Xblog

[Note: This was going to cover a lot of different points, but I’ve decided to focus on the main one, and perhaps address the others at a later time.]

So, the fundamental premise of the essay is that startup founders don’t have bosses. This is the great deceit of the self-employment dream. I remember when I was in college, a successful entrepreneur visited the school to lecture us wet-behind-the-ears types, in hopes of imparting some of his wisdom from his successes and failures (“successful entrepreneur” just means you’ve succeeded at least once, and most “successful” entrepreneurs have more failures than successes). One of the first things he tackled, was the notion that by starting your own company, you get to be your own boss. Having participated in my own startup, I couldn’t agree with him more.

Who’s the boss of a startup founder?

Well, for starters, there are investors. Most investors want some control over their money, and they literally own a chunk of the company. VC’s and other seasoned investors, will also exert additional influence thanks to extensive shareholder rights that they tend to negotiate in to funding agreements. Of course, these days, you can supposedly start a company on a shoestring budget, and if you are lucky (strictly in the sense of having more “freedom”) you can either find a silent partner or self finance. Of course, your chances of success tend to be higher if you don’t go either route, but we’re talking about living your life to the fullest here.

Then there are lenders. A lot of software startups avoid lenders initially, but sooner or later, a lot of small companies come to involve lenders in their financing. The good thing about lenders is that they tend not to be as nosy as investors. They are however, more risk averse. If they start to think that they aren’t going to get paid, they can get squirrely and start talking about things like collateral and what are you going to do to improve your cash flow? Lenders can literally break a company when it is in trouble, so once you have their attention, they are your boss until you can pay them off (Steve Jobs underscored this when he wrote with palpable relief when Apple was debt free for the first time after his return to the company). Again though, if you don’t need money for your startup, and don’t stand to benefit from the extra cash flow, you can avoid this one too.

Then there are your board members. These will often include representatives for your investors, and sometimes even lenders depending on the terms of your debt, so there is often overlap between this group and the previous ones. If you provide your own funding, you get to choose who is on your board, so you might feel you are really their bosses, and to a certain degree you are right. However, they still have a fiduciary responsibility to you, the startup owner, to tell you, the startup officer (isn’t it great wearing many hats?), what to do. Indeed, you should probably consider firing them if they never do. Still, if you provide your own money and have no real interest in chasing down investment, you can have whatever push over board members you want.

Then there are your cofounders. These guys typically have a similar stake in your company as you, and they frequently are on the board, but they obviously have special status. In fact, if you have more than a couple of founders for your company, it is likely that collectively your cofounders own more of the company than you do. Of course, the shared adversity of a start up environment tends to bind you even closer to your cofounders, creating additional responsibilities. A common phenomenon are feelings of guilt about not working as hard as your other cofounders, which can often lead to an unspoken competition to see who will work hardest. More importantly though, it is really key to have all the founders of a company on the same page, so when even one founder raises a concern, you have to listen to them. Of course, if you found the company entirely by yourself, you can avoid these concerns too.

Then there are your employees. Your employees? Yup. You might think the term “employee” kind of implies that you are their boss, and you wouldn’t be entirely wrong. In practice, nothing is more important to the success of a startup than the initial choice of employees. Competition for talent is fierce, particularly in the valley, and you should assume that whenever the risk/reward equation for a given employee looks better elsewhere, they’ll start thinking about making a move. Furthermore, at a startup, you typically have to offer employees some level of equity in your company, so they also qualify as investors. Consequently, if they think you should do something, you need to listen, or your labour pool can’t grow beyond the founders. Of course, maybe that’s what you want, even if that lowers your chances of success. It is, after all, your company.

The one boss you can never escape is your customers. That’s right. The owners of a startup are, ultimately, looking to get customers to part with their money in exchange for some kind of product or service. Whatever terms your customers demand ought to be treated as divine commandments, and even if they just want or like something, you probably should listen. This is of course is true with a large company as well, but with a startup, customers exert significantly more leverage. Indeed, this is why customers often like smaller businesses: “they are more flexible and listen to my needs [because I’m some measurable chunk of their revenue and they have to listen to me]”. It’s not uncommon for potential customers to have more capital than the entire net worth of a startup. They know this, and they love to exploit it. Customers can actually be far more demanding than your typical manager at a large company, because ultimately they might not care whether your business succeeds or fails, so long as they get what they want (IBM and Walmart are famous for actually driving companies in to bankruptcy by making and/or changing outrageous demands of their suppliers, and then happily moving on to another company, leaving investors and lendors to pick up the pieces). A startup that doesn’t need customers isn’t a company: its hedge fund. ;-)

Now, you still might say, “yeah, but I still get to call the shots more when I run my own company,” and you might very well be right. I will concede that there are three aspects of being a founder that is different from working at a large company.

First, there is your own mindset. When people found their own companies, they feel a sense of propriety that causes them to try to exert control more: “it’s my company, I’ll set my own hours” or “I don’t care what they say, I know this is the right way to do it, and it is my company”. I’d argue this is mostly a failure of mindset. Large companies are rife with people who play with new technologies, take on high risk projects, set their own hours, etc. The trick is learning how to create those opportunities for yourself, and it is a trick that takes some time to learn how to do.

Second, the risk/reward equation is typically fundamentally different for founders. Unless you’ve handed over almost all your equity to VC’s and employees, as a founder you tend to have a huge stake in the company’s future; the kind of stake that allows people to retire after five years of work if they are lucky. You also typically are risking a significant chunk of capital and/or sweat equity. As an employee at a large company, one typically has some options that might at best double or triple your income for a year, but normally the “I don’t have to work any more” scenario doesn’t enter in to the equation. An employee also has weighty guaranteed income in the form of their salary. Now, startup founders can sometimes negotiate a nice salary with their investors, but smart investors (which frustratingly are the ones you want) will typically seek to keep founder salaries low in order to ensure founders have a similar risk/reward profile to their own. The employee’s compensation package can be a set of golden handcuffs that limits their flexibility, making them risk averse and lazy, and a founder’s compensation package is typically akin to a ticket at a state fair concession that encourages them to assert themselves and swing for the fences, but beyond the undeniable economics of the situation, that is really a matter of choice.

Finally, and I think this is the one that a lot of people, including Mr. Graham, tend to not fully appreciate: the potential rewards for conformity in a large company are much, much higher. Large companies are very much like big ships at sea: they may not be able to change directions as quickly as startups, but they can bring tremendous power to bear in whatever direction they choose to point. This tends to create tremendous pressures to conform. If you try to negotiate a unique benefits package for your team, people will look at you funny (and look for an explanation), because you can get way better cost/benefit by going with the corporate plan. Same goes for having different hours, dress codes, coding styles, technologies, etc. This often creates situations where what would be the wrong decision at a startup actually turns out to be the right decision at a larger company just for this reason. If you don’t like conforming though, it isn’t hard to find places/roles in a company where the value of conformity is substancially less.

When you look at all this, the you realize that the one difference that is hard to overcome is the risk/reward equation. Now, the being in a high risk/reward situation does tend to change how you live your life, but unless you are lucky, it is not necessarily a net positive one (as Kevin has noted); feral cats might be living the call of the wild, but the stress of their “natural” lifestyle limits their lifespan to a small fraction of domesticated cats. When appealing to evolutionary notions of how we are “meant to live”, it is important to keep in mind that often what was “meant” was for us to die (particularly if you’re a weak geek with poor hand-eye coordination ;-).