Job Title First: Why It Matters for Your Startup

The Importance of Formal Structure in Early-Stage Startups

In the initial phases of a company, often beginning in garages or through virtual meetings, adaptability can seem crucial for generating innovative concepts. The absence of strict contracts is frequently a defining characteristic of successful startup narratives.

We often highlight the speed with which startups can change direction, favoring minimal viable products (MVPs) over fully developed platforms. Attention is also given to serial entrepreneurs who secure funding for their next venture even before a concrete idea emerges.

The capacity to rapidly assemble a team and initiate a launch is undeniably central to the unique appeal – and the engaging nature of reporting on – the startup world.

Navigating the Nuances of Roles and Ownership

Despite the energizing nature of a startup’s fluid beginnings, establishing clear formality is essential. Significant distinctions exist, both in terms of ownership and responsibility, between a founder, a founding team member, an adviser, an investor, an angel investor, and an early employee.

As demonstrated by cases like the Winklevoss twins versus Facebook, Reggie Brown versus Snapchat, and Avi Dorfman versus Compass, disagreements frequently stem from ambiguous definitions of these roles.

The Rising Potential for Disputes

While numerous high-profile legal battles illustrate the prevalence of founder disputes, the current startup landscape suggests a potential increase in new conflicts. Several factors contribute to this possibility.

These include rapid funding cycles, a dynamic startup creation environment, and the celebration of loosely structured teams focused on passion and brainstorming rather than defined roles.

Establishing Governance and Transparency

For startups and emerging movements to thrive, establishing robust governance is vital for managing expectations and preventing conflicts that arise later in development.

Although this formalization can be challenging, it often depends on the willingness to address issues directly, engage in open communication, and prioritize transparency.

• Clear definitions of roles are paramount.
• Open communication fosters understanding.
• Transparency builds trust and minimizes misunderstandings.

Strong governance is not about stifling innovation; it’s about creating a sustainable foundation for growth and success.

What factors contribute to discord among founders beyond financial and power struggles?

Akshaya Dinesh, previously a co-founder at Ladder, experienced rejection from an accelerator program due to an inability to definitively identify the CEO.

“This occurred prior to securing any funding, with just the two of us actively involved,” she explained. “Our response indicated a shared, collaborative approach, stating we were both technical and handling various aspects, but if forced to choose, it would be X.” Dinesh later understood that a decisive answer, clearly outlining each founder’s responsibilities and their anticipated evolution, was expected.

Titles frequently fuel disagreements between co-founders, and this inquiry serves as a gauge of your willingness to address difficult conversations from the outset. This explains why “Who is the CEO?” remains a standard question during YC interviews. (Dinesh subsequently secured funding from Seven Seven Six Ventures, DoorDash, Pear VC, Forerunner, and Harry Stebbings).

Saba Karim, an investor at Techstars, corroborates this, asserting that co-founder conflict is a primary cause of startup failure, second only to a lack of product-market fit. “What other elements typically lead to division if not considerations of finances and authority?” he questioned.

“Initial decisions may not remain valid over time, even within a short period, making the implementation of vesting schedules and cliffs essential,” Karim stated. While he hasn’t observed a rise in founder disputes or title inflation recently, he emphasizes the importance of formal agreements, particularly once funding or revenue is established.

Interestingly, Karim views an equal equity distribution among all founders as a potentially negative indicator.

“Typically, one founder contributes greater experience, dedicates more time, provides initial funding, or assumes the CEO role – and their equity stake should reflect this,” he clarified. “If you have a strong existing relationship (a lack of familiarity is a warning sign), a preliminary agreement of 50/50 equity for two founders or 33/33/33 for three, based on an assumption of equal effort, is acceptable.”

Jennifer Fleiss, co-founder of Rent the Runway, highlights the importance of knowing your co-founder well, having stepped down from her position at the publicly traded company in 2014. Jennifer Hyman continues to lead the company as CEO.

“I consider myself fortunate to have met my co-founder in an ideal setting: Harvard Business School, within a section of 90 students, allowing for authentic assessment of each other’s business perspectives through daily case study discussions,” Fleiss said. “This first year served as an informal evaluation of compatibility.”

Fleiss advises founders to simulate relationship-building scenarios before formalizing a business partnership. For those without access to a business school environment, she recommends early MVP testing of your product.

“While testing consumer response, you’re simultaneously evaluating your working relationship with your co-founder,” she explained. “Prioritize determining if you enjoy collaborating with this person and navigating challenges together, alongside assessing market viability and potential profitability.”

The entrepreneur, now an investment partner at Volition Capital, believes the increasing frequency of questions regarding title justification reflects the current business climate.

“Salaries and benefits are currently very competitive, and employee expectations at startups can be substantial,” she noted. “If you weren’t involved in the initial decision-making process or the early discussions about launching the business, it feels inappropriate to request or assume a specific title.”

However, a distinction exists between entitlement and legitimate self-advocacy.

The Significance of Ideas in Business

Arun Subramanian, a partner at Susman Godfrey involved in Dorfman’s lawsuit against Compass, discussed with TechCrunch the challenges in proving impact. He highlighted that financial success, demonstrated by valuation or revenue, often motivates initial team members to seek recognition for their contributions. However, he indicated that legal disputes frequently stem from more personal concerns.

“Entrepreneurs prioritize their professional standing and accomplishments,” Subramanian explained. “A failure to acknowledge an individual’s contributions can significantly affect their future career prospects.”

Adam Wolfson, a partner at Quinn Emanuel in Los Angeles, participated in the initial stages of the Compass litigation. Previously, he represented the Winklevoss twins in their lawsuit against Facebook’s Mark Zuckerberg, alleging the theft of their social network concept. This highly publicized dispute concluded with a private settlement, awarding the twins, now co-founders of Gemini, a substantial sum.

“In the case of Compass, Avi provided the necessary technical expertise,” Wolfson stated. “Conversely, the Winklevoss twins possessed an initial idea but lacked the technical skills for implementation, leading them to enlist Mark Zuckerberg, who both recognized the idea’s potential and possessed the ability to realize it.”

Jonathan Harris, a managing partner at Harris St. Laurent & Wechsler, believes that while the broad outlines of founder disagreements are consistent, the specific outcomes and details vary. Nevertheless, Harris generally advocates for resolving such issues outside of court. “Publicizing these conflicts is rarely beneficial for the business,” he asserted. “The primary goal should be the success of the venture itself.”

He routinely encourages co-founders to discuss three potential outcomes: success, moderate performance, and a scenario where the business survives but the individual departs.

“The specific wording of an agreement isn’t crucial; proactively considering different possibilities is,” he emphasized.

The central takeaway is clear: cultivating a co-founder relationship based on open communication, transparency, and a willingness to address difficult topics – including the possibility of failure – is essential. Maintaining thorough records, whether through an operating agreement, shareholder agreement, or even email correspondence, is also vital.

Avoid allowing the initial enthusiasm of a startup to overshadow the formalization of key differences regarding ownership. As demonstrated by both public legal battles and less visible instances, titles and agreements carry significant weight – potentially even exceeding the importance of the company’s name.