Sometimes it is necessary to go back to the past and revisit one of the greatest research papers ever written. Authored by Noam Wasserman, then a professor at Harvard Business School, “Rich versus King: Strategic Choice and the Entrepreneur,” was published in September 2006.
May I politely suggest that every founder read it, and then when you start to assemble a team and eventually go out to raise money, that you re-read it. Twice.
Wasserman frames the entrepreneurial journey, “founders must navigate the critical trade off between wealth and control.”
Yes, some founders can retain both control and most of the wealth, but for the majority of us, there comes a stark choice, often early in the process: “to grow their company rapidly by relinquishing control or to retain power at the cost of limiting the venture’s potential.”
So simple. Would you rather have 78% of Manny’s corner deli or 0.006% of Google. When I frame it this way to my students, they always nod and agree. No question, so obvious.
But when that decision crossroad arrives, most of them will get it wrong. In the incubator startup world, there seems to be an inordinate focus on dilution and the infamous “cap table.”
Each decision builds on itself. The classic mantra is to only hire “A” players. OK, then structure your company for success. “A” players need a meaningful stake in the outcome. Rockstar CTOs do not grow on trees. Make it worth their effort.
That decision is followed closely by the conundrum of the “pre-money valuation” of your company. There is no formula, but it is always more painful to go backward. Where you start often determines where you end up.
Wasserman says that at some point, if the founders choose rich, they will need to relinquish “control.” The team will need to grow to include professional managers, executives and smart money.
The company is not your personal baby. If a founder feels that he is defined by the company, by his vision, and his alone, then there is very little chance to grow the pie by letting go.
On my second company, which was funded by a venture capitalist, I was the CEO, and I wrote out a letter of resignation on the day the funding closed and gave it to the managing partner. The date was left open, he could bring it out whenever he felt it was necessary.
In fact, after a couple of years, he took out the letter, and while I was not thrilled, a deal is a deal. A year later, the company got sold successfully to a large private company that was using our product. Not so terrible, I still had a lot of my “founder stock.”
Wasserman talks about “social capital,” which he defines as “gaining added resources, resources not presently possessed by ego.” Social capital expands the network effect. The expanded team creates new resources based on their own networks that you did not have access to.
Wasserman calls it out firmly. “Founders tend to believe they are uniquely qualified to lead their companies.” It is exactly this overconfidence that can blind founders to their own limitations.
It takes multiple skills to get to the promised land. The founder may be brilliant at code, but clueless at marketing. Or managing large organizations. I maxed out at one company with 48 employees. I have come to accept that I am OK at the startup game, but running a big company with a few hundred employees, not a chance.
Given all the incubators and startup programs that exist today for founders, I think perhaps a few sessions with Wasserman would be time well spent.
Wasserman explores five distinct areas. “Define your motivation early.” That one is baseline rich v. king.
Next, he says, “Understand the demands of growth.” Scaling requires sharing authority across the enterprise.
Third, he says “plan for leadership transitions.” The letter.
Fourth, “Align decisions with long term goals.” Selections of people and money need to be consistent.
Fifth, “Seek outside perspectives.” This one is gigantic. Find an adviser or a mentor. We all have blind spots.
In the end Wasserman says it is the founder’s dilemma, rich, king, “or a little bit of both.”
Rule No. 790: “A crown is merely a hat that lets the rain in.” — Frederick the Great
Senturia is a serial entrepreneur who invests in startups. Please email ideas to [email protected]
