As an entrepreneur, you have a vision for your startup. You want to create something valuable, innovative, and impactful. You also want to be in charge of your own destiny and have the freedom and flexibility to make your own decisions.

But as your startup grows, you may face a dilemma: how much equity and control are you willing to give up in exchange for resources and growth? This is what Harvard Business School professor Noam Wasserman calls the “founder’s dilemma”.

The founder’s dilemma is the trade-off between being rich and being king. Being rich means maximizing the value of your startup and your share of it. Being king means maintaining the authority and influence to shape the direction and culture of your startup.

The founder’s dilemma is not a simple choice. It is a complex and dynamic process that involves multiple decisions and trade-offs along the way. For example, you may have to decide:

• Whether to start a business alone or with co-founders and how to split the equity among them.
• Whether to bootstrap or raise external funding and how much equity to give to investors.
• Whether to hire professional managers or keep the founding team and how to delegate responsibilities and authority.
• Whether to stay as the CEO or step down and how to transition to a new role.

Each of these decisions has implications for your startup’s performance, your personal wealth, and your personal satisfaction. There is no one-size-fits-all answer to the founder’s dilemma. Different entrepreneurs have different goals, preferences, and motivations. Some may prioritize wealth over control, while others may value control over wealth. Some may seek a balance between the two, while others may change their mind over time.

The founder’s dilemma is not a problem to be solved, but a challenge to be managed. As an entrepreneur, you need to be aware of the trade-offs and consequences of your choices, and align them with your vision and values. You also need to be flexible and adaptable, and adjust your strategy and expectations as your startup evolves.

In this blog post, we will explore the founder’s dilemma in more detail, and provide some tips and advice on how to manage equity and control in your startup.

Solo or Co-Founders: How to Decide

One of the initial decisions an entrepreneur faces is whether to start a business alone or with co-founders. This choice significantly impacts your startup’s success, as well as your equity and control.

Launching a business solo comes with perks. You retain complete ownership and autonomy over your startup. Your vision, profits, and decisions remain yours alone, avoiding potential conflicts or power struggles with co-founders.

However, going solo also has drawbacks. You shoulder all risks and responsibilities alone. You might lack diverse skills, expertise, or networks that co-founders could bring. Raising funds, attracting talent, or gaining credibility might pose more significant challenges.

Starting with co-founders has advantages too. You form a team sharing vision, passion, and goals. Leveraging diverse skills, expertise, or networks becomes possible. Co-founders provide valuable support, feedback, and accountability.

But co-founding has its downsides. Sharing ownership and autonomy is necessary. Aligning visions, values, and expectations with co-founders is crucial. Managing potential conflicts or disagreements becomes a shared responsibility.

Choosing between solo or co-founding isn’t definitive. It depends on personal preferences, the startup idea, and market opportunities. However, studies suggest that having co-founders can boost success rates. Research from the Kauffman Foundation indicates that startups with two founders tend to survive, grow, and raise funds more than solo founders. Similarly, the Startup Genome Project found that teams with two or three founders tend to outperform solo founders or larger teams.

If opting for co-founders, another crucial decision arises: how to divide the equity among them. This choice directly impacts wealth, control, and relationships among co-founders.

Many co-founders opt for an equal equity split initially. However, while seemingly simple and fair, this approach might not be the most suitable.

Equal equity may work if all co-founders contribute equally. Yet, in reality, contributions in terms of time, money, skills, and value often vary. Roles, responsibilities, and expectations might differ, leading to resentment or conflict.

A more effective method is a dynamic equity split, aligning equity with each co-founder’s actual contribution and value. This rewards co-founders accordingly and reflects the startup’s reality.

Various methods exist for a dynamic equity split:

1. The Slicing Pie method: Determines equity based on each co-founder’s contribution’s fair market value.
2. The Founder Institute method: Evaluates contributions’ relative importance through a set of questions and allocates equity based on weighted scores.
3. The Co-Founder Equity Calculator: Estimates a fair equity split among co-founders based on inputs like roles, experience, and funding.

Regardless of the method, successful equity splitting involves open, honest, and respectful conversations. Discussing goals, expectations, and assumptions openly while staying flexible, transparent, and fair is vital. Documenting the equity agreement and reviewing it regularly as the startup evolves is equally important.

The founder’s dilemma isn’t just about equity and control; it’s about trust and respect. Choosing the right co-founders and fairly dividing equity can build a strong, lasting partnership, crucial for your startup’s success.

Bootstrapping or Funding: The Equity and Control Trade-Off

Another pivotal decision an entrepreneur encounters is whether to bootstrap or seek external funding for their startup. This choice profoundly influences the startup’s success, along with the equity and control involved.

Bootstrapping entails self-funding the startup using personal capital or generated revenue. It’s a popular and viable option, especially in the early startup stages.

There are benefits to bootstrapping. You retain complete ownership and autonomy without diluting equity or surrendering control to investors. You’re free from pitching, negotiating, or reporting to investors, allowing a focus on product/service development and customer satisfaction.

Yet, bootstrapping also has drawbacks. Limited resources and cash flow could hinder startup growth. Access to investor expertise, networks, or credibility might be missed. Additionally, competition from funded startups with faster scaling or lower prices could pose challenges.

Seeking external funding involves obtaining capital from sources like angel investors, venture capitalists, or crowdfunding platforms. This route is common and attractive in later startup stages.

There are advantages to external funding. Access to more resources and cash flow can fuel startup growth. Leveraging investor expertise, networks, or credibility becomes possible, while gaining exposure and validation for the startup.

However, raising external funding comes with its cons. Giving up ownership and autonomy is necessary. Diluting equity and sharing control with investors becomes a reality. Time and energy spent on pitching, negotiating, and reporting to investors increases, accompanied by higher pressure and expectations from investors.

Determining whether to bootstrap or seek external funding isn’t straightforward. It hinges on personal preferences, startup stage, and market opportunities. Nonetheless, research suggests that bootstrapping might enhance success rates. Studies from the University of Wisconsin-Madison and the University of Chicago and Stanford University indicate that bootstrapped startups are more likely to survive, grow, and yield higher returns on investment than funded startups.

For entrepreneurs opting for external funding, another significant decision arises: how much equity and control to offer investors. This choice impacts wealth, control, and relationships with investors.

The equity and control allocation to investors depend on several factors:

• The valuation of the startup: This refers to the estimated value of your startup, determined by factors like revenue, growth, market size, and traction. A higher valuation means needing to relinquish less equity to investors for equivalent funding.
• The startup’s stage: The stage of your startup is the level of development and maturity of your startup, based on various milestones, such as your product, your customers, your revenue, or your team. The later the stage, the less equity you have to give up to investors for the same amount of funding.
• The type of investors: These are the various sources, such as angel investors, venture capitalists, or crowdfunding platforms, providing funding to startups. Different investor types have different expectations and requirements regarding the equity and control they seek in return for their funding.
• The terms of the deal: These are the specific conditions and clauses that define the relationship between you and investors, including valuation, equity distribution, voting rights, board seats, liquidation preferences, and anti-dilution provisions. These terms significantly impact the equity and control surrendered to investors and what you retain for yourself.

Calculating the fair share of equity and control is a negotiation process between the entrepreneur and investors. Successful deals are rooted in open, honest, and respectful discussions with investors. Transparently discussing goals, expectations, and assumptions, along with flexibility and fairness, is essential. Regularly reviewing and documenting the deal as the startup progresses is crucial.

The founder’s dilemma extends beyond equity and control; it encompasses trust and respect. Choosing the right investors and negotiating fairly can foster a durable partnership crucial for the startup’s success.

Funders or Managers: How to Delegate

Another crucial decision entrepreneurs face is whether to hire professional managers or retain the founding team for their startup. This choice significantly impacts the startup’s success, along with the equity and control involved.

Hiring professional managers means bringing in external experts with skills, experience, or networks to manage and grow the startup. It’s a common and essential option, particularly in later startup stages.

There are advantages to hiring professional managers. Accessing more talent and expertise to run the startup becomes feasible. Leveraging the skills, experience, or networks of these managers proves beneficial, along with gaining fresh perspectives and feedback.

However, hiring professional managers also has downsides. Surrendering some ownership and autonomy over the startup is necessary. Sharing equity and control with managers becomes a requirement. Additionally, finding, hiring, and training managers demand time and energy. Aligning visions, values, and cultures with managers might present challenges.

Retaining the founding team means relying on the original founders or early employees with passion, vision, or knowledge to manage and grow the startup. It’s a popular and viable option, particularly in the early stages.

There are advantages to keeping the founding team. Full ownership and autonomy remain intact without diluting equity or ceding control. Avoiding the need to spend time on finding, hiring, or training managers is a benefit. Maintaining the startup’s vision, values, and culture with the team is also possible.

However, keeping the founding team also has disadvantages. Limited talent and expertise for running the startup might pose challenges. Lack of skills, experience, or networks that managers could provide could become apparent. Additionally, increased pressure and stress might arise as the startup grows and complexity escalates.

Deciding between hiring professional managers or retaining the founding team isn’t straightforward. It hinges on personal preferences, startup stage, and market opportunities. Research suggests that keeping the founding team might enhance success rates. Studies from the Harvard Business Review and the MIT Sloan School of Management indicate that startups with founder-CEOs or founder-managers tend to perform better.

Opting to hire professional managers leads to another crucial decision: how to delegate equity and control to them. This choice significantly impacts wealth, control, and relationships with managers.

The equity and control allocation to managers depend on several factors:

• The role of managers: Your managers’ role is what they do in your startup—like sales, marketing, engineering, or finance. This role can impact how much equity and control they aim to have in your startup.
• The value of managers: Their value lies in what they bring—like revenue, growth, innovation, or keeping customers happy. This value can influence how much equity and control they feel they should get in your startup.
• The type of managers: Their type refers to their personality—whether they’re visionaries, executors, leaders, or followers. This can influence how much equity and control they’re comfortable having in your startup.
• The terms of the agreement: The agreement terms are the specific rules that govern your relationship. They cover things like equity, vesting, voting rights, board seats, compensation, or incentives. As mentioned before, these terms shape how much equity and control you share with your managers and how much you keep for yourself.

Successful delegation requires open, honest, and respectful conversations with managers. Transparent discussions about goals, expectations, and assumptions, coupled with flexibility and fairness, are essential. Regularly reviewing and documenting the agreement as the startup progresses is crucial.

The founder’s dilemma extends beyond equity and control; it encompasses trust and respect. By hiring the right managers and delegating the appropriate amount of equity and control, entrepreneurs can build a strong, enduring team essential for startup success.

CEO or Not: How to Transition

As an entrepreneur, one of the most critical decisions you face is whether to retain or step down from the CEO role in your startup. This choice profoundly influences not just your startup’s prosperity but also your degree of equity and control within it.

Remaining as the CEO means continuing to helm your startup as its chief executive officer. This choice is popular among entrepreneurs who wish to retain a firm grip on their equity and control.

The advantages of staying as the CEO are significant. You retain complete ownership and autonomy over your startup. No need to relinquish any equity and control to others. Moreover, you avoid the potential loss of identity, purpose, or satisfaction that could accompany stepping down. This path allows you to continue pursuing your dream and impacting your startup.

However, staying as the CEO has its downsides. You shoulder all the risks and responsibilities of running your startup. As your startup grows and becomes more complex, you might face heightened challenges and pressures. Evolving alongside your startup might require adapting and acquiring new skills and roles.

Stepping down as the CEO involves passing on the leadership and oversight of your startup to someone else. This option is seldom chosen and proves challenging, especially for entrepreneurs deeply attached to their startups.

There are benefits to stepping down. You free yourself from the risks and duties of managing the startup. It opens doors to focus on other aspects of life, like family, health, or hobbies. Additionally, it presents opportunities to explore new ventures or assume mentorship roles.

Yet, stepping down has its share of drawbacks. You sacrifice some ownership and autonomy over your startup. There’s a likelihood of losing some equity and control to the incoming CEO or other stakeholders. Additionally, the potential loss of identity, purpose, or satisfaction might create a feeling of abandoning your dream and team.

Determining whether to stay or step down as the CEO hinges on personal preferences, the stage of your startup, and market opportunities, while carefully managing the equilibrium of equity and control.

Should the decision be to step down, the type of role you transition to depends on several factors:

1. The reason for your departure, such as personal choice, investor pressure, acquisition, or retirement, significantly influences the role you may seek in your startup, affecting your equity and control.
2. Your relationship with the new CEO, whether a co-founder, colleague, friend, or stranger, might sway the type of role you wish to assume in the startup, affecting your equity and control.
3. Your level of involvement with the startup, whether full-time, part-time, occasional, or none, may influence the role you desire within the startup, impacting your equity and control.

Various transition roles after stepping down as the CEO include:

• The founder: The original creator and visionary of the startup, involved in the strategic direction and culture but not operational management and execution. This role may include advisory positions or symbolic titles, like founder-chairman, founder-president, or founder-emeritus, affecting equity and control.
• The executive: A senior leader involved in operational management and execution but not the strategic direction and culture. Roles might include chief technology officer, chief product officer, or chief marketing officer, impacting equity and control.
• The employee: A regular worker involved in tactical tasks and projects but not in the strategic direction and culture. Technical roles such as engineer, designer, or developer can be considered, affecting equity and control.
• The shareholder: An owner involved in the financial performance and value but not the strategic direction and culture. This role might impact equity, revenue, or the exit of the startup.
• The outsider: A former member involved in personal relationships and networks but not in the strategic direction and culture. Roles such as mentor, investor, or partner within the ecosystem may be considered.

There’s no fixed formula for choosing the type of role after stepping down as the CEO. Negotiation and compromise between you, the new CEO, and other stakeholders, such as co-founders, investors, or employees, play an important role in determining the equilibrium of equity and control.

Discussing goals, maintaining transparency, and regular documentation as the startup evolves is key to managing equity and control effectively.

Conclusion

The founder’s dilemma centers on balancing between maximizing wealth and maintaining control. Achieving financial success (being rich) involves maximizing your startup’s value and your stake in it, while maintaining control (being king) means preserving authority and influence over your startup’s direction and culture.

This dilemma isn’t a straightforward decision. It’s a complex, ongoing process involving numerous decisions and trade-offs. As an entrepreneur, recognizing these trade-offs and their impact on your equity and control is crucial. It’s essential to align these choices with your vision and values and remain adaptable, adjusting strategies as your startup progresses.

One of the tools that can help you manage the founder’s dilemma is a financial model. A financial model is a representation of your startup’s financial performance and value, based on various assumptions, projections, and scenarios. We offer custom financial models fully tailored to suit your startup’s needs and goals, and we will guide you on how to use and update them, as well as how to present and pitch them to your investors and stakeholders. Contact Us or Book a FREE Call to get started!

Remember, this is not a problem to solve outright but a challenge to navigate adeptly. By selecting the right partners and negotiating effectively, you can build a strong team contributing to your startup’s success.