How do you decide who to select as a cofounder of a company? What are the benefits and drawbacks of venture capital funding?
As an entrepreneur, you’ll need to consider the tradeoffs that come with each decision you make—and how each decision, in turn, creates new decisions that you’ll have to consider. In The Founder’s Dilemmas, Noam Wasserman explores the critical choices entrepreneurs face, including the fundamental tradeoff between wealth creation and maintaining control.
Read more in our overview of The Founder’s Dilemmas.
Overview of The Founder’s Dilemmas by Noam Wasserman
In The Founder’s Dilemmas, Noam Wasserman analyzes the choices and tradeoffs founders face when they begin their ventures. He notes that, as an entrepreneur, you need to consider the significant tradeoffs that come with each decision you make—and how each decision, in turn, creates a new set of decisions that you need to make. As a founder, you’ll need to navigate these choices and tradeoffs based on your preferences and the ultimate goal of your business.
Wasserman is the dean of Yeshiva University’s business school and has previously served as a business professor at Harvard and the University of Southern California, where he directed the Founder Central Initiative. This overview will direct you through Wasserman’s analysis, exploring:
- The inherent tradeoff between becoming wealthy and maintaining autonomy over your company
- Who to select as a cofounder and the opportunities and risks associated with different founding partners and team structures
- How to divide the equity in your company and the risks and benefits of different equity-splitting strategies
- How founders staff their companies and the pluses and minuses of different hiring strategies and compensation structures
- The opportunities and perils of venture capital (VC) funding for startup founders
Part 1: The Rule Versus Riches Dilemma
In this section, we’ll explore Wasserman’s contention that founders’ motivations typically fall into one of two categories: maintaining control over their company versus becoming wealthy. We’ll call this tradeoff the “rule versus riches dilemma.” He notes that most entrepreneurs achieve one or the other, but rarely both, because each path requires different strategic decisions that often conflict with each other.
Wasserman writes that control-oriented founders typically pursue a lone-wolf strategy of founding a company on their own, which lets them retain unchallenged decision-making power. Wealth-driven founders, meanwhile, are more likely to run with a pack—they tap the talent and resources of cofounders and investors to get on the path to revenue quickly.
The Path of the Lone Wolf
Wasserman writes that choosing to be a lone wolf entrepreneur comes with advantages and inherent risks. For founders seeking maximum control (rule), the lone wolf path can be particularly attractive. Without cofounders, you maintain complete decision-making authority and avoid diluting your leadership position, allowing you to remain firmly in the driver’s seat. However, this control-maximizing approach often comes at the expense of potential wealth creation. As a lone wolf, you may end up preserving autonomy at the cost of the additional resources, skills, and connections that cofounders might bring to accelerate growth and value creation.
The Risks of Going It Alone
However, Wasserman notes that going it alone as a solo founder comes with significant challenges. Perhaps most critically, solo founders face inherent knowledge gaps—areas where they lack expertise or experience that would be covered if they had partners with complementary skills.
For example, a technical founder might struggle with coming up with a marketing strategy, while a business-focused entrepreneur might need help with product development. If you’re the only decision-maker, these knowledge gaps can lead to poor choices across critical areas of the business. You might misread market signals, make suboptimal hiring decisions, or pursue flawed strategies without anyone to challenge your thinking or offer alternative perspectives.
Another challenge you face as a solo entrepreneur is that you bear the entire burden of venture failure with no cofounders to share financial responsibilities, workload, or emotional strain. The mental and emotional toll of being the only person accountable for your company’s success or failure shouldn’t be underestimated. Without cofounders to provide support during inevitable setbacks, solo founders often experience isolation precisely when they most need encouragement.
Running with the Pack
On the flip side, writes Wasserman, founders who prioritize “riches” over “rule” often choose to be pack dogs, embracing teamwork and shared responsibilities through cofounding arrangements. Cofounding gives founders a greater chance of financial success when they lack the necessary networks, experience, or capital to lead a company alone. This approach is especially valuable in complex, regulated, and mature markets with high barriers to entry, such as the tech and science sectors. Cofounders can fill each other’s knowledge gaps and distribute tasks based on everyone’s strengths, which creates opportunities for greater specialization and efficiency—ultimately boosting the company’s bottom line.
However, as Wasserman notes, the cofounding route requires that founders sacrifice some degree of personal authority. It also introduces an entirely new set of dilemmas around equity splits, decision-making authority, and role definition—each with its own rule versus riches implications. We’ll explore these cofounding dilemmas and their potential impact on both wealth and control outcomes in the next part of this guide.
Part 2: Find Your Cofounders
Wasserman doesn’t recommend one path over another—both solo entrepreneurship and cofounding with a team have pros and cons to weigh as you decide how to proceed. But, he writes, you should be aware that cofounding introduces a cascade of additional decisions and potential challenges that solo founders don’t have to navigate. In this section, we’ll explore three of these considerations: forming a homogeneous team versus building a diverse one; cofounding with friends and family or with existing professional contacts; and managing the tradeoffs that come with building an effective team structure.
Overcoming Homogeneity for a More Diverse Skill Set
Wasserman writes that it’s common for founding teams to be homogenous in terms of ethnicity, gender, and experience. This is because founders believe it’ll be easier to establish rapport and manage potential conflicts among people from similar backgrounds. However, Wasserman advises against this natural gravitation toward sameness. He argues that an overly homogeneous team can lead to blind spots due to a lack of diversity in skills and perspectives. A diverse founding team, on the other hand, provides the platform for robust decision-making processes, more creativity, and potentially greater resilience in the face of startup challenges.
Who to Choose As Your Cofounders
Wasserman recommends looking for your cofounders from your network of pre-existing professional relationships. He says this is beneficial because you already understand each other’s work styles and capabilities, which can streamline the early stages of collaboration. You’ll also avoid the tricky personal ties we covered in the last section—making it less complicated to part ways if the business demands it.
Avoid Cofounding with Friends and Family
Wasserman cautions against starting a venture with friends, family, or romantic partners. Founders with deep personal connections may find it challenging to deliver hard truths to one another—leading to nepotism or gaps in accountability. Moreover, he warns, conflicts that emerge from business relationships can sometimes take on personal undertones. If you do cofound with family or friends, Wasserman advises compartmentalizing those relationships—keeping friends and family in separate departments or under different reporting lines.
Build Your Team Structure
In addition to choosing the right cofounders for your business, it’s critical that you establish the right team structure with your cofounders. Wasserman identifies three dilemmas founders face in establishing that structure: assigning titles, dividing labor, and delegating decision-making authority.
Assigning Titles
Wasserman notes that founders often assume senior roles in the company—with the person who conceived the original idea assuming the title of chief executive officer (CEO). While this might seem appropriate at the outset, it could become less conducive to success as the company grows and matures due to the varied skill requirements of different growth stages.
Initially, writes Wasserman, the start-up phase often demands vision, risk-taking, and out-of-the-box thinking—all attributes commonly associated with founders. Therefore, it might be fitting for the ideas-driven founder to lead as CEO during this phase. However, as the company grows and establishes itself, different leadership competencies may become paramount. For example, the company might require more focus on operational efficiency, process management, human resources, financial control, and stable growth—skills that a founder-CEO may not possess or excel at. That’s when it may be time for another cofounder with the requisite skills to step up as CEO, or the company may bring in an outside hire.
Dividing Labor
Wasserman points out another common dilemma you’ll face on the cofounding path: how to divide labor among founders without creating rigid silos. Assigning clear roles is appealing—for example, you might make one founder the CEO responsible for strategic decisions, another the chief financial officer (CFO) handling financial matters, and a third the chief operating officer (COO) overseeing daily operations. This enhances each founder’s focus and accountability while minimizing overlap and confusion, ensuring that each area of the business has a dedicated leader driving progress and making informed decisions based on their expertise.
However, Wasserman warns about the potential pitfall of siloing—a situation where company leaders overly compartmentalize their responsibilities and focus solely on their designated area without thinking of the impact on the company as a whole. Silos can make founders lose touch with the broader goals of the company. For example, if the chief technology officer (CTO) is too focused on perfecting a product’s features without consulting the marketing team, they might miss aligning these features with market needs. This lack of collaboration often results in limited communication across departments, reducing the company’s big-picture thinking while slowing decision-making and problem-solving.
Establishing Decision-Making Authority
Wasserman emphasizes that it’s not only vital for startups to determine who will be making which decisions—but also how those decisions will be made. He notes another tradeoff that founders have to face: committee-style, consensus-driven leadership or a top-down structure with a strong CEO.
Initially, he writes, startups often adopt a committee-style approach where decisions are made collectively with everyone having a voice. This consensus-driven method can foster a sense of camaraderie and equal say among the founder team, encouraging diverse thoughts and ideas. It also has the potential to reduce conflicts, as no single person holds all the decision-making power. However, consensus-driven decision-making can also be time-consuming and may delay important decisions in instances where a unified agreement is hard to achieve.
While startups often start with the consensus-driven approach, as they grow, they might transition to a top-down decision-making structure. In this model, a strong CEO or leader often carries the responsibility of making final decisions. This approach can lead to swift decisions, maintain momentum, and ensure the organization’s forward movement in line with the CEO’s vision.
Part 3: Dividing the Gains
In the last section, we explored how to build an effective founding team and divide power and responsibility among founders. Now, we’ll move on to an equally crucial dilemma—how and when to divide equity among the founders.
Equity Split Strategies
According to Wasserman, founders’ decisions on splitting equity should be based on the value each person brings to the venture through their skills, ideas, contributions, and financial capital. He observes that idea originators often feel entitled to larger equity stakes—but they typically need partners with technical or operational expertise to transform concepts into viable businesses. These “implementers” can leverage their essential role to negotiate for significant equity.
Similarly, founders who take on the CEO position or contribute more financially to the startup usually secure larger portions of ownership. Wasserman strongly recommends that equity distribution should be determined by the objective value each founder contributes, rather than by emotional factors. He cautions against allowing personal relationships between founders to cloud judgment—arguing that even close friends or family members should receive equity proportionate to their actual contributions to avoid future conflicts and resentment.
Timing the Equity Split
When should you split the equity? The timing presents another dilemma because, as Wasserman writes, there are advantages and drawbacks both to splitting the equity early as well as to doing it later in the company’s life cycle.
The Advantages of an Early Equity Split
According to Wasserman, early equity splits—when the company’s valuation is still low—are typically less complicated and contentious. That’s because at this stage, the founders’ reputations, financial risks, and commitment to the venture are more or less comparable, making it fairly agreeable to allocate equity.
The Drawbacks of an Early Equity Split
According to Wasserman, splitting equity too early after company formation can mean that founders lack crucial information about each member’s actual value, commitment, and contributions, leading to potentially unfair allocations. On top of that, people’s roles within the company change over time, and an early equity split might not accurately capture the evolution of responsibilities as founders leave the business or reduce their involvement.
The Advantages of a Later Equity Split
Wasserman highlights that delaying some equity allocation decisions can create opportunities for employees who join after the company’s initial founding. Rather than distributing all equity among the original founders, reserving a portion for future team members allows later hires to receive stakes in the company that can significantly appreciate in value. These equity reserves are called option pools.
As the company grows and attracts investment capital, even relatively small equity percentages granted to these employees can become quite valuable. This approach benefits both the organization (by creating powerful incentives to attract talent) and the employees themselves (who may join a company that already has traction and therefore face less risk than the original founders did).
The Drawbacks of a Later Equity Split
However, Wasserman warns, waiting too long also has risks. He says that if founders stall the equity division until the business has grown, the negotiations can become more complex. As the company’s value increases, so does each equity share’s worth. This makes the division more critical because the stakes are higher. It may lead to disagreements among co-founders or partners over their contributions’ perceived value and the corresponding equity they deem fair. Ultimately, unsettled equity allocations may sow seeds of resentment or apathy among partners, potentially disrupting the company’s operation. Some partners may be reluctant to fully commit to the company if they’re unsure what their equity rewards will be.
Part 4: Make Your First Hires
Having explored the different options and tradeoffs for building your cofounding team, dividing roles and responsibilities, and splitting the equity stake of your startup, it’s now time for the next step: selecting the right non-founding employees and investors to join your company. In this section, we’ll explore whether to hire rookies or veterans and how to structure their compensation.
Rookies Versus Vets
Hiring for a startup is a critical task that can shape the future trajectory of the business. Early employees significantly influence company culture and capabilities. If you make poor hires early on, it can cause cascading failures that may cost your company for a long time. If you make thoughtful hires early on, you lay the foundation for a resilient, high-performing team that can adapt and grow with the business. Therefore, leaders must choose their first hires carefully—and one thing to consider is whether to hire rookies or veteran workers.
According to Wasserman, some control-oriented founders hire rookies—less experienced (and less expensive) personnel who aren’t likely to challenge the founder’s authority. However, while this approach may preserve the founder’s control and conserve funds, it can limit the company’s access to fresh perspectives and expertise needed to innovate and grow.
Wasserman writes that experienced hires, or “vets,” can quickly identify industry patterns, are experienced in navigating the corporate environment, and often boast a network of contacts that can be an invaluable asset. These relationships can open doors to potential clients, partners, investors, or even attract more experienced talent. However, vets also command higher salaries, which may be a concern if you’re a money-oriented founder. Moreover, cautions Wasserman, vets might be more set in their ways and struggle to shift from a structured, corporate mindset to a flexible, fast-paced startup culture. Perhaps most troubling for a control-oriented founder, they may be more likely to challenge your authority.
Structuring Compensation
Typically, writes Wasserman, startup compensation strategies blend cash (in the form of salaries, bonuses, and incentive pay) and equity. Founders are often at a crossroads, negotiating between offering larger equity options or opting to pay higher salaries. This fundamental tension between cash and equity compensation represents one of the most critical strategic decisions early-stage companies face.
The Equity-Based Compensation Approach
Wasserman writes that when startups lean toward equity-based compensation, they preserve cash reserves that can be deployed toward product development, marketing initiatives, or extending their operational runway. This approach becomes particularly attractive during the precarious early stages when cash flow is uncertain and every dollar spent on salaries represents a dollar not available for growth investments. However, as we’ve seen, equity compensation also introduces ownership dilution that compounds over time, potentially leaving founders with diminished control over their company’s future and a reduced financial upside from their creation.
The Cash-Based Compensation Approach
According to Wasserman, the cash compensation route presents its own set of strategic advantages and challenges. Higher salaries and cash bonuses can attract more experienced talent while providing founders with greater predictability in their ownership structure and eliminating the need for a complex equity management system. Yet cash-heavy compensation strategies can rapidly deplete limited resources, forcing companies to raise capital more frequently and potentially on less favorable terms, while also creating fixed-cost burdens that become difficult to manage during economic downturns or revenue fluctuations.
Part 5: The Risks and Rewards of Investors
We’re now ready to delve into the tradeoffs and dilemmas that startup founders face when taking on investors. We’ll explore the benefits and complications of working with venture capital (VC) firms—investors who provide capital in exchange for equity. In particular, we’ll explore the most severe risk of all to control-oriented founders: fully losing control of the company at the hands of a VC-dominated board.
Benefits of VC Funding
According to Wasserman, the majority of startups eventually bring in VCs. A VC’s fundamental objective lies in maximizing returns, not just on your venture but across their entire portfolio of investments. Thus, they’re vested in seeing your startup succeed over the long haul.
Bringing VCs on board doesn’t offer just monetary benefits, writes Wasserman. One vital advantage is that VCs provide access to new networks that can present opportunities for your business. When VCs invest in a company, they typically introduce its founders to their extensive professional connections, including other companies in their portfolio, industry experts, potential clients, and talented job candidates. These introductions often happen through formal networking events hosted by the VC firm, direct personal referrals, or by leveraging the VC’s reputation to open doors that would otherwise remain closed.
Many top-tier VCs also maintain talent recruitment teams dedicated to helping their portfolio companies find key employees. In addition, the VC’s experience can offer invaluable guidance on personnel, operations, marketing, and other non-financial aspects of your business.
The Risks of VC Funding
Despite the benefits of VC funding, Wasserman writes that taking on VC funding can be risky, especially if you’re a control-oriented founder. One significant concern is the potential loss of control for the founder-CEO. If founders give away equity in their pursuit of funding, that equity translates into voting shares, board seats, and a say in the company’s strategic and operational decisions. Although this exchange aids in company growth and success, it may restrict the founder’s power and affect how they steer the company’s direction.
Furthermore, some VCs may challenge the CEO’s role if they suspect the CEO will become a future barrier to their control or success. Experienced VCs have ideas about how a successful business should run, and if they perceive the existing leadership as a potential hindrance, they may push for a change. Indeed, writes Wasserman, the progression and success of startups often involves the passing of control from the original founder-CEO to the board or an externally recruited CEO. More often than not, these changes are initiated by the board of directors or investors who seek managerial experience and expertise which they find lacking in the founder-CEO.
