Noam Wasserman, an associate professor at Harvard Business School, based his book on his award-winning course, “Founders’ Dilemmas.”. A few take it to the extreme by refusing to back founders who aren’t motivated by money. After much soul-searching, he decided to take a risk, and he sold an equity stake to the venture firm. However, once they grasp that they’ll probably have to maximize one or the other, they will be in a position to figure out which is more important to them. The decisions you face along the way – when to launch, whom to bring on board, where to obtain financing and how to share equity – have short- and long-term ramifications. By contrast, two years later, for his next venture, the podcasting company Odeo, Williams quickly brought in Charles River Ventures to invest $4 million. The first major task in any new venture is the development of its product or service. They think investors should have no cause for complaint and should continue to back their leadership. Other investors, to reduce their risk, dole money out in stages, and each round alters the board’s composition, gradually threatening the entrepreneur’s control over the company. Similarly, at Wily Technology, a Silicon Valley enterprise software company, founder Lew Cirne gave up control of the board and the company in exchange for financial backing from Greylock Partners and other venture capital firms. Engaging – You’ll read or watch this all the way through the end. This book offers solutions. By contrast, founders who understand that they are motivated by control are more prone to making decisions that enable them to lead the business at the expense of increasing its value. Heads of not-for-profit organizations must make similar choices. For example, at one health care–focused internet venture based in California, the founder-CEO held a series of discussions with potential investors, which helped him uncover his own motivations. By the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies’ initial public offerings. There’s a great deal of truth to that view. Harvard Business School professor Noam Wasserman identifies the common “founder’s dilemmas” and details their short- and long-term consequences. They may also want to wait until late in their careers, after they have developed broader management skills, before setting up shop. One of my favorite examples comes from history. The Founder’s Dilemmas, by Noam Wasserman is a book of research and case studies conducted into starting up a company from the vantage point of an entrepreneur. My study of compensation in 528 new ventures set up between 1996 and 2002 showed that 51% of entrepreneurs made the same money as—or made less than—at least one person who reported to them. Drawing on a decade of research, Noam Wasserman reveals the common pitfalls founders face and how to avoid them. Another study of high-growth firms reported that, of the founder-CEOs who were replaced, around 25% left their companies while 50% remained on the board of directors for the next five years. Choosing money: A founder who gives up more equity to attract investors builds a more valuable company than one who parts with less—and ends up with a more valuable slice, too. Wasserman argues that people problems are responsible for a significant portion of startup failures, and that entrepreneurs tend to underestimate … Such founders will often bring in new CEOs themselves and be more likely to work with their boards to develop new, post-succession roles for themselves. On the other side of the coin are founders who bootstrap their ventures in order to remain in control. Visionary – You’ll get a glimpse of the future and what it might mean for you. Founders can act, sometimes unconsciously, as negative forces. Drawing on a decade of research, Noam Wasserman reveals the common pitfalls founders face and how to avoid them. Others invest in a start-up only when they’re confident the founder has the skills to lead it in the long term. Creating a business from scratch is difficult, even when your dreams and passions guide and motivate you. Founders who understand that they are motivated more by wealth than by control will themselves bring in new CEOs. “Since I’ve gotten us to the stage where the product is ready, that should tell them that I can lead this company” is a common refrain. Ideally, a board should keep the founder involved in some way, often as a board member, and use his or her relationships and knowledge to help the new CEO succeed. In fact, entrepreneurs make less, if you account for the higher risk. Bad decisions at the inception of a promising venture lay the foundations for its eventual ruin. As start-ups grow, entrepreneurs face a dilemma—one that many aren’t aware of, initially. He’s not the only one to have fought the inevitable; four out of five founder-CEOs I studied resisted the idea, too. "The Founder's Dilemmas fills an important gap in the entrepreneurship literature by providing an in-depth treatment of the people problems that confront all new business founders. Entrepreneurs who focus on wealth, such as Jim Triandiflou, who founded Ockham Technologies, can make the leap sooner because they won’t mind taking money from investors or depending on executives to manage their ventures. “Congrats, you’re a success! The dramatic broadening of the skills that the CEO needs at this stage stretches most founders’ abilities beyond their limits. However, a 2000 paper in the Journal of Political Economy and another two years later in the American Economic Review showed that entrepreneurs as a class make only as much money as they could have if they had been employees. Our rating helps you sort the titles on your reading list from adequate (5) to brilliant (10). The Founder's Dilemmas is the first book to examine the early decisions by entrepreneurs that can make or break a startup and its team. The path from founding to success is a long and winding one, with dilemma after dilemma forcing founders to make decision after decision, all with important—and sometimes surprising—short-term and long-term consequences. The book is both a biography of John Winthrop—one of the leading figures in the establishment of the Massachusetts Bay Colony—and a chronicle of the settling of New England. Founders who want to manage empires will not believe they are successes if they lose control, even if they end up rich. Then it usually takes two or three rounds of financing before outsiders acquire more than 50% of a venture’s equity. Founders who want to become wealthy should be open to pursuing ideas that require resources. Harvard Business Publishing is an affiliate of Harvard Business School. More specifically, he exposes the tacit tension that exists between creating wealth and maintaining control. Founders claimed that there was an 81% chance, on average, that they would succeed but only a 59% probability of success for other ventures like their own. Many entrepreneurs are overconfident about their prospects and naive about the problems they will face. At times, you may find yourself wishing for a bullet-point list. The Founder’s Dilemma harvard business review • february 2008 page 3 higher ﬁnancial gains but others, which founders often chose, conﬂicted with the desire for money. For instance, at Wily Technology, Lew Cirne agreed to become chief technology officer after giving up the CEO’s post; later he saw that not a single person reported to him. For founders, a “rich” choice isn’t necessarily better than a “king” choice, or vice versa; what matters is how well each decision fits with their reason for starting the company. Some boards and CEOs try to manage those risks by taking half-measures, relegating the founder to a cosmetic role, but that can backfire. This isn’t a quick read; it’s an in-depth, intelligent analysis based on 10 years of extensive research. Some venture capitalists implicitly use the trade-off between money and control to judge whether they should invest in founder-led companies. The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (The Kauffman Foundation Series on Innovation and Entrepreneurship) Analytical – You’ll understand the inner workings of the subject matter. Whether gradual or sudden, the transition is often stormy. As one investor stated, “You can replace an executive, but you can’t replace a founder.”. The angel investor’s offer would have left Triandiflou in control of the board: Joining him on it would be only his cofounder and the angel investor himself. The Puritan Dilemma: The Story of John Winthrop is a nonfiction account of the early colonization of America, written by acclaimed historian Edmund Morgan. The Founder’s Dilemmas – The Answer is “It depends!” The Founder’s Dilemmas is at the same time a fascinating and frustrating book. New research shows that it’s tough to do both. In such cases, investors allow founder-CEOs to lead their enterprises longer, since the founder will have to come back for more capital, but at some point outsiders will gain control of the board. The author’s studies indicate that a founder who gives up more equity to attract cofounders, new hires, and investors builds a more valuable company than one who parts with less equity. For the money and the chance to control their own companies, certainly. Their past decisions regarding cofounders, hires, and investors will usually tell them which they truly favor. The surprising thing is that trying to maximize one imperils achievement of the other. Conversely, founders who understand that their goal is to amass wealth will not view themselves as failures when they step down from the top job. Investors wield the most influence over entrepreneurs just before they invest in their companies, often using that moment to force founders to step down. For instance, in 2002, the founder-CEO of a Boston-based information technology venture wanted to raise $5 million in a first round of financing. The decisions you face along the way – when to launch, whom to bring on board, where to obtain financing and how to share equity – have short- and long-term ramifications. If he accepted the other offer,though, he would control just two of five seats on the board. Founders don’t let go easily, though. For beginners – You’ll find this to be a good primer if you’re a learner with little or no prior experience/knowledge. Comprehensive – You’ll find every aspect of the subject matter covered. But new research from Harvard Business School professor Wasserman shows that those goals are largely incompatible. Check out this great listen on Audible.com. Consider, for example, Ockham Technologies’ cofounder and CEO Jim Triandiflou, who realized in 2000 that he would have to attract investors to stay in business. However, successful CEO-cum-founders are a very rare breed. For instance, serial entrepreneur Evan Williams built Pyra Labs, the company that coined the term “blogger” and started the Blogger.com site, without the help of outside investors and eventually sold it to Google in 2003. He gave up board control, but in return he gained resources and expertise that helped increase Ockham’s value manifold. Triandiflou felt that Ockham would grow bigger if he roped in the venture capital firm rather than the angel investor. “How can I dispassionately evaluate my idea?”. In my study of succession in technology start-ups, I found that 37% of founder-CEOs left their companies when a professional CEO came in, 23% took a position below the CEO, and 40% moved into the chairman’s role. These moves increased Cirne’s unhappiness. Founders’ optimism and commitment can blind them to harsh realities, such as scarcity of resources or unrealistic timelines. Why do people start businesses? Diverging ideas about impact can—and decisions and take very different actions. Eloquent – You’ll enjoy a masterfully written or presented text. Most entrepreneurs want to make a lot of money and to run the show. management control long before their companies went public. The founder has to build a company capable of marketing and selling large volumes of the product and of providing customers with after-sales service. Background – You’ll get contextual knowledge as a frame for informed action or analysis. One factor affecting the founder’s choices is the perception of a venture’s potential. Overview – You’ll get a broad treatment of the subject matter, mentioning all its major aspects. Phases of core dilemmas The phases of core dilemmas: His successor also wanted Cirne to give up his position as board chairman. New ventures are usually labors of love for entrepreneurs, and they become emotionally attached to them, referring to the business as “my baby” and using similar parenting language without even noticing. If they choose the right investors, their financial gains will soar. Wasserman argues that people problems are responsible for a significant portion of startup failures, and that entrepreneurs tend to underestimate their potentially dangerous long-term effects. Asked why, Williams told the Wall Street Journal in October 2005: “We thought we had the opportunity to do something more substantial [with Odeo].” Having ceded control quickly in an effort to realize the substantial potential of the company, Williams has had a change of heart, buying back the company in 2006 and regaining his kingship. Early on, a hospital executive who felt he was himself more qualified to lead the organization mounted one takeover bid, and some years later, a board member made the other bid when the venture was beginning to attract notice. In a chapter in Creating Modern Capitalism, Peter Botticelli records Royce’s reaction: “From a personal point of view, I prefer to be absolute boss over my own department (even if it was extremely small) rather than to be associated with a much larger technical department over which I had only joint control.” Royce wanted control—not money. If they do, founders may even become accomplished enough to regain control. What’s more, the less similar the new CEO is to the founder—if the new CEO is 10 years older, for instance—the easier it is for the founder to accept the change. Many times, keeping the founder on board is easier said than done. Many founders operate by gut and intuition rather than by assessing every option with careful consideration. First published in 1958, The Puritan Dilemma has since … Founders’ attachment, overconfidence, and naïveté may be necessary to get new ventures up and running, but these emotions later create problems. Even these firms, though, have to replace as many as a quarter of the founder-CEOs in the companies they fund. Concrete Examples – You’ll get practical advice illustrated with examples of real-world applications or anecdotes. In 1917, Henry Royce was pushed to merge Rolls-Royce with Vickers, a large armaments manufacturer, in order to form a stronger British company. Drawing on a decade of research, Noam Wasserman reveals the common pitfalls founders face and how to avoid them. Founders seeking to remain in control (as John Gabbert of the furniture retailer Room & Board has done) would do well to restrict themselves to businesses where large amounts of capital aren’t required and where they already have the skills and contacts they need. “The Founder’s Dilemmas” Creating a business from scratch is difficult, even when your dreams and passions guide and motivate you. The Founder's Dilemmas is the first book to examine the early decisions by entrepreneurs that can make or break a startup and its team. Eye opening – You’ll be offered highly surprising insights. Niklas Goeke Business, Creativity, Entrepreneurship, Leadership, Management, Marketing, Productivity, Startups. Those desiring control should restrict themselves to businesses where they already have the skills and contacts they need or where large amounts of capital aren’t required. Inspiring – You’ll want to put into practice what you’ve read immediately. Let me explain why. This fundamental tension requires founders to make “rich” versus “king” trade-offs to maximize either their wealth or their control over the company. Don’t shed any tears for our founders. At the start, the enterprise is only an idea in the mind of its founder, who possesses all the insights about the opportunity; about the innovative product, service, or business model that will capitalize on that opportunity; and about who the potential customers are. The Founder’s Dilemmas examines the early decisions by entrepreneurs that can make or break a startup and its team. The founder’s moment of truth sometimes comes quickly. Format: Print | Pages: 8 ShareBar. New research shows that it's tough to do both. In HBS professor Noam Wasserman's second-year MBA course, Founders' Dilemmas, students study quandaries that virtually all entrepreneurs face when trying to realize the dream of launching a startup—from deciding when to start the company to learning how to make a graceful exit. ExhibitCaption Founders’ choices are straightforward: Do they want to be rich or king? 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