders generally split shareholding close to evenly. That is precisely what makes co-founders “co.” To avoid getting bogged down over resolutions, a split like 51:49 is common, but Google’s Larry and Sergey are said to have gone with a perfect 50:50.

In the case of a solo founder, in most cases, even after going through seed stage or Series A fundraising, the founder still holds an overwhelming majority of shares. In such cases, even if the majority of shareholders (by headcount, not by number of shares) become convinced that “he is unfit to be CEO,” there is no way to remove him other than through “persuasion.” It’s an extremely difficult decision for anyone to be told to “quit” the company they founded (and which, at first, was theirs alone) and actually quit. If it were me? Honestly, I don’t think I could do it.

But viewed objectively, this kind of situation is nothing but a risk from a corporate governance standpoint. (To be clear, I keep saying “risk, risk,” but I’m talking about a situation that is actually quite common.)

On the other hand, when there are co-founders and shares have already been split — whether 51:49, 50:50, or 40:30:30 — and executive-level hires who joined later and investors have gradually been given equity stakes, the representative’s individual ratio might in some cases even fall below the 33% needed to exercise a veto.

This, one could say, is the healthier state of affairs.

Incidentally, most of the cases where a representative holding nearly a majority of shares nonetheless steps down happen when “stepping down as representative is made a condition of additional investment.” I’d say this pattern accounts for roughly 99.9% of cases. There are a rare few exceptions — I know of admirable, wise people who stepped down of their own accord for the sake of the company’s growth and achieving its goals — but honestly, that’s rare.

The ones who bear the brunt of this kind of corporate governance risk, though you might not think of it this way, are actually the employees working at the startup. The risk is greater the more senior the executive. Especially for officers, who normally join with a commitment to results, it’s only natural that they face harsh scrutiny.

That said, things can’t all be explained from a single point of view. For example, a feature implemented by pushing back the release date by one month might end up saving the company six months later. But in the short term, the development-side officer who failed to meet the release deadline might well deserve to be dismissed. There’s no clear standard for how this balance should be struck. It might just come down to the mood of the board meeting.

Now, for those who know, they know — what is a board meeting like at an early-stage startup founded by a solo entrepreneur? In practice, it’s just a discussion between the representative and a handful of executives (and if things go badly, it might just be the representative alone, formally “holding” the meeting and leaving minutes behind). So who decides how judgments get made there? Doesn’t that feel like a risk?

By contrast, at a startup that, say, has “three co-founders” on the roster, they discuss as equals and decide the company’s direction and each person’s performance evaluations together.

Well, that does look like the healthier setup, from the employees’ point of view too.

I think most of the objections raised at the start — whether from the solo camp or the multi-founder camp — are each largely true, and depending on the situation and phase, there will be times when you think “this was better” or “that was better.” But when it comes to how things look from the outside, securing a co-founder when starting a company clearly works in your favor in many respects.

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Originally published in Japanese at https://clazytech.com/2022/10/1264/. Translated with LLM assistance and reviewed before publication.