When Scaling a Startup, Phased Equity Agreements are a Good Thing

The Question: We started our business five years ago and in spite of a rough start, it’s now doing really well. The problem is my co-founder, who is happy to keep the business small. If I’m honest, he probably doesn’t have the skills to manage a bigger team or to scale the business. We wouldn’t have this company without him, and he was invaluable during the hard times, but I don’t think he can take us to the next level. What should I do?

The Advice: Congratulations on making a successful company, which as you know from experience, is not easy.

I was lucky in that my cofounder at Jambok (now part of SAP Jam) and I had worked together for five years at Sun Microsystems before we started a company together. We had a similar vision for where we would go with the product and the company, and we exited in less than a year before taking on investors. Growing a business is a whole new challenge. I’ve advised a few startups on founder issues, and this one is quite common.

I’m unclear what your equity agreements are, but I am highly in favor of agreeing from the start to negotiate equity at each stage of the business. For example, the product development lead might have a big split while you are in the first phase of creating a product, but the sales lead might have a bigger split when it comes time for world dominance. Too many companies agree on a fixed split of the business early on, and realize they need more flexibility later. Agreeing from the start that different skills will be needed at different phases of the company’s growth makes it easier to have those discussions when the time comes.

Let’s assume though that you have agreed to a 50/50 split and don’t have investors with strong opinions on this as well. There is no way around this but to have a heart-to-heart discussion. When you were starting up the company, did you have any shared dreams of what the company could become? I would start the conversation focused on acknowledging all you have come through together, and then asking an open-ended question such as, “Knowing all we know now, where do you think we can take this business?”

You might be surprised to see he shares a vision for where it could go, but worries as well whether the company has the skills it needs to get there. Hopefully you will get an opening to introduce the idea of bringing in skills to help the company grow. Over time, as he is comfortable with new people with skills to scale in leadership roles, you can broach what roles he loves the most. Many founders move to support roles as a company grows. After all, they always get to hold on to the founder title. A great article on this subject is “The Founder’s Dilemma,” by Noam Wasserman in Harvard Business Review. The dilemma is whether a founder chooses control or chooses money, as it is usually an either/or choice.

Of course it’s tricky business to bring in senior level people. Rarely does it work to bring in someone from a career position in a large company to a startup, unless they’ve had startup experience as well. What you need is someone who has helped a company scale, and knows all the systems, structures, and processes needed that will last as you grow. Someone who has only seen what it looks like once a company has scaled won’t understand the pains of getting there. Picking the right people for your leadership roles is important so that your cofounder can begin to trust that scaling the business will work and he can begin to relinquish some control. Of course you need to be open to that same prospect, as all founders must do if they love their company.

The Small Business CoachKarie Willyerd_SBC1

This week’s Small Business Coach is Karie Willyerd, Workplace Futurist at SuccessFactors, an SAP company. Prior to that she was the cofounder and CEO of Jambok, the industry’s first video-based informal social learning software platform, which was acquired by SuccessFactors in March, 2011. Her new book, Stretch: How to Future-Proof Yourself for Tomorrow’s Workplace will be out on September 28th. Follow Karie @angler.

Today’s question on The Small Business Coach is simulated based on a common business dilemma. If you have a question about how to run your small business better, smarter, and faster – send it in to The Small Business Coach using the form below or email it to newsroom@sap.com. Be sure to follow SAP’s latest news and events for small business on Facebook and Twitter @SAP4SmallBiz.

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