By Sabah Al Binali
The idea of a fearless business leader is entirely inaccurate
In my different roles as an investor, a board director and an advisory board member to various start-ups, I have occasionally found myself in what I call the “psychiatrist” advisor role. This isn’t a formal role and it took me some time to understand it.
People, and in particular the strong personalities of entrepreneurs, fear showing vulnerability. This is a normal human trait. Showing vulnerability can be mistaken for showing fear or indecisiveness, a trait that is not consistent in people’s minds with the idea of an entrepreneur as a fearless leader. This latter idea is of course nonsense; fear is a natural protective emotion without which far too much risk is taken.
The psychiatrist advisor is basically the person that an entrepreneur feels comfortable opening up to, showing their vulnerability by speaking about their fears and what they don’t understand. This is different than a mentor role, although there is an overlap. A mentor is supposed to help people figure things out on their own, almost like a therapist. A psychiatric advisor does that, but also acts as a support, providing not only business advice but personal advice as well.
Because such issues are delicate they are rarely discussed in public. I think it is time to change that by providing insights without exposing people.
Many start-ups have more than one founder. Since the business idea and reality changes over time, so too, do the roles of each founder. This creates continuous potential points of friction. A simple example is, which founder becomes CEO? Quite often the answer is to create co-CEO positions, a recipe for disaster. An overall solution might be to agree everything from the start, but that is cumbersome, is not how creativity works, and the plan will change weekly.
In my experience, the most valuable approach to handling this challenge is one that I borrowed from best practice family business governance. The central idea is to recognise that there are multiple headline roles and to include independent third parties. In family businesses these would be a shareholder, a family member, a board director, and/or employee.
“The psychiatrist advisor is basically the person that an entrepreneur feels comfortable opening up to”
For start-ups, one possible breakdown is a concept founder, a business developer, a promoter, a financial investor, a board director or executive management.
Too often, someone involved in the concept stage feels that they are entitled to be part of all the other roles. This is not necessarily true but rarely faced head on. Or a promoter, who helps get anchor investors or anchor clients, feels that he is now part of the executive management. Again, rarely true. I have found that a good solution is to settle on roles quickly.
Creating a strategic advisory board and a business development board helps tremendously. Furthermore, splitting the authorities via a written authorities matrix can keep people feeling happy that they have control even if they don’t have the title. I have often advised a co-CEO position to be split into CEO and COO, but the authorities matrix gives the two positions equal power. This is not tenable in the long run, but a great stepping stone.
Just as sensitive as a job title is of course compensation, in particular sweat equity. In this section I will focus on the initial portioning of equity between founders.
When the time comes to incorporate a start-up there usually has been an initial idea and, hopefully, a business plan.
What I usually see next is that the shares of the company are divvied out in a socialist, politically correct manner, i.e. everyone gets about the same amount. That’s simply ridiculous, not least because it is socialist.
An initial idea is worth nothing. Anyone can have an initial idea. A business plan of the quality that a founder can put together can usually be commissioned for less than $20,000. Yet the arguments on equity are so divisive that you’d think it was for $2bn. And that’s the problem. In the minds of founders they are arguing over future value, not current value. From my simple argument, the current value of an initial idea, a business plan and a newly incorporated company is worth no more than $20,000.
The second problem is that even if you value the company based on a DCF (discounted cash flow) in your business plan and get a value of, say, $5m, why would anyone think that this whole amount should be divvied up? At most, $20,000 worth of shares should be divvied up. What do you do with the rest? You set deliverables, value these deliverables, and set aside shares against these deliverables.
Simply put, people, including founders and entrepreneurs, should be paid on deliverables. Raising $500,000 is a deliverable, with a value. Developing a well-defined iPhone app is a deliverable and has a value. Signing up clients who generate $200,000 per annum is a deliverable and has value.
This won’t remove all of the friction but at least it creates a foundation for discussions.
And by the way, SAFE (simple agreement for future equity) contracts are a terrible idea as it incentivises angel round investors to get a lower company valuation. Risk isn’t managed, it is simply delayed.
It is extremely hard to terminate someone’s employment. Separating from a co-founder is so much harder, akin to an actual divorce, because there are material financial consequences. Now, you can try and be unfair to your partner(s), but you better be lucky enough to be successful in your first start-up, otherwise you will find it much harder to find people to partner with or back you up.
I have not found an easy way to handle this. But I will say that not dealing with the matter quickly and explicitly will result in a nightmare.
The best scenario is if the start-up already has a board with independent directors to help mediate these issues. If not, then the financial investors are a second choice, although they will not be happy at being pulled into company politics. Other choices include involving one or a small number of independent people who all stakeholders trust.
Whatever you do, don’t stay in a corporate marriage in which you are unhappy. The emotional abuse is no different than a real marriage.
I’ve said this before: I am convinced that Americans are so successful commercially because they don’t feel shame, just guilt. If something goes wrong they think something along the lines of “Right, I messed up, lesson learnt, how do I move forward?” Pretty much the rest of the world thinks “I messed up, what’s wrong with me, what am I going to say to people, and what are they going to think of me?”
If you’re an entrepreneur, try to find someone that you can open up to.