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Today I want to talk about the biggest reason startups fail. What is the reason? Run out of money? Bad business model? Good guesses, but wrong. In my experience, the biggest reason startups fail is that the founders fight with each other and break up 创始人分家.

My first startup was not EachNet. It was a medical IT company in the U.S. I was 22 years old, and my boss at BCG (Boston Consulting Group 波士顿资讯集团) started the company with a friend of his, and they asked me to join them. It was a big business: they were raising a billion dollars to buy several companies, combine them, run them for a few years, and then take it public. It was and still is a great business. But it failed. The reason? My boss and his friend had a fight.

Of course, founders always have fights: if two founders always agree on everything, that is not good thing. However, in this case, the fight is about who should have 51% of the equity, and who should have 49%. My boss was saying:I am contributing so much more to the company; of course I should have 51%. His friend was saying: we decided a year ago that we are “equal” partners; how can you go back on word? They argued for several months, and at the end, they broke up, the business failed, and I went to Harvard Business School. After graduation, I started EachNet. The rest, as they say, is history.

Out of the five early-stage companies I got to know well in the past two years, in 4 out of the 5 companies, the founders fought, and the business almost failed. In 3 out of the 4 fights, the fight was about equity. In one case, the business actually failed. In the other two cases, I was able to help the founders resole the argument and the business was able to survive.

I find the founders make two common mistakes:
1. They did not divide up the equity clearly, in writing, on day one. 他们没有在第一天就把股份的分配谈清楚,并写下来。
2. They dd not put in a vesting schedule of founder equity. 他们没有想到,如果一个创始人中途走的话,他的股份怎么办。

My old BCG boss made the first mistake. Many times, the founders do not want to have the difficult discussion about who should have what %. It can hurt feelings. They either avoid the discussion completely, or talk about it in general terms, such as “we are equal partners,” or delay the discussion, saying “I am sure we will work it out later since we are both nice and reasonable people.” “我们两个还有什么不好说的,以后再谈吧。” If it is 3 or more founders, the discussion is even more difficult, so people tend to delay the discussion even more.

I guess we Chinese people are less open than Americans in general, so people are even more unwilling to have this discussion explicitly. The problem is, the discussion becomes harder, not easier, later. 问题是,股份的分配等得越久,越难谈。

It is human nature to think highly of themselves. If you ask everyone in a class whether they did better or worse than average in an exam, I am sure much more than 50% of the people will say they did better – which is impossible!. In a company, it is very natural for a person to think “without me, this project/result will not happen, so I should get most of the credit for this success!” Very few people realize “this project/result will not happen WITHOUT OTHER PEOPLE too, so I only deserve some of the credit.” Between founders, as time goes along, each person will think he contributed more. 每个人都会觉得自己是一个项目成功的必不可缺的功臣,想不到这个项目可能有好多其他的也可能是必不可缺的功臣。So as time passes, most people will gather more and more evidence why he contributes more, making the eventual discussion about founder equity more and more difficult.

Waiting makes things worse. Have the difficult discussion about equity as early as possible. I think the ideal time is AFTER founders agree on working together, but BEFORE they actually start working together.

But agree on a % is NOT enough. What if a founder contributes less than the agreement? 如果一个创始人拿了很多股份,但后来做事不力?What if a founder wants to leave the company or the company wants to fire a founder? What happens to his equity?

The vesting schedule becomes useful. I will talk about it in my next blog.

4条评论 leave one →
  1. Unknown permalink
    2008/09/08 06:44

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  2. Unknown permalink
    2008/09/08 06:45

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  3. Unknown permalink
    2008/09/22 06:58

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