Should I Offer a Co-Founder CEO an Equal Equity Share?
As a former founder of several companies and a retired investment banker who has funded many startups, mid-sized, international, private, and public companies, I understand the complexities of this decision. The primary challenge lies in understanding the unique roles and responsibilities of both founders and CEO-level executives. Here, we explore the issues and provide a strategic framework to guide your decision-making process.
Founders vs. CEOs: Roles and Responsibilities
Founders and CEOs play significantly different roles in a startup's growth and success. While founders are the driving force behind the initial vision and product, CEOs are responsible for scaling the business, making strategic decisions, and leading a team. Founders often focus intensely on their area of expertise, such as engineering or specific product features, which can sometimes limit their ability to make broader, forward-thinking decisions.
The Founder's Narrow Focus vs. CEO's Broader Vision
Imagine sitting at a table with four people, each with various plates and dishes. Founders tend to focus intensely on one dish, which may not be the most beneficial choice for the entire table. Similarly, while founders are crucial in conceptualizing the company, their narrow focus can hinder the ability to adapt to market changes and take on a more strategic role. On the other hand, a CEO is responsible for overseeing the entire menu, making decisions that benefit all stakeholders.
Equity and Its Proportional Distribution
Equity is like the table at which the entire team eats. It is proportioned based on the contributions of each member. Founders have the control to allocate equity among themselves and other key contributors. However, the division should be based not only on initial contributions but also on future contributions and performance. A typical startup is often built through the collaboration of finance and management professionals who bring a forward-thinking vision and expertise. Their contributions should be recognized with a fair share of the company's success.
Balancing Founder Equity with CEO Compensation
While it is crucial to bring in a fresh perspective from an external CEO, a significant equity stake may not be necessary. A good starting point is to consider the average equity stake awarded to CEO-level executives in similar companies within the same sector. Resources such as Glassdoor can provide valuable insights into industry-wide equity and compensation practices. By examining case studies and market data, you can make a more informed decision about the equity structure for your startup.
Lessons from Past Failures
The success or failure of a startup cannot be attributed solely to the founder; the CEO plays a vital role. Case studies from major tech giants like Nokia, Wang Computer, Bowmar Company, and Blackberry remind us that even established companies can face challenges. The fall of Nokia, for instance, highlighted the importance of adapting to market changes and relying on a skilled leadership team.
Strategic Insights
My father’s advice, “You always bet on the jockey and not the horse,” is a poignant reminder to invest in the right leadership. While the company’s vision and product are important, the execution and strategic direction are ultimately what determine its success. By bringing in a CEO with the right skills and experience, you can ensure that your startup is better positioned for growth and success.
In conclusion, while it is important to offer a co-founder who is also the CEO an equity stake, it should be balanced with a strategic understanding of the roles and responsibilities of both parties. By carefully considering market data, learning from past failures, and focusing on the right leadership, you can create a robust and successful startup ecosystem.