The Founder’s Dilemma – Startup Finance

Entrepreneurship is all about making decisions in the face of uncertainty. Entrepreneurship involves beginning a journey that the founder does not currently have the resources to complete. For instance, when any start-up is first formed it does not have the money, assets, or human capital required to create value. It is the central job of the founder of the business to indulge in activities that help the firm acquire more resources. The quantum of resources that a founder can amass and the speed at which he/she can do so are clear predictors of the success of the organization.

Hence, the primary job of a founder is to convince external parties to supply these resources to the firm. However, the firm also has to give something in return to these external parties since the resources are in short supply and hence are sought by a lot of external parties. External parties ask for two important things from the founders. One of the things is a percentage of ownership which guarantees them a percentage of future profits. The second thing is control of the firm.

Founders are reluctant in parting away with both the points mentioned above. However, they are most reluctant in parting with the control. This leads to what is commonly known as the “founders dilemma” wherein the founder is forced to choose between wealth and control. In this article, we will have a closer look at the concept of the founder’s dilemma.

What is the Founder’s Dilemma?

When an entrepreneur launches a new start-up, they generally have two aspirations.

1. The first aspiration is that they want the start-up to be a big success.

2. The second aspiration is that they want to run this start-up for a long time.

   In other words, they want to be in control of the start-up.

However, many founders realize that many times, both these dreams can be contradictory. This means that if the founder tries to maximize the value of the firm they created, they are very likely to lose control over it. This is because, with the passage of time, investors might ask for the founder to be replaced by a professional CEO. Also, they could try to obtain seats on the Board of Directors, which would make it difficult for the founder to execute his/her vision without their explicit consent. Hence, founders often have to make a choice between being control-driven and being wealth-driven.

What is a Control Driven Founder?

A control-driven founder prioritizes their control of the firm over the wealth generated by the firm. Such founders may prefer to go solo. They may decide to set up the entire company on their own by not having any co-founders or not collaborating with them.

Control-driven founders are more inclined toward hiring inexperienced people. This is because having inexperienced people on board allows them to stay in complete control of the decision-making process.

Control-driven founders may face great difficulty in choosing investment partners. Almost all investors expect to have a certain degree of control over the firm. As a result, these founders eliminate a lot of investors and prefer to settle for a lower valuation instead of giving up control.

Control-driven founders try to remain the CEO of the firm throughout its lifecycle. This means that they tend to interfere in the day-to-day functioning of the firm well after the firm is past its nascent stage.

What is a Wealth Driven Founder?

Wealth-driven founders are quite different from control-driven founders. Wealth-driven founders are actively looking for co-founders who have the economic or social capital which can be used by the firm to increase its wealth.

These founders are quick to delegate the work of running the firm to other more capable people. This helps them free their time and resources in order to focus on growing the firm.

A wealth-driven co-founder is more focused on raising resources and hence connects with a large number of investors. These founders have no qualms in giving up a reasonable level of control as long as substantial wealth is generated to justify this loss of control.

King Vs Rich

There is no right or wrong approach when it comes to the founder’s dilemma. A reasonable case can be made for both approaches. There are many founders who have built successful companies by retaining control over their ventures. At the same time, there are several entrepreneurs who have ended up with a sub-optimal outcome because they were too focused on control. The same can also be said about entrepreneurs who are more focused on wealth.

Like many things in the start-up domain, this can also be traced back to what the founder’s vision is. Some founders are more content with being the king even if their kingdom is small. To them, retaining control matters more since they believe that they have the unique skills and ideas required to grow the firm. On the other hand, some founders are more concerned with being rich. They do not mind giving up control over the firm as long as they end up with more money than they previously had.

It is important for both the founders as well as the investors to be on the same page when it comes to the control vs wealth debate. This will help avoid conflicts that could jeopardize the interest of the firm at a later stage.