Abstract
In this year’s 25th anniversary edition of Family Business Review, Frank Hoy reviewed three seminal family business books. My prediction is that a fourth work will now be added to the list: Noam Wasserman’s The Founder’s Dilemmas.
Hands down, if there was one book I would give to any founder, or anyone contemplating becoming an entrepreneur, it would be Wasserman’s recently released The Founder’s Dilemmas. This is the handbook of critical knowledge that every entrepreneur/founder needs. Wasserman gives real-life examples and key data illustrating the dilemmas at important choice points in the entrepreneur’s journey, when decisions are made that shape the startup’s future, affect its value, and determine the founder’s degree of control over the firm.
The Founder’s Dilemmas reports findings based on an annual survey over a 10-year period (1999-2009) of more than 10,000 entrepreneurs/founders in more than 400 companies. The data give a clear sense of “best practices” influencing each critical decision made by founder-CEOs. Wasserman’s research also identifies the necessity for successful entrepreneurs to understand their own motivations and the motives of others in order to make wise decisions for the company. He analyzes both internal and external factors affecting succession, and Wasserman discusses the factors affecting the ultimate replacement of the founder-CEO.
Incorporating other recent studies, Wasserman has written a readable book that describes critical factors and founder-CEOs’ decision points that shape the future of their businesses.
Best Practices
Most CEOs conceptualize “best practices” as systems and procedures used by a charismatic leader (e.g., Steve Jobs or Jack Welch) or a successful leader in the same field or industry. Best practices can also be extracted from studies of many companies, industries, or factors produced by consulting firms. In this case, Wasserman bases his findings on studies following a large number of individuals, from many companies, measured over time. Wasserman’s research of more than 10,000 founders over 10 years offers an aggregated measure of norms or yardsticks for success.
Family business advisors know that there is no one right answer that fits all founder-CEOs, as individual differences among founders as well as varying circumstances affect each major decision. However, Wasserman has quantified, illustrated, and explained the impact of the critical variables in a manner that helps founder-CEOs make wise decisions. By understanding the practices he analyzes, family firm owners can follow best practices to become successful entrepreneurs.
Decision Making
Successful founders, like other successful people, are differentiated from those who are not as successful by the decisions they make. Wasserman points to the variables that influence founders’ decisions—psychological (both intrapersonal and interpersonal variables), situational (availability of resources), and time frame (short- vs. long-term goals).
He says that the essential requirements in making the best business decisions are (a) self-knowledge of the decision maker; (b) awareness of the possible choices, and the consequences of each choice, at a given point in time; (c) knowledge of the decision-maker’s short-term and long-term goals; (d) anticipation of the impact of the different motivations of others involved in the business (partners, investors); and (e) the ability to adapt to unexpected changes. An important factor that is emphasized is the constancy of unexpected changes in staff, competition, technology, and the legal and regulatory environments. These changes are experienced by founder-CEOs as jarring, even if they know they need to anticipate change.
Some of the critical founding dilemmas that Wasserman explores revolve around the choice to have cofounders. The decision to take on cofounders is usually influenced by the need for additional competencies, access to financial resources, or connections to social networks that widen hiring and selection choices or distribution channels.
The dilemmas are, if deciding to have cofounders, (a) whether they are friends, families, strangers, and prior coworkers; (b) what roles and decisions should each leader make; (c) who makes which decisions; and (d) how equity and other financial rewards will be divided. The equity splits among teams with prior relationships, as compared with teams without prior social relationships, is among the key factors that have short- and longer-term consequences on the CEO’s retention of power and/or equity. (Most founder-CEOs want to maintain control of the firm until they choose to give it up. Maintaining this control is complicated when there is more than one founder.)
Wasserman compared solo founders to founder teams (included 1,658 start-ups between 2005 and 2009). The data showed that solo founders hired younger and less expensive employees, were twice as likely to use debt that did not dilute the founder’s ownership, and were more likely to retain the titles of chairman and CEO after their first funding.
Bringing in outside capital is another major challenge for many young companies that Wasserman explores. He illustrates that, with each round of successful fund-raising, the founder loses control of the board and diminishes his or her share of equity.
Emotions, Personality, and Self-Awareness
Beginning with an awareness of the entrepreneur’s primary motivation—money or power—Wasserman’s research shows how such motives can influence crucial decisions throughout the founder’s life and at different stages of the company’s lifecycle. The emotions behind these motives affect key activities (most important actions that the company must take to operate successfully), key partners (leadership that makes the company successful), and key resources (the relevant human, social, and financial resources needed to help the company grow).
Wasserman demonstrates how major decisions are influenced by emotional factors—whether founders are motivated by control or wealth, whether founders are related or have relationships prior to starting a company (e.g., prior familiarity may cause them to do less due-diligence), whether there are family or nonfamily members on the executive team, and whether the members of the founder team change their perspective of the other founders’ contribution to the organization, for example. His data illustrate how emotions affect the decisions and actions by founders and boards of directors.
The impact of certain personality traits of founder-CEOs on the firm’s leadership is also described: for example, conflict avoidance often leads the founder to make easy short-term decisions; success can result in inertia or complacency that prevents adaptations to change.
Wasserman argues that founder-CEOs need to be aware of their own emotional investment and also realize that the motives of others usually differ from their own. For example, founders need to consider that their motivation is typically different than that of potential investors, who demand a share of the company and usually a place(s) on the board—thereby reducing the founder-CEOs power and equity. Wasserman shows that if founders know their primary motivation, they will have an easier time making decisions and can make consistent decisions that can help reach their goals.
Few founder-CEOs have a clear awareness of the changing needs of the company: for instance, the different competencies needed when developing a product to lead the company to the next level (usually characterized by a more formal organizational structure). In fact, the data show that the more capable and the quicker a founder-CEO leads the start-up through the early stages, the more quickly the likelihood of CEO replacement. The very success of the company makes it very difficult for the founder to believe another CEO is needed.
One of those more psychologically sophisticated points made in this book is that the very strengths and sources of the founder-CEO’s power can later become his/her liabilities.
Succession
As family business advisors know, succession is one of the most critical and difficult processes for a founder-CEO. The Founder’s Dilemmas clearly describes many of the factors influencing the replacement of the founder. Wasserman shows that the trigger for changing the CEO is usually initiated by the board or another party: 73% of CEO replacements are board initiated versus 27% founder initiated. Furthermore, there are two types of board-initiated succession: (a) when the board removes a poorly performing founder-CEO and (b) when the board replaces a high-performing founder-CEO. Factors contributing to this voluntary versus involuntary succession are delineated in the book.
Social-psychological factors exist affecting successor choice; for example, founder-CEOs are drawn to people who share their backgrounds and skills. However, the new CEO almost always comes from outside the existing executive team in founder-led companies because the board is looking for capabilities that the founder-CEO does not possess. The CEO candidates have to strike a balance, showing alignment with the board/investors and also with the founder-CEO.
Continuation of control of the company is a paramount founder-CEO need. Wasserman’s research shows that when the board of directors initiated the CEO replacement, the replaced founder remained on the board 60% of the time, and when the action was founder-CEO initiated, the replaced founder remained on the board 96% of the time. In non-founder-led companies, the replaced CEO almost never remained on the executive team or the board of directors.
There are risks and advantages of keeping the founder after her or she is replaced as CEO. Psychologically, founder-CEOs experience an emotional jarring when trying to accept this change even when they support the need for their own succession. This is illustrated by the quotation, “They think it’s a title change, not the tidal change it really is.” Wasserman highlights the importance of viewing founder-CEO succession not as an event but as a process, and he recommends that succession planning should be initiated early in the company’s development.
Summary
The Founder’s Dilemmas illuminates to founder-CEOs the consequences of each critical decision for their company’s long-term growth, value, and ownership. In Wasserman’s words, the book’s central message is that “these founding decisions need to be made by design, not by default. Each decision requires the founder to assess multiple options; there are more critical decisions—and more options within each decision—than many founders realize” (p. 7).
This book gives founders the opportunity to make wise decisions by helping them see the necessity for self-awareness, for knowledge of the different motivations of other players, and for understanding the changing needs of the company, its leaders, and investors. They can see the range of decisions possible and the likely consequences of those choices. Thus, the book can help founder CEOs develop realistic expectations by considering more alternatives than they could have thought of on their own. In other words, the normative data presented by this research can give founders a broader perspective that can help them make less emotional, more thoughtful decisions.
Family business advisors can also use this book to persuade reluctant founders to examine their behaviors and assumptions. Wasserman notes that outside advisors or coaches may be needed to incorporate this knowledge and awareness. The book may become a touchstone not just for founders but also for advisors seeking to help founders and their families plan for the future.