How many founders should a startup have?Faith Obafemi
Client: “Hello, please, we would like you to register a company for our business. But before that, we would like to document our agreements in a Founders Agreement.”
FINT: “Awesome! FINT is happy to incorporate your company. So, how many founders does the business have?
Client: “At the moment, we are five, (5) with the possibility of a couple more joining us.”
As with all things in the startup ecosystem, there are no hard and fast rules on the number of founders a startup should have. Thus, rather than giving you a cut and dry answer to the question in focus, we will analyze some points to consider when faced with the question of how many founders should a startup have? Remember though, the fewer the better, for both your sanity and your startup’s success.
Venture-Backed vs Bootstrapped
This should be your first consideration if you are considering more than one founder for your startup. Investors look out for certain things when deciding to invest in a startup. Where a startup does not fit any of their criteria, chances of getting a signed cheque is slim.
Usually, investors prefer to deal with at most two or three founders, their perfect choice is the two founder startup. It helps to cut down on the decision-making process since all founders’ opinions need to be factored in. Moreover, having more than three founders paints a negative picture of weak leadership to investors. They will prefer to stay away. An additional point to make here is that investors do not automatically become founders, regardless of how huge their stake in the startup is.
If however, your business is bootstrapped, you could probably get away with three and more founders, so far things can be properly managed.
SideBar: There’s a Mumbai based startup, Housing.com which originally started with twelve (12) cofounders. Yes, you read that right, 12!
Protect Founder’s Equity
In a future piece, we will discuss in detail how to divide equity amongst co-founders. For now, let’s consider how the number of founders can affect founder’s equity. Put quite simply, the more founders, the lesser the stake a founder holds in the company. And the lesser the stake, the lesser the motivation to stay committed to the startup. In addition, the more founders, the higher the chance that someone would jump ship.
One way to manage commitment is by vesting. This will help prevent a situation where a nominal founder who does nothing walks away with valuable equity based on the sweat of others. Yeah, that’s why it is sometimes called sweat equity. We will definitely ensure there is a vesting clause in the founders agreement the client in the opening story asked for.
Your first thought after reading above subheading is most likely financial risks. What about health risks? It’s common knowledge that most startups founders burn the midnight candle, sometimes till daybreak. Occasional late nights are allowed, unfortunately, most founders get stuck in this bad habit which is detrimental to their health or optimal productivity.
On the risk of discouragement, regardless of how difficult situations maybe, where there is more than one founder, the chances of operations coming to a standstill because someone at the top is in despair, is low. The more founders, the lower the chance. As a support system, when one founder is indisposed, the others will be able to step in and hedge the risk of discouragement.
On business development risks, solo founders are forced to drop a ball as they juggle building a customer base and building/iterating the product. With more than one founder and effective distribution of skill sets in place, the startup can easily hedge the countless risks challenging its success. After all, one shall chase a thousand, two shall chase ten thousand.
Other Founding Contributors
Okay, we have been chanting “the smaller, the better” for a while now. What then happens to those who have made a significant contribution, even from ideation? Simple! They get their deserved sweat equity. Topping it with a founder title is not necessary. What the startup needs are the appropriate skill sets for the appropriate positions.
We conclude this piece by emphasizing that “too many cooks spoil the broth”. Protect founder’s equity, hedge risks and stay attractive to investors by keeping the founders circle as small as possible.
Would you like to chat with the FINT team? Stop by on our Telegram group and ask your questions! Also, let us know what other topics we should write about.
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DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice.
Interesting and helpful read. Thanks a lot.