Aidi — Co-founding (Part II)

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The first part of this article explained the benefits of co-founding, how and where to find a co-founder and pitfalls to avoid in any business partnership. The second part will explore how to choose designated titles for you and your associate and manage roles, responsibilities and equity split in the business. 

Often, disagreements over who should be CEO and who should do certain things in the company happen between founding team members. For startups, roles and decision-making dilemmas usually affect the business tremendously. Titles may seem insignificant at the beginning, but they really matter because they hold symbolic significance and often translate into real authority. When it comes to assigning titles and positions, Noam Wasserman suggests that the following be taken into consideration; each founder’s level of commitment, which founder(s) is the idea person- the individual who came up with the idea or developed the intellectual property on which the startup was founded and, each person’s human, social and financial capital. Founders with higher levels of commitment and who proposed the business idea are more likely to get the CEO title, vetoing everything and approving the other founders' visions. 

Additionally, title designations are also affected by the skills of the individual founders. A perfect example will be that of Steve Jobs and Steve Wozniak. Wozniak was the technical person while Jobs was more of the sales person, the marketing guru. Both complemented each other’s skills and so, assigning roles and responsibilities was easy. The most effective way of designating titles and roles for a company is to first clarify the need of the business. Note that tags and the roles behind the labels must be clearly outlined. 

When it comes to splitting roles and responsibilities amongst founders who have similar skills and capabilities, adopting overlapping day-to-day tasks is recommended. This way, both founders can pitch in when needed as it offers the flexibility early-stage startups need. Another important point to keep in mind is the need to describe responsibilities in detail. What will the CEO be concerned with on a daily, weekly or monthly basis? What do the operations of the business entail? What will the Chief Technology Officer do? Which departments will he oversee? Assigning clear responsibilities to each founder is key to working effectively and smoothly together. 

Assigning responsibilities might take a lot of time and energy, this time is better spent on this than on straightening out issues, conflicts or disagreements caused by poorly defined roles. The more effective founders are at defining their responsibilities, the more efficient the business will be. Ben Cohen and Jerry Greenfield of Ben and Jerry’s exemplify this. They clearly defined their roles right from the beginning of their business and this they say helped the business succeed. Ben was doing sales and marketing and Jerry, manufacturing. Each had complete say over their own departments/ area of expertise and this helped them get along, make good decisions and build a successful business. 

Another critical aspect in assigning titles, roles and responsibilities is coordination. Founders need to decide how they will coordinate their roles. It is important to state if they will report to each other, and in cases where they would not, how they will coordinate their efforts. Coordinating efforts may include how often they will meet to share what they have been working on, what their team is currently doing, their method of working together, their accountability and feedback structure, performance review etc. The essence of this is to ensure that both founders are still working toward the same goal, are functioning in their roles and carrying our required responsibilities and to figure out a way to help inefficient partners/ founders (this depends on the agreement and structure set at the beginning for handling scenarios like this). 

Moving on to the elephant in the room- equity distribution. This is far more complicated and dicey compared to assigning titles and responsibilities. For most venture-backed startups and founders, the large potential equity is the main financial motivation rather than the paycheck which is most times smaller in their cash-restrained startups than what they can earn somewhere else. 

Equity split can be done at the time of founding or later (not later than the closing of the first fundraising round) and there is no perfect time for splitting. Splitting at the time of founding can cause tension later in the business as the role of one founder can be underestimated (giving him a smaller percentage of the equity) and the other overestimated (giving him a larger percentage of the equity). It can however help in attracting key players who need equity incentives. Carrying out the split after several months or more can allow the founders to learn more about each other; getting to know whose skill, connection, finances etc will contribute more to the business, giving him/ her a larger percentage of equity. Additionally, putting off the split until later gives founders the opportunity to work and prove their expertise as opposed to becoming laidback when the split is done at inception. On the other hand, splitting when a company has raised significant funding can be tough and can make it hard for cofounders to come to a mutual agreement. 

There are various factors that founders consider when negotiating an equity split. Some of these factors are based on- individual contributions (how much the founder contributed to building the company.), Capital contributions (the amount each founder has put into the business) and opportunity cost (what the founders are sacrificing to build the startup). 

Equity splits can be unequal (60/40, 70/30, etc as the case may be), and equal (50/50). In several cases, founders with similar backgrounds, experience, resources and levels of commitment usually do equal equity splits. Whereas, founders with varying degrees of commitment, capital etc have unequal splits. In negotiating with your founder, this can be used in determining individual stakes. Every split can be formal or informal. A formal equity split involves committing the agreement to writing and an informal agreement may involve just verbal consent and perhaps, a handshake. Although it is obvious that a formal agreement is recommended, it does, however, have some downsides. For example, rigid agreements do not give room for adjustments and changes that may occur as the business expands and this may pose a problem for the startup in the future. Some of these changes may involve the departure of a partner, the death of one, a change in roles and responsibilities, etc. 

What should founders do when the equity split has been agreed upon and then, changes occur? A solution for this will be to adopt the dynamic equity split method instead of the static splits most use. The dynamic equity split allows for change and adjustments as situations arise and change. This type of equity split puts into consideration issues such as buyouts and vesting schedules (vesting can be based on a milestone or on a time frame). It also contains how the split will change in different worst-case scenarios and expected scenarios. One major advantage of the dynamic split is its ability to keep founders motivated to build the company’s values irrespective of change and shifting dynamics.