Your startup is not a democracy, so stop running it like one

Photo credit: Margarida CSilva.

I’ve advised over 700 early-stage startups in one-to-one free advisory sessions in the last six years, and one issue that always crops up is founder shares.

Many times, all founders have equal shares in the company and are all part of the board, regardless of their role. This really irks me. Our firm, TRi5 Ventures, often deals with early-stage startups and regularly encounters first-time entrepreneurs who are uncomfortable talking about shareholdings amongst their co-founders. This often results in an equal split between all founders on the directorship. In these situations, the decisions these founders make become democratic and they have to get a majority consensus before proceeding.

Being one of the accredited mentor partners of Spring Singapore, I’ve noticed that this issue has gotten more pronounced, and I feel it must be addressed.

Implications of a democratic startup

Some entrepreneurs have told me that there is nothing wrong with providing equal shares. After all, everyone is putting in the same amount of hard work regardless of what role they play. This is especially true when a startup is new and a consensus is necessary for direction and decision making. Founders also come in as friends and don’t want to rock the boat with such a sensitive topic.

So, what’s my concern with this?

1. A startup needs strong leadership in the early stages to grow

Every ship needs a captain. The captain’s orders dictate the direction of a ship, how fast it moves, and how resources are managed. In times of harsh weather, the crew relies on the captain’s orders to bring them out of harm’s way or abandon ship.

It’s the same with startups. One founder has to be the CEO and take leadership. He can listen to his co-founders’ perspectives, but ultimately, he makes the decisions and sets the vision and direction of the startup.

In the case of equal shares, the lines are blurred as to who is actually in charge. Even if one person is placed as the CEO, he can’t dictate matters that require shareholders or board approval without taking time to convince a majority to approve.

Let’s get real. Everyone has their own opinion on how a company should be run. And because these companies are literally like democracies, they end up being unnecessarily bureaucratic instead of nimble.

2. The CEO takes responsibility

A team that I used to advise had four founders with equal shares and were all directors in the startup. One founder, who was the front-end developer, asked me, “I put in the same amount of time and effort as my co-founder who is the CEO. As co-founder, I am equally responsible for the future of my startup. So why do I not deserve equal shares in the company?”

I’m sure you’ve read about Travis Kalanick’s resignation by now. As you know, Uber had a string of mishaps that prompted this. The responsibility for any failure or success lies with the CEO. This is why the CEO has the authority to dictate the company’s direction. How the company moves, what products it makes, what markets it enters, and its policies and vision are all the CEO’s call. The other co-founders may provide advice and insight but the person responsible is the CEO.

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