Building Your Team

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Christina Hernandez Sherwood, eMed Editor, MedCity News

Team building, when it comes to early-stage companies, refers to the relationship between startup co-founders and the way entrepreneurs hire, manage and grow personnel in their business. Surrounding yourself with the right people isn't just important for your business. It's a matter of survival. About 65 percent of the failures of high-potential startups are due to "people problems" or interpersonal tensions within the team, according to Noam Wasserman's The Founder's Dilemmas.

There are many issues to address in order to avoid business-killing "people problems" and develop best practices in hiring.

  • Co-founders
    • Trust
    • Complementary skills
    • Social relationships
    • Ask the important questions
    • Co-founder "dating"
    • Co-founder agreements
    • Potential problems for co-founders
  • The team
    • Company culture
    • Advisers
    • Think types, not titles
    • What to look for in team members
  • Best practices in hiring

Co-founders

Co-founders are the people you'll work with day-to-day on developing your product or service and making it successful. Choosing co-founders isn't a decision to be taken lightly. When it comes to relationships with co-founders, the two main considerations are functional considerations, such as specific skills, experience, education, time, and social relationships, said Jason Greenberg, assistant professor at New York University's business school, during a panel at last year's Life Science Ventures Summit.

Trust

Trust - both interpersonally and in a business context - is the most important quality to look for in a co-founder, Greenberg said. "That's not easy to access," he said. Contingent upon that trust, Greenberg added, is finding functional diversity in someone with complementary skills. Team members' roles within the company should be well defined, said Geoffrey Clapp, an entrepreneur and mentor at Rock Health, in a Kauffman Foundation video. "One co-founder should say of the other, 'I don't know how they do that. It's magic to me,'" he said.

Complementary skills

Finding those complementary skills can be a challenge, Greenberg said, because research has shown that people tend to know others like them. "Founders that have good business ideas also tend to know people who have business ideas," he said, "but often don't have the technical skills they need." New technologies like FounderMatch and FounderDating are working to alleviate this problem, Greenberg said. Unfortunately, he added, these websites don't overcome the all-important trust issue. "As a consequence of this, most founding teams are remarkably small," Greenberg said, adding that he often sees teams of just two or three co-founders. "At the core, they're people that know each other."

Social relationships

There are many disagreements in terms of what social relationships between co-founders should look like, Greenberg said. According to his research, founding teams are typically made up of the following groups: co-workers (more than 40 percent), friends (nearly 25 percent), family (more than 10 percent), or strangers (about 4 percent). Though it's common to start a company with family or friends, the collaboration is risky, according to The Founder's Dilemmas. In fact, teams of relatives or friends are the least stable of all founding teams - even less stable than teams of strangers or acquaintances. Within a founding team, each additional family or friend relationship increases the likelihood of a co-founder leaving the team by nearly 30 percent.

Instead, starting a business with co-workers typically leads to better outcomes, Greenberg said. Generally speaking, he said, the best co-founder teams are made up of people who have worked together and have common ways of working. The opposite is true for starting a company with strangers or friends who have never worked together. If you have a lot vested in the relationship on the social level, but no common understanding of how to work together, he said, that can lead to a negative business outcome and destroy the social relationship.

Ask the important questions

How do you find the right fit in a co-founder? Ask the important questions - about skill set and commitment level - up front. This can sometimes lead to an equity discussion (which we'll describe later). Lesa Mitchell, vice president of the Kauffman Foundation, said it's natural for co-founders to postpone "sensitive" discussions, such as founder compensation. But these delays can make later decisions more difficult. "When you start talking about these issues from the very beginning of a new venture, it's going to make it a lot less difficult," Mitchell told eMed. "Unfortunately, it doesn't usually happen that way."

One of the most important questions to ask a potential co-founder is how much time he or she is willing to commit. People often try to hedge their bets when entering an early-stage venture by, say, continuing to work at their old job, Greenberg said. If someone else is committing all of their time to the startup, he said, that can cause strife. For that reason, it’s useful to have a roadmap of who is going to do what and their rewards, Greenberg said. But it’s tough to talk about who gets what share of the pie when there’s no product or service yet, he said. Attempting the discussion too early can lead to wheel spinning (spending too much time on these decisions rather than on developing the product or service). While there’s no ideal time for the discussion, Greenberg said it should be delayed until there’s something tangible around which to have the talk, such as a minimally viable product. “I’d argue against having that conversation at the idea or conceptual stage,” he said.

Co-founder “dating”

Some entrepreneurs advocate for “dating” potential co-founders. This includes spending time together in work settings (perhaps collaborating for a set period of time on a contract basis) and social settings. Elliot Cohen, co-founder of Corengi, said in the Life Science Ventures Summit panel that he didn’t look at the co-founder relationship as a marriage. “Instead it was, ‘Hey, let’s date for a while,’” he said. If a potential co-founder helps to build, say, a prototype, and the collaboration goes well, the team can continue working together. If not, the relationship can be severed. In the same discussion, Stephen Cary, co-founder of Omniox, said he “dated” his co-founder for about six months and approximately 50 coffee and dinner “dates.”

Co-founder agreements

Once you’ve settled on a co-founder or co-founders, it’s necessary to set up a written agreement. “Co-founder agreements are critical,” Greenberg said, but that doesn’t mean they’re simple. A standardized co-founder agreement should be used only as a baseline, he said, because many agreements are idiosyncratic to the relationship. While it might seem easier – and cheaper – to consult your family lawyer on a co-founder agreement, Greenberg advised seeking a law firm that has experience working with startups. Co-founders can iron out the broad parameters of the agreement on their own, he said, but it’s ultimately a good idea to seek outside advice from someone experienced.

On Simeon Simeonov’s blog High Contrast, he dispelled several myths about founder agreements – including the idea that all founders need to have the same agreement – and described important elements to include in the documents. Common clauses in founder agreements include capital contributions and distributions, company ownership, vesting, IP transfer, and founder resignation/removal, according to Thomas Law Firm PLLCSeedhack also created a Founder’s Collaboration Agreement that can serve as a model.

Potential problems for co-founders

Once you’ve teamed up with your co-founder(s), it’s important to be aware of potential problems that can arise later in the relationship. One of the first obstacles often revolves around co-founder equity and how to divide up stakes in the company. The relative ease or difficulty of this discussion can often predict a company’s success, Cohen of Corengi told eMed. “The companies I’ve seen where it’s been a difficult conversation basically never succeed,” he said. “In the companies I’ve seen where it’s been an easy conversation, people seem to be much more committed to solving the problem the company is trying to solve in the world than they are to making sure they get the biggest share of the pie.”

It’s important not to get into this discussion too early, according to Wasserman’s book. The majority of founding teams (73 percent) split the equity within a month of founding. And although nearly all startups will have a major change in strategy, business model, or co-founder involvement, more than 50 percent of teams fail to include mechanisms for adjusting equity split later on. This eMed article offers a look at how other companies handle equity decisions.

Rewards shouldn’t be viewed statically, Greenberg said. In other words, it’s not necessarily a good idea for one co-founder to receive a certain percentage of shares in the business in perpetuity. Instead, it’s better to incentivize future action, he said. That’s because many companies change direction, so it wouldn’t make sense for someone who is no longer critical to the business to receive the same percentage of shares.

Fundraising is a potential pitfall for co-founders. In fact, raising the first round of financing actually enhances team instability, according to The Founder’s Dilemmas. Though it seems counterintuitive, raising a new round of financing dramatically increases the chances a founder will leave. A founder is more likely to leave at this point if new investors trigger a company realignment or if the investors decide to demote a founder that they worry can’t keep up.

Speaking of co-founder exits, it’s important to define from the beginning what will happen if one or more co-founders leaves the company. Other co-founders will want to ensure they’re protected. The answer isn’t always equal ownership, said Anmol Madan, co-founder and CEO of Ginger.io, at the Life Science Ventures Summit panel. When the stakes are equal and there’s a disagreement, he said, no one can take control.

The team

Once the co-founders are in place, it’s time to establish your company’s culture and build human capital. Bringing together a founding team is almost as important as choosing co-founders. When a company like Apple or IBM has one bad employee, that person won’t sink the ship of such a large corporation, said Clapp of Rock Health in this Kauffman Foundation “sketchbook” interview. But “when you have five people sitting in a tiny room, one person is 20 percent,” he said. “If that one person isn’t pulling their weight, they’re taking away from everyone else.”

Company culture

Team members should fit into your startup’s culture, but how do you build a healthy culture for your team? The first step is to “embrace a small set of non-negotiable values, and hold people accountable for those values,” Genomic Health CEO Kim Popovits told the Kauffman Foundation. Co-founders should use those values to create a clear mission for the company. “It’s really about building a healthy company,” she said. “‘Smart’ won’t create ‘healthy’ but having a healthy company culture will make you smarter.”

Advisers

Advisers are important for any startup, especially at the early stages of hiring and firing, Greenberg said. “That first hire can be critical to success,” he said. “If it doesn’t work out, being able to fire is another skill set that many entrepreneurs don’t have.” Angel investors and venture capitalists can help entrepreneurs hire the right talent for the particular issues the company is facing, Greenberg said. If the company is working on a technologically intensive enterprise developed in a university setting, he said, entrepreneurs should access someone working in that area to provide advice and referrals. As with a founding team, trust is also important in an adviser.

Think types, not titles

Don’t get wrapped up in titles when building your team, Clapp said. You probably don’t need a CFO, CMO, CTO, or COO, he said. “What you need is a group of people who are busting their tail to get something done,” he said. “They’re going to earn their titles. It’s about having the roles defined and having a deep respect for each other’s contribution.”

Instead of thinking in terms of titles, consider the types of people that would make your business thrive, said Bill Gross, founder and CEO of Idealab, in a lecture from the Stanford ECorner. Startups begin with an entrepreneur who thinks ahead of the times, he said. If the entrepreneur isn’t also someone who can get the product or service into the customers’ hands, Gross said, he should hire someone who is. Also important is an administrator who can ensure a smooth workflow, he said, and a “people person” who helps the other three get along.

What to look for in team members

Once you’ve made the choice to hire into the company, rather than contract out, the first hires are critical, Greenberg said. It’s imperative for the new employee to be able to work in a context where they’ll likely perform tasks that exceed what was described in the job posting, he added. “They have to be jacks of all trades,” Greenberg said. “They have to be willing to do what needs to get done.” There’s also a strong possibility that in the company’s early days there will be ebbs and flows in compensation, he said. It’s important that potential team members understand that, Greenberg said, and options like equity to offset uneven compensation might be worth discussing. “In many respects,” he said, “those first hires are also gambling on the startup’s success.”

What are the best and worst qualities for potential team members? While intelligence and competence are important, Clapp told the Kauffman Foundation, they’re not the only qualities to consider. “You don't hire to skills, you hire to passion, and the people you believe can develop those skills,” he said. “You don't need the best engineer; you need the person who is most passionate about what you’re trying to accomplish.” While startups need some degree of greed and ego to succeed, you don’t want to show those qualities in your team, said Sofie Qiao, co-founder and president of LINQ Pharmaceuticals. "I was taught that greed and ego kill companies,” she said. "It's important to keep that in check.”

Best practices in hiring

Because new startups can’t afford to make bad hires, bringing on new team members can be stressful. To ease the burden, Greenberg offered a few best practices in hiring:

  • Use your network - and your potential teammate’s network – to seriously vet how the candidate works. "It's remarkable how candid a lot of those references will be," he said.
  • Try before you buy, especially if your first hire is technical in nature. Put the candidate in a situation where you can assess whether she can handle the job under the same constraints as your business.
  • Find out how the candidate handles stress. Is it in the same way that you and the co-founders handle it?

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