I’ve just finished reading Founders Dilemmas by Noam Wasserman the central point of which is that for entrepreneurs there is a trade off between wealth and control. In my experience, few founders see it this way.
“But wait!” I hear you say, “I can have both wealth and control, like Larry Ellison or Mark Zuckerberg”.
Theoretically it’s possible, but Wasserman conducted a study of 10,000 startups over ten years and concluded that:
Although the desires for wealth and control seem complementary, as entrepreneurial motivations they turn out to exist in perpetual tension with one another … Even a seemingly reasonable strategy for achieving high levels of both wealth and power, rather maximising one or the other, is actually more likely to put them both out of reach.
460 of the startups in the study were particularly closely analysed and within this group Wasserman found that the equity stakes of founders who remained CEO and kept control of their board were only 52% as valuable as those of founders who had given up the CEO position and control of the board.
The reason is that many of the decisions which maximise wealth nibble away at a founder’s control. The most obvious of these is raising venture capital which typically involves giving up a substantial chunk of equity, granting certain shareholders extra control rights, bringing outsiders onto the board (who may one day seek to bring in a new CEO), and making a difficult to reverse commitment to a high growth strategy and eventual exit. Hiring great people, either as co-founders or execs will also maximise wealth creation but come at the expense of control as such people demand a say in how the business is run and generous share or option packages.
If you are an entrepreneur beware the cognitive bias that makes you think you are Superman, that you can be an outlier like Zuck or Ellison. It’s great to have that self belief, it’s what enables you to move mountains, but it is irrational and you want to make sure you use it in the right way and don’t let it lead you down the wrong path.
Founders Dilemmas is well worth a reading if you are part of the startup ecosystem. It’s a dry read, but it systematically explores the decisions that founders make and their impact on wealth, control, and other success criteria, helping you to better understand the situation you are in and the things you should think through.