The Founder’s Dilemma

Most entrepreneurs want to make a lot of money and to run the show. New research shows that it’s tough to do both. If you don’t figure out which matters more to you, you could end up being neither rich nor king.

by

Noam Wasserman

by

Noam Wasserman

From the Magazine (February 2008)

Summary.

Reprint: R0802G

Why do people start businesses? For the money and the chance to control their own companies, certainly. But new research from Harvard Business School professor Wasserman shows that those goals are largely incompatible.

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. More often than not, however, those superior returns come from replacing the founder with a professional CEO more experienced with the needs of a growing company. This fundamental tension requires founders to make “rich” versus “king” trade-offs to maximize either their wealth or their control over the company.

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. They may also want to wait until late in their careers, after they have developed broader management skills, before setting up shop. 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. 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.

Choosing between money and power allows entrepreneurs to come to grips with what success means to them. Founders who want to manage empires will not believe they are successes if they lose control, even if they end up rich. 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.

The Idea in Brief

Most entrepreneurs want to make pots of money and run the show. But Wasserman reveals that it’s tough to do both. If you don’t figure out which matters most to you, you could end up being neither rich nor in control.

Consider: To make a lot of money from a new venture, you need financial resources to capitalize on the opportunities before you. That means attracting investors—which requires relinquishing control as you give away equity and as investors alter your board’s membership. To remain in charge of your business, you have to keep more equity. But that means fewer financial resources to fuel your venture.

So, you must choose between money and power. Begin by articulating your primary motivation for starting a business. Then understand the trade-offs associated with that goal. As your venture unfolds, you’ll make choices that support—rather than jeopardize—your dreams.

The Idea in Practice

At every step in their venture’s life, entrepreneurs face a choice between making money and controlling their businesses. And each choice comes with a trade-off.

If You Want to Get Rich

Startup founders who give up more equity to attract cofounders, key executives, and investors build more valuable companies than those who part with less equity. And the founder ends up with a more valuable slice of the pie.

On the other hand, to attract investors and executives, you have to cede control of most decision making. And once you’re no longer in control, your job as CEO is at risk. That’s because:

You need broader skills—such as creating formal processes and developing specialized roles—to continue building your company than you did to start it. This stretches most founders’ abilities beyond their limits, and investors may force you to step down.

Investors dole out money in stages. At each stage, they add their own people to your board, gradually threatening your control.

If you’re motivated more by wealth than power:

Recognize when the top job has stretched beyond your capabilities, and hire a new CEO yourself.

Work with your board to develop post-succession roles for yourself.

Be open to pursuing ideas that require external financing.

If You Want to Run the Company

To retain control of your new business, you may need to bootstrap the venture—using your own capital instead of taking money from investors. You’ll have less financial fuel to increase your company’s value. But you’ll be able to continue running the company yourself.

If you’re more motivated by power than wealth:

Restrict yourself to businesses where you already have the skills and contacts you need.

Focus on a business in which large amounts of capital aren’t required to get your venture off the ground and flying.

Consider waiting until late in your career before setting up shop for a new venture. That will give you time to develop the broader skills you’ll need as your business grows and to accumulate some savings for bootstrapping.

Every would-be entrepreneur wants to be a Bill Gates, a Phil Knight, or an Anita Roddick, each of whom founded a large company and led it for many years. However, successful CEO-cum-founders are a very rare breed. When I analyzed 212 American start-ups that sprang up in the late 1990s and early 2000s, I discovered that most founders surrendered

A version of this article appeared in the February 2008 issue of Harvard Business Review.

NW

Noam Wasserman, a longtime Harvard Business School professor, is now dean of the Sy Syms School of Business at Yeshiva University in New York City. A former venture capitalist and entrepreneur, he is the author of the bestsellers The Founder’s Dilemmas and Life Is a Startup.

The Founder’s Dilemma

The Idea in Brief

If You Want to Get Rich

If You Want to Run the Company

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