FOUNDER AUTONOMY

A Founder's Dilemma

In the dynamic world of startups, a Founder’s journey is unique and individualized. While the era of SaaS revealed a formulaic process for startup we are understanding more clearly that the Founder’s path is nothing short of dynamic, having many relationships that influence the outcome of a company. In this article we aim to shed light on that path by offering facts and insights and detail what we describe as “Founder Autonomy”, a complex journey and web of relationships that determine control and ownership of their company's destiny.

Why Is Founder Autonomy Important?

Our detailed exploration of the startup ecosystem reveals that the dynamics of resources, domain knowledge, equity trade-offs, and the implications of critical decisions made by early-stage Founders greatly influence “the startup journey”.¹ One single day in the life of a Founder feels equivalent to a month in relative time, each day overflowing with important decisions, conflated by the sound of a ticking clock now emblazoned in the back of their mind.

For Founders in the high-stakes game of launching and nurturing a startup, the phrase "own your destiny" resonates with profound significance. From a Founder’s perspective, maintaining control over their company to ensure that their vision and purpose are not unreasonably overshadowed by external influencers is an exercise in careful negotiation and tactics.

It is important to establish that Founders have two forms of currency: equity and cash. The latter is often scarce for early stage companies, particularly those that are pre-revenue. Therefore, it is common for Founders to trade out equity in their budding business in exchange for various forms of advisory services. At very early stage companies, these transactions are typically accomplished through SAFE notes, a simple agreement for future equity, that reduces the legal expenses for the transactions that enable an early stage company to raise capital.

While many startups seek financing from external investors, “bootstrapping” is another common approach where a Founder self-funds their venture. Whether a Founder is a self-funded bootstrapper or funded by investors does not answer the question of which is a better path, simply because there are tradeoffs to both. While this is also true for established businesses, the impact of early decisions for startups–both what a Founder does and doesn't do–has more relative weight than in established companies. Again, time is money.

What Resources Do Founders Need?

The energy of an initial idea to solve a problem in the market is the catalyst for getting started. That said, Founders are in constant need of and pursuit of essential resources: capital, expertise, advisory, and tools, to name a few. Their search often leads them to various support structures, including startup accelerators, incubators, and studios, with each offering unique benefits in exchange for fixed fees, equity or both. Decisions in the early days, weeks and months then become imprinted on the business. Such decisions can be lasting, whether a Founder knows it or not.

Founders in this stage often seek guidance and knowledge from “startup programs”. The common startup program models generally fall into three different categories: startup incubators, studios and accelerators.

Startup incubators generally focus on early-stage companies that might need a longer runway to develop their business model and product. Mainly, they focus on providing business support at the ground level and work for a fixed fee using models which circulate around membership fees and shared access to knowledge, networks, and workspace.

Startup studios on the other hand engage more deeply by co-creating businesses, often from the conceptual stage, and embed themselves significantly in the operational and strategic aspects of the startup. This involvement is reflected in a more significant equity stake, which can range from 30% to 80%,² alongside an initial investment that averages around $232,458 per startup, using the Venture Studio Business Model Explained.³

Startup accelerators, known for their intensive training programs and networking opportunities, typically claim a 5% to 10% equity stake in exchange for their services and a modest capital infusion. It is important to note, not all Founder’s get investments from the accelerator even though they may be “accepted” into a program. Startup school in this manner is a pipeline for finding unicorns and Founders with the highest potential.

Founder Tradeoffs And Risk

As we explore this topic and survey experts familiar with the startup ecosystem, we are discovering that knowledge is the primary need for Founders in the earliest stage of a company formulating their ideas. Specifically, knowledge around what to do, and also what not to do in the early days of developing the company. According to our research, what not to do appears to be the most nuanced element of all, and the blueprints reside in a “black box” of startup knowledge.

In business, leading a startup is the ultimate form of risk-taking. The degree of risk is relative to the startup Founder, their history, the company purpose and mission. Deciding to engage investors has significant advantages. It is difficult early on, however, for startup Founders to evaluate which risks are worth the potential rewards.

To add to the swings in equity and offerings, there are challenges in valuing young startup and growth companies due to factors such as limited history and unique characteristics.⁴ These challenges are even more evident in today’s current hyper speed of technology evolution,⁵ which is moving at a faster cycle than ever before. In 2023, many AI startups were wiped off the map when foundation models revealed GPT wrappers had no real business design, nor a moat. Getting to market is easier, but staying there has never been harder.

Another layer of knowledge resources are advisors who have extensive domain experience and access to exclusive networks. Discerning how much equity to grant, to whom and for what value-based actions can be difficult for Founders to navigate. The data from Carta Research suggests advisor equity grants vary significantly across early stage companies, and most importantly, most equity grants for advisors do not have performance criteria.⁶ To maximize the value of advisors, Founders must see each equity transaction not as a burning need for resources, but as a strategic investment in shaping their company's future. This means negotiating for values, vision alignment, and strategic support in addition to advisory in order to ensure an effective long-term partnership. The relationship between Founders and advisors is essential, and like most things in business, boils down to trust and mutual respect.

At the heart of every entrepreneurial endeavor, navigating the web of tradeoffs without getting stuck in it is an exercise that involves shrewd judgment, knowledge, experience and frankly, a bit of luck. Each decision has the potential to disrupt the delicate balance between immediate needs and the long-term vision.

As Founders set out on their ventures, they are energized by new ideas while simultaneously being weighed down by constrained resources. The appeal of startup programs offering the promise of capital, knowledge, and networks is tempting for many. That is, if they can get accepted. According to “Down Times Look Like Up Times”,⁷ a Crunchbase article, only 1% of Y Combinator applicants are welcomed into the program, and the acceptance rate for Techstars is said to be approximately 1% to 2%. The goal is a major equity stake in the next big thing.

These examples are consequential and substantial challenges facing early-stage Founders. Trading equity for much-needed resources is a critical decision, one fraught with risk and potential for breakthroughs. This does not change the profound need for knowledge however.

Potential Consequences

This intricate environment presents Founders with a complex dilemma: sacrifice equity in order to acquire critical resources to move the business forward, or bootstrap it and carry the runway risk that may limit a startup’s ability to take development and early positioning to its maximum potential. While funding is often an attractive and exciting topic for Founders, especially those in nascent stages of a startup, investment funding has long-term implications. Equity given up early in the journey represents not just a current valuation slice, but a portion of future potential and growth.

As the startup evolves and seeks further rounds of financing, the dilution from earlier stages can complicate negotiations, potentially leading to less favorable terms or even deterring future investors. Another risk associated with equity considerations is the possibility of future fundraising challenges. Each percentage of equity relinquished in the early stages of a startup's life reduces the founder's leverage in subsequent financing rounds.

The initial exchange of equity for resources, intended as a stepping stone, can inadvertently become a stumbling block that limits both the Founder's control and the startup's trajectory.

As more investors come on board, the Founder's control is further diluted, potentially leading to more stringent terms and conditions from new investors who are wary of entering a cap table with little room for influence. Additionally, the entry of senior executives or hiring financial investors can also lead to “founder illusion of control”.⁸ The complexity of managing a broad set of stakeholders, communication and reporting can become burdensome depending on the skill of the Founder and team.

The collection of voices can obscure the clarity of vision and focus on the core mission necessary for a startup to navigate its critical growth phases. It can also lead to an imbalance in the team's composition—too many executives and not enough people equipped to roll up their sleeves and do the hard work. A startup bloated with executives and advisors may find itself lacking the hands-on workforce needed to execute its vision effectively.

Are There Other Options?

The traditional startup program designs exist in a backdrop of a globally changing workforce, with more independent workers and a spike in popularity of fractional executives. The gig worker economy, composed of 64 million people, will become the largest population of US workers who have been laid off, marginalized and are seeking more independence as corporate work for many did not represent the stability they hoped for. Businesses like Hard Skill Exchange⁹ are aggregating domain expertise in the form of ”just in time” advisors, which will undoubtedly be an interesting dynamic to observe as it relates to options for startups. We have not even mentioned the possibilities of generative AI’s impact on the traditional startup ecosystem, which some may argue lacks innovation and is stuck in its own economic design.

It begs the question, are there options besides the traditional startup program design that could help Founders protect their equity and capital in the early days? The key is in balancing the need for skills with burn rate. Money can solve many Founder dilemmas but not all of them, and it comes with strings attached. Whomever has the gold makes the rules. The essence of a thriving startup lies in maintaining an equilibrium, where both Founders and investors collaborate towards a shared vision, ensuring the startup not only survives its early challenges but thrives in its pursuit of innovation and growth.

What options are there for early stage Founders to gain the knowledge they need without having a revolving door of advisors? Many are not aware that having too many advisors can make a company “toxic” to future potential investors.¹⁰ If Founders are able to go it alone successfully, decisions in the early days with regard to time, money and resources have a direct impact on runway to revenue. In both scenarios, what is common is the desire to extend that runway as much as possible.

Founder journeys are complex. It is not to say any one path is better than another, the relationship between Founders and investors is essential. What is important is to have a clear understanding of your vision as a Founder and seek knowledge and resources that are aligned to the purpose, which then informs the mission. This is the heart of strategy and the core rationale for maintaining Founder autonomy.

References

¹ Paul Graham: "What We Look For In Founders", cited in February 2024 (Source)

² Medium: "What are Venture Studios? And how have they evolved with the market?", cited in February 2024 (Source)

³ Next Big Thing: “The Venture Studio Business Model Explained”, cited in February 2024 (Source)

⁴ NYU: "Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges", cited in February 2024 (Source)

⁵ StartStak: “Emerging Technologies: The Hyper-Speed Evolution”, cited in February 2024 (Source)

⁶ Alex Pattis via LinkedIn: “2023 Recap: Equity for Advisors”, cited in February 2024 (Source)

⁷ Crunchbase News: "Down Times Look Like Up Times For Accelerator Applications", cited in February 2024 (Source)

⁸ The VC Factory: “Owning 51% Gives Founders An Illusion Of Control.”, cited in February 2024 (Source)

⁹ Hardskill Exchange: “Make Your Skills Your Greatest Asset”, cited in February 2024 (Source)

¹⁰ Medium: “✓ Too many advisors”, cited in February 2024 (Source)