Tips for Bringing in a Co-Founder for Startups
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Memo re: Essential Points for Startups Considering a Potential Co-Founder(s) and How to Subsequently Navigate a Successful Professional Relationship
Looking for a Co-Founder
When looking for a co-founder please ensure you take into consideration the following:
Long-term potential - Don’t give equity to anybody you don’t want permanently involved in your business. Those small percentage pieces that startup entrepreneurs give away in the process of development will add up, give them away with caution. If you grow and prosper, you’ll need those shares for employees.
Align your values - While having a shared vision and business strategy is important, finding someone who shares the same values is essential for a successful long-term business relationship.
Look for complementary strengths - Creating a team with varied experiences and outlooks can give a business a competitive advantage. The perfect ally is a person who has everything the business owner needs. Looking for a partner who is strong in areas where you are lacking will ensure that there is no gap in necessary knowledge.
Once a Co-Founder is Found
When you are certain that you have found a suitable co-founder, use the following tips to govern your business relationship to ensure success.
Determine areas of accountability early – Determining what founder is responsible for which area of business early will allow for efficient problem solving. New businesses need to react quickly to evolving situations and collaborating and seeking consensus for every issue will become burdensome. By establishing your respective areas of accountability early, you'll respect your co-founder's decisions and won't step on his or her toes. That said, it may be necessary to shift responsibilities as needs change.
Communicate - Your business won’t get anywhere if you and your partner don’t communicate. To maximize success, take some time to sort out your priorities and share them with one another.
Risk tolerance – An individual’s propensity for risk varies, so make sure you know where the other stands and that you’re both comfortable with any and all prospective decisions.
Working styles and culture - Think hard about the type of company you want to build culture-wise and make sure you’re in agreeance on how best to achieve your shared vision.
Division and Capital Considerations
Use the following tips to ensure fair and equitable division of your company amongst you and your co-founder(s).
Have a strategic business plan in place - Investment by outsiders is for scalable, defensible, high-profile startups with proven management teams. Unscalable services don’t attract professional investors. And there has to be a real commitment to a credible exit strategy in three to five years. If you don’t like these criteria, rewrite your business plan to need less investment.
Prioritize fairness, and the perception of fairness - This is much more valuable than owning a large stake. Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is co-founders disagreeing and arguing over who works harder, who owns more, whose idea it was, etc.
Choose your investors wisely - While it may be possible to buy back some of the shares that you have issued to an angel investor, in general terms, once the shares are gone, they are gone. The investor is with you until you sell your business.
Research different kinds of investors and the percentages they expect - In exchange for providing capital, most investors take a percentage of ownership in your company. Different kinds of investors are characteristically comfortable with different levels of risk. Angel investors typically want from 20 to 25 percent return on the money they invest in your company. Venture capitalists may take even more; if the product is still in development, for example, an investor may want 40 percent of the business to compensate for the high risk involved.
Be mindful of the risk you are asking of potential investors - Consistently, an investor will ask for equity in your company so they’re with you until you sell the business. You may not want to give away a large piece of your company, however, remember, the money is not a loan. You are asking the investor to put up a large amount of money they may not get back.
Remember the math of equity and valuation - You calculate how much money investors give for how much ownership by managing valuation, meaning how much you say your company is worth. So, if you want to give 10 percent equity for $250,000, you’re saying your company is worth $2.5 million. Be certain you can back up this claim with proof.
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