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The Founder's Dilemma
Why do people start businesses? For the money and a chance to control their own companies, yes. New research shows those goals are largely incompatible.
Harvard Business Review
Apr 4, 2023
As the old Chinese proverb says, “Decide on three things at the start: the rules of the game, the stakes, and the quitting time.”
According to Harvard Business School professor Noam Wasserman's article about his research, 212 American start-ups in the late 1990s and early 2000s, he discovered that most founders surrendered management control well before their companies went public. When founders gave up more equity to bring on cofounders, additional headcount, and investors they will actually grow a more valuable company than founders who chose to part with less. Often, the higher returns result in replacing the founder with a professional CEO resulting in swapping either their wealth or control over the company.
Choosing money: A founder who gives up more equity to attract investors builds a more valuable company than one who parts with less—and ends up with a more valuable slice, too.
Deciding between money and power allows entrepreneurs to understand what success means to them. Founders who want to manage empires will not believe they are successes if they lose control. On the other hand, founders who are aware that their goal is to grow wealth will not view themselves as failures when they step down.
The choices? To be rich or to be king? The “rich” option might lead the company more valuable but sideline the founder by taking away the CEO position and control over major decisions. The “king” option allows the founder to retain control of decision-making by staying CEO and maintaining control over the board—but often only by building a less valuable company.
A “rich” choice isn’t necessarily better than a “king” choice, or vice versa; what it comes down to is how well each decision the founder makes fits with their reason for starting the company.
Dr. 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.