Rich vs King – entrepreneurs should choose between wealth and control

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.

  • http://twitter.com/a_alshalabi Abdullah Alshalabi

    I’m reading the book as well, but I’m still half way. I now understand all of the mistakes that we did in our first startup that made our co-founding team to fall apart. The biggest take away for me was the danger of having an overlapping skills and roles in a co-founding team. This will drag the team in endless discussions, let the startup moves very slowly and create continues tension between the co-founders. I learned my lesson the hard way, I wish I’ve read the book 3 years ago!!

  • http://www.theequitykicker.com brisbourne

    Interesting point. Most teams have worked out their roles by the time they come to see us, although we do get some pitches where the team talk over each other and don’t look like they’ve worked it out. That always puts us off.

  • http://wildirishguy.com Damon Oldcorn

    What is irrational is entrepreneurs thinking that tech start ups are a route to wealth, as you know only too well the majority don’t make any money. If that is the key objective of your life there are many more lucrative careers available in the professions. There is no such thing as control by the way it is an illusion, we all tread a very fine line, it is just most don’t realise it. (which is good as most couldn’t cope with the thought)

  • http://twitter.com/raitens Rait Ojasaar

    Awesome and important book. Reminded me of an old African proverb – if you want to fast, go alone. If you want to go far, go together.

    Although not optimal, overlapping skills and roles are common in startups. Especially the ones founded by the less experienced entrepreneurs. There are couple of reasons for that.

    Lets say you’ve got an idea. More often that not it is built on series of guesses, some educated, some pure fantasies and “what if”-s. Most think you’re crazy to leave your paid job to pursue unproven idea. Most think it will never work and you’ll just get burnt. Who do you look for then? Someone as crazy, someone with similar mindset, someone who is willing to believe. With the whole world (seemingly) opposing your untested idea you opt for the lowest barrier of entry and pick the path of least resistance. Additionally, quite often the idea itself prevents young entrepreneurs from seeing value in skill & role diversity. Instead, they place too much value on the idea and hope it will be the driving force for success…just as long as they’ve managed to pick up a few like-minded believers to accompany the journey. And we all know where majority of these journeys end …

    Although there is difference between knowing the path and walking the path, hopefully Wasserman’s book will help entrepreneurs to better understand the dynamics between the control and wealth. Perhaps some even get it right the first time.

    “I shall be telling this with a sighSomewhere ages and ages hence:
    Two roads diverged in a wood, and I,
    I took the one less traveled by,
    And that has made all the difference.”
    -Rober Frost

  • http://www.theequitykicker.com brisbourne

    Thanks Rait. ‘Choosing likeminded founders is the often the path of least resistance’ – great insight. The path of least resistance is rarely the right one…
    Also spot on that an over-belief in the idea makes other choices seem less important.

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