I was gifted a once in a life-time opportunity. It was exciting. It was everything I wanted to be a part of. It was the ability to put to work all the skills I had amassed to make a real difference for myself and for others. But I chose the wrong co-founders and investors and the consequences were dire.
I was gifted a once in a life-time opportunity. It was exciting. It was everything I wanted to be a part of. It was the ability to put to work all the skills I had amassed to make a real difference for myself and for others.
Business ownership has always been in my blood. My father, a retired business owner, would say “always be master of your own universe – no matter how small that universe is.” In my 3rd year of college, when I became a father, business ownership chose me as the only path I could employ to finish my degree and provide for my family. I do wish I could say “I knew exactly that starting a business was the answer to the challenge.” I didn’t – I tried to pick up shifts at retail jobs and talk to traditional employers into hiring me on a piecemeal basis or with a schedule that would accommodate my academic classes. Nobody was receptive, so I inadvertently dove into the world of business ownership – and it was a success – and has been for 23 years in the running. It’s what I know; what I learned growing up; and what has driven me to achieve and succeed in many ways.
I was excited by the opportunity because I was asked to be a part of something that I really wanted to do anyway. So, to be asked to do it together with someone that could provide the fuel (capital) and connections to make it bigger than I could on my own or ever could imagine – a dream come true. Being able to be a part of something to help other entrepreneurs and perhaps get mega rich and famous at the same time? Sign…me…the…fuck…up! So, we did it.
I will acknowledge, that maybe the person that asked me to be a co-founder of this organization chose the wrong person. Or maybe I chose the wrong investor at that stage? In terms of business results and outcomes, it’s probably hard to argue that. Mistakes were made. But for the first 2+ years of the 3 years this organization existed, it sure did not feel that way.
Highlights from the first year include:
(1) Having a business that we incubated recognized as Entrepreneur of the Year.
(2) Asking 5 people for a seed round – and getting 5 “yes” replies. We never asked a 6th.
(3) Attracting the interest of 2 professionals that left their big jobs and titles behind to join the team. I have never been so proud in my life – it’s still my greatest professional accomplishment.
Lowlights – or realities of this same first year include:
(2) Burning through a lot of my savings (again, what do you expect?).
(3) Not able to get the traction desired from a couple of our ideas (yes, it takes more than 1 try. More to come on this).
The good news about the latter bullet point is that our investors realized we needed help. And help came in the form of 2 professionals that caught wind of an early stages start-up venture fund and program in a tiny, sleepy town.
“How could this be here?” they asked. “How do I get involved?” At first, when we proposed the deal to each of them – they gasped in horror at the salary we could offer. That changes when another investor – one that anyone would want on their side – wanted to make a $1.5 million investment to fund the desired salaries of these 2 new partners and expansion.
How much vetting was done on these new team members – ones that were labeled co-founder? None. Zip. Zilch. Nada. How much vetting was done on our investor? Zero as it related to a great fit for our story and deal. His background and proximity earned a rubber stamp on his investment. Looking back, the lack of vetting to see if the newly appointed co-founders and investor would be great fits for the vision were fatal mistakes.
We expanded – FAST. We built up the horsepower and pipeline to service start-ups, take stakes, and make things happen. We built out version 1 of a business that we knew had huge potential. There was so much excitement around this enterprise in so many ways. We had products in the marketplace getting usage. We had start-ups inquiring into us about our program – start-up founders were willing to leave their big cities to come spend a summer or spring with us in this little place. We had an active internship program. We had something very special.
So much that our investor bought a racehorse in September 2015, named it after the company, and we would zealously watch this horse race – and after several races of steady improvements he scored his first win on June 4, 2016. What is more start-up than that?!?!?!?
But as the script goes, most stories that have exciting and happy commencement have very unhappy endings.
The first red flag was the nature of the investment we received. We never received the full investment. Our investor would dole out funds as needed as a preferred stock loan. It’s not an unreasonable approach. But, it’s not common for a company to announce a seed round of whatever amount of funds and not have those funds deposited directly into the corporate bank account. Considering the proximity of our investor to past deals, it was an acceptable approach. However, any established start-up founder would say ‘nuh uh’ to this.
It didn’t take long – a few months – before the excited co-founders started complaining about their small salaries (it was what they asked for – although they did allegedly make compromises compared to their salaries at their prior large employers) and their equity stakes. My salary was about 20% less than each of them and my equity stake was about 25% bigger than each (they each were given a lot of stock options upon joining). Makes sense, right? After all, I started this and wrote checks along the way. I was coaxed to make each of them equal partners with me. I accepted. That was red flag #2. We marched on.
Red flag #3 was the shift in our business model and the failure of our new co-founders to recognize how start-ups work. We built version 1 of a product. It worked. We put it out there to the world. Customers signed-up. We had interest from partners. The product’s performance was good, but we knew we had to make improvements. In start-ups, you iterate, yes? I remember when our CTO/co-founder said “I built it exactly the way we said we would, so we are done.” I agreed and argued that we need to make improvements. He said ‘that’s not how things work.’ I couldn’t believe my ears.
My entire career to that point had been in the start-up space. His? All in big companies. There is not a chance he knew how it worked. I was forced into submission. In part, because I was out voted by my co-founders 2 to 1. They had master’s degrees from big schools, worked at big companies, and in big cities. I had a religious studies degree from a tiny school, had only lived in towns with no more than 50,000 people, and my best feather in my cap was being an early-stage employee of a start-up that grew (Inc 500/5000 for 7 straight years) but never amounted to anything up to that point. These guys had to be right, yes? More experience; more education; more polished.
From there, and it is crystal clear looking back, things went downhill. Our investors wanted us to change paths to stop burning money. Of course, nobody except me was willing to take a salary cut. But, start-ups burn money, yes? The answer? Sell services by the hour. Talk about a business that is not scalable and that you don’t want to invest in – at least not in the start-up sense.
We never regained momentum. And it culminated in March, 2017 when I got a call from my co-founder. I was fired. Terminated. I was the problem getting in the way of us succeeding. I accepted my termination and slipped away. My depression and lost sense of self was so bad but something I could accept.
I did everything I could in my power to make that start-up go. I acquiesced to wiser professionals; there is nothing I was asked to do that I did not do or accomplish. From making cold calls for technology services to copy/pasting 50,000 rows of data 1 by 1 to populate our database. I took on debt and drained significant portions of my retirement savings. Why? Because that is what you do. How many stories do you hear of founders that put it all on the line – their last penny and turned it into billions. Tons right? Well, there are multitudes more than do not have happy endings.
Every fact and observation led me to one conclusion: I just don’t have what it takes to be successful in the way I wanted and envisioned to be. I was devasted – financially, mentally, physically. Who cared? Nobody. Not my business partners – not my co-founders. Who did? My family and close friends – that’s about it. Professionally, nobody wants to hire a ‘loser’ – someone that tried and failed. The coach that goes 0-12 rarely get a call back for another job.
So what happened to the horse? After his win, our investor sold the horse. Maybe it was indicative of what was coming. The glass trophy awarded to the horse for winning the race stayed in the office. On my departure, I wanted to take the trophy with me. I accidentally dropped it while cleaning out my stuff and it shattered. I spent another hour making sure every shred of glass was cleaned up. In part, because that is what you do – just common courtesy. In other part, because I didn’t want anyone to think I lost my temper and threw it to the ground out of anger. It crossed my mind.
I picked the wrong co-founders. We did not vet them. They had zero understanding of the start-up space and zero intestinal fortitude to get through start-up growing pains. We never bothered to even evaluate their fit for the venture. We (I) just accepted their involvement as face value.
Deeper than the wrong co-founder, was the wrong investors. Not providing the full investment from the start, yes bad. Asking us to change direction and to pretend that they don’t know how start-ups works? Doubly bad. But the worst was the realization of betrayal.
At some point, the two other co-founders went to the Chairman of our company – our main investor. And asked for permission to fire me. Likely building up a case for many weeks. I’ve read Robert Greene – I get it. I got behind the power curve. My fault, right?
Except our Chairman was the CEO of the start-up I was at for 10+ years. We went back close to 15 years. We worked side by side on many things as we grew the company from $100,000 of annual revenue to $70,000,000. He tasked me with working on a new idea at that company and it became one of the fastest growing and most profitable units of the entire enterprise. And in just a few weeks of politicking, he agreed to my termination. Never a call, advanced warning, no offer to mentor or help counsel. I was the bad guy in his eyes, too. 15 years was wiped clean in a few weeks. Maybe everyone else was right.
On some levels, I was still excited. I had my equity in a business and my two co-founders promised they would make something of it. They were going to make it work and grow the business. They lied.
My entrepreneurial spark was extinguished. My finances strained. My mental health – wrecked. I received a small reprieve when I received a call from our Chairman 3 months later. The 2 co-founders were embezzling and working on side projects using company resources. They had a whole master plan to cut bait from the enterprise and do their own thing (apparently, they didn’t understand or like liquidation preferences). I felt the small spark rekindle ever so slightly. After all, who can survive that? How can you win the game (or even compete without embarrassing yourself) when everyone else is playing another game and don’t bother telling you the rules. I never received an apology.
For the first time in several months, I did not feel it was 100% my fault. That helped.
Yet, the scars from choosing both the wrong co-founders and investors have left permanent damage on me. In general, I am ok by most standards. But, on the inside, I still hurt. In business, people I want to trust, I cannot. People that I feel do have confidence in me and may even support me in my next venture – these are the same ones that turned their backs on me. I can’t confidently go to them and ask for help or guidance.
My proudest accomplishment of recruiting 2 established professionals? I am terrified to revisit that skill and super-power again. Why? What if I choose wrong? What if my pride gets in my way as it did last time?
How big was the opportunity that we missed because we did not want to try again? HUGE. How do I know this? I know of ONE other company in the whole world that works on this same product. They have raised $250 million; acquired companies; are worth more than $2 billion; are angling to go public. They have not built ANYTHING yet. Maybe soon? We had something built! Why don’t I pursue this idea again? I have already gone all in a couple of times and got cleaned out. I am not sure if I can handle another knockout punch.
Vet Your Co-Founders
While nobody has a crystal ball, domestic abuse victims fail to spot any abusive behavior for months or years before damage is done. The person you co-founded the company with today may be a very different person 1 year from now when the chips are down, or if life circumstances change.
Trust but verify. If a representation is made by a co-founder about an accomplishment, accept it and verify it. Call former employers and partners. Run background checks. Do personality tests. Hire a consultant to help you understand the conflicts that are likely to arise from the different personality types come together.
Write a Team Charter.
Document, in writing, the approach to address conflict. The rules of engagement. You always want to be sure everyone is playing
the same game. Feel free to revisit it
and evolve it as the company grows. It’s
a lot easier for everyone to agree or disagree and commit when promises are
made in writing. More importantly, it
provides written basis for dismissal of a founder if there is a need.
Be Generous but not Equal. From George Orwell’s Animal Farm: “All animals are equal but some animals are more equal than others.” When it comes to bringing up co-founder structure, document contributions – time, money, expertise. This is what feeds the capitalization table and ownership structure. It also gives you insights into the values and level of commitment of each partner. Who is willing to write checks? Who cannot? Who needs a bigger salary? In my situation, rather than cutting in each new co-founder the same, the capitalization table should have evolved in my favor as I took less salary and did not have health insurance through the company – they did.
Vet Your Investors
The world rings of messaging that investors are on your side. They are, but first they are on the sides of themselves and their LPs. This is ok. Great situations happen when all can win. However, when faced with taking a loss on behalf of their LPs or firing the management team from an investment, the VC firm will first protect the interests of its LPs over a founder’s.
Check References. The same logic applies for investor due diligence. Call former portfolio company founders and employees. Both successful exits and failures. What were the personality conflicts? What was the culture like? This will give you a firsthand view of who you are dealing with and what things can look like if things do not go well.
Governance Frameworks. Like the Team Charter, document how board and governance need to work and should function. Set best practices for submitting complaints. No founder should be instantly fired because others say so. From a proper trail of documenting performance to goal setting to communications expectations.
Vet Yourself
Before taking on investors or co-founders, vet yourself. Look inward – perhaps even with the help of a trusted friend or mentor that has no dog in the fight. Are you ready for partners? Are you ready to face the inevitable conflicts that comes from putting many personalities in the same room. Are you equipped to take a knockout punch? Because at least one will absolutely come your way and may even connect. I wasn’t prepared to take a knockout punch. And it was a doozy.
Like I said, I am ok by most standards. I am in a better spot financially than I ever have been. By some definitions, I have already won the game. The mental and physical health toll stemming from the poor selection of co-founders is slowly healing. Yes, it can take many years to recover from a shock of a catastrophe like that. I am slowly rebuilding my strength and capacity to take another swing – and this time armed with start-up life lessons, an MBA, 2 languages learned, a lot more wisdom and many other assets I did not have in 2014-2017.
How did I get through it? Sheer luck. Exercise, meditation, hard work, therapy, etc. etc. All the usual suspects have been a part of this. But, most importantly, the support of family. Yes, our family is well off with the fuel to fight off many invading armies from our little universe – a privilege that 99% of the world does not have. Without those means, I am not sure I would have been able to recover – and yes, there are many untold stories of entrepreneurs that made fatal mistakes that never do recover.
So, what’s next for me? One fault of entrepreneurs is that ‘more’ is always a word that defines them. Rarely, does this ‘more’ mean more money. More often, it means more giving, more exploring, more learning, more doing, more impact, and yes, more money is not excluded from this list. And this drive for more is the source of great resiliency and success and can also be the source of great aggravation and pain.
I am an entrepreneur and business owner at heart. And I want more and a have lot more to give.
He has won several races since his victory. Including a big upset win in October, 2021. His racing career is likely ending soon, but likely has a few more runs in him. Hold all tickets…
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