The Positives of Sole-Founder Startups (Draft)

[This is a draft post, seeking feedback.]


Introduction

When it comes to the topic of sole-founder versus multiple-founder startups, I find that the debate is almost always whether being a sole founder is a bad thing or a really bad thing?”.

I am not sure if I have ever seen a post about the many positives of sole-founder startups.

However, there are some very clear positives for startups just one founder. As a sole founder myself, I thought it was worth sharing my thoughts in case it helped anyone else who is in a similar position.

I will start by addressing the positives of sole founders in a startup. To ensure this article is balanced I will also address the benefits of multiple founders. Finally, I will wrap-up with my thoughts on which is better (spoiler: it depends).

The Positives of Sole Founders

No risk of founder relationship breakdown

A common reason for early startup failures is the deterioration of the relationship between founders. Even founders who have known each other for a long time can find the stresses of building a startup become too much for them. It’s no different to a marriage, where couples who have been together for years can still find that things change and they are no longer right for each other.

When a founder and a senior team member have a falling out, while it’s not ideal, it’s clear who stays and who goes. When two founders have a complete falling out, it’s not always obvious what happens next and it can get messy.

A sole-founder business removes any risk of a failed founder relationship impacting the company because there is no founder relationship to fail.

One vision, one strategy and one plan

Even if a disagreement between founders doesn’t lead to a complete failure of their relationship, it can mean weeks or months of valuable time are lost due to an inability for multiple founders to agree on key decisions. I liken it to coming to a T-intersection in a road where, even if you don’t know the best way to turn, it is definitely better to turn left or right than to drive straight through the intersection.

Yes, the additional responsibility of being the one key decision maker can weigh heavily on some people. And yes, if the founder doesn’t have a vision, strategy or plan then there are major problems. But having just one founder avoids the significant risk of the company being dragged in multiple directions, or making decisions based on major compromises that no founder loves but are the only way they could move forward.

More equity available for early team members and advisors

(I don’t think this point gets nearly enough attention!)

For a startup to become successful it is just as important to find great early team members as it is to have great founders. Often it will be more important because one or more of the founders might not be strong on execution, or might lack certain skills required to succeed or scale. One or more founders might even just be there because they were friends with another founder, not because they are outstanding performers.

A sole founder, who starts with 100% equity, can allocate a lot of very attractive equity stakes for early team members and advisers and still hold a very large majority stake. While most founders probably wouldn’t do this, in theory you could give 10 people a 5% stake and still hold the same shareholding as you would have had if you had started with one equal cofounder.

You would assume that having one or more cofounders means less need for senior hires and advisers, but you had better make very sure they are the right cofounder(s) given the other potential uses of that same equity.

Lower valuation (and why this is a GOOD thing!)

Another benefit of having fewer founders is that every capital raise can be done at a lower valuation while still maintaining a reasonable value on the founder’s equity. For example, assuming equal founder stakes:

  • A startup with four founders requires a pre-money valuation of $4M for each founder to have a stake worth $1M.
  • A startup with a sole founder only needs a pre-money valuation of $1M in order for the founder to start with a stake worth $1M.

Some founders think a lower valuation is a bad thing. However, raising money for a startup is often much easier than delivering the results that justify that valuation, let alone the results required for the value of the company to increase beyond that point. In other words, all other things being equal, it is easier to achieve the results required to justify a low valuation than a high valuation. And consistently achieving results about what was expected is a great way to ensure the startup survives and grows. Unless a founder really needs cofounders for a particular reason, it might be preferable for many founders to start with a larger share and a lower valuation than it is to take on cofounders and reach for the higher starting valuation.

The argument against this is that early-stage startup valuations are more about supply & demand than risk & return, and many investors care less about valuation than other factors. So, while it might be theoretically better for many startups to start with fewer founders and a correspondingly lower valuation, if the investors care more about the number of founders than the valuation then, in reality, that option may simply not be available.

Investor equity is cheaper than founder equity

This one is best described with an example. Let’s compare two situations:

  • Someone joins a startup as a cofounder and works unpaid for one year. They could have been earning $100,000 per year in a normal job.
  • An investor contributes $100,000 to hire that same person and pay them a salary instead of them joining as a founder.

All other things being equal, the person is taking a much bigger risk by joining as a cofounder as they are betting a whole year of (lost) income on this startup. Assuming the investor is a reasonably rational person and follows common advice about startup investing, their investment is likely one of ten or twenty similar investments and is not a huge single bet.

To compensate for the risk of joining as cofounder instead of employee, the new team members is likely to want a larger share of the company than the investor would expect to receive.

To keep this example simple, let’s assume the new cofounder wants 10% for their year of work while the investor requires only 5% for their $100,000 investment. In that case, another option for the original founder is to raise $200,000 to hire two people of similar experience, and they are still only giving away 10% of the company. Again, it’s up to the founder to decide whether they would prefer one cofounder or two employees for the 10% they are giving up.

Yes, this is an oversimplified example that doesn’t take into account a range of factors including legal and hiring costs, taxes, etc. Regardless, I think it demonstrates that raising money to hire staff might be financially better than taking on cofounders, even for founders who are lucky enough to have a cofounder available to them.

Also, while this is looking at the benefits for the original founder, investors should also want to see equity being used in the best way possible, including more equity going to investors instead of cofounders if that leads to the best outcome for the startup.

More employees available than cofounders

The pool of talented people who are in a position where they can join a startup as a founder is much, much smaller than the pool of talented people who are able to join as paid employees.

So, unless you have the perfect person ready to join you as a cofounder, sole founders might be much better off working harder to raise money and hire someone than to take on a cofounder.

No risk of “dead equity”

Going back to the topic of founder relationships, a failure in a founder relationship doesn’t necessarily mean the end of the startup. However, even if there is good documentation in place and some of the parting founder’s equity can be repurchased, often they retain some shares in the company. The equity owned by a founder who leaves is often termed “dead equity” because that shareholder is unlikely to contribute any further time or money to help the company. New investors don’t like this as it places all the load on the remaining founders and investors to make the company successful.

In no way am I saying that a departing founder should not retain some equity. If that person put in time, and was unpaid/underpaid for that time, they deserve to retain something approximating a fair amount of equity for their contribution. However, this does not overcome the fact that their equity will still be regarded as “dead equity” and this can create difficulties moving forward. A few percent may not cause too many issues but, if the startup has been around for a while and most/all of the founder stock has vested, founder stakes of 20%, 30%, or more, can create enormous issues for the company when it comes time to raise more capital.

The Positives of Multiple Founders

There are many obvious benefits to having multiple founders. So let’s examine those positives and the arguments against them.

Spread the workload

It is easier, for example, for three people to do one year of unpaid work than one person to do three years unpaid. And it’s a faster way to get the same amount of work done.

However, if you can raise money to hire the people you need then this is not an issue.

As the team grows, a higher share of the work is done by employees than founders so this issue reduces over time.

More skills and ideas

Just as more people give you more pairs of hands, it also gives you more potential variety in skills and ideas. Diversity of ideas and skills is important in all companies, including early stage startups.

Again, if you can raise the money to hire the good people then this is not an issue.

Also again, as the team grows the reliance on the founders reduces, the benefits of having multiple founders for their skills and ideas also reduces.

Less risk of the startup being left with no founder

The most obvious risk of having only one founder is that it only takes that one person to leave and the startup has no active founder. If the startup is still in the early stages, this has a very high risk of leading to the end of the startup.

However, just because a startup has multiple founders, that doesn’t mean it has multiple founders who are capable of running the company. So, for many startups, investors may be worse off if the strongest founder leaves and there are no remaining founders who can step up to fill their role. Worse, a remaining founder might demand to be made CEO simply because they are a founder, even though they are not up to it. Just because a startup has more than one founder, that doesn’t mean the startup will survive the impact of a key founder leaving.

Also, in the case of a multiple founder business, it is arguably more likely that any one founder will leave because they think the business will continue without them. A sole founder knows that everything is riding on them so their decision is often stay or close the company, which is a much tougher decision than leaving the company in the hands of other founders.

The fact that multiple founders will each have a smaller share than a sole founder could make it even more likely that they would leave, because they have less to lose in terms of unvested equity if they do leave. You could actually find that all founders end up leaving because their individual stakes are too small to want to stick around when things get tough or they get better offers, whereas a sole founder would have had a lot more to lose.

Share the mental load

This is a big one for many founders. There is no doubt that being a startup founder is difficult in a lot of ways, particularly because of the mental strain. Having a cofounder might allow you to feel more relaxed about taking some time away from your startup, knowing that your founder has your back.

However, having a cofounder doesn’t instantly remove all of the stresses of being a founder. It might even introduce some new stresses.

Taking on a cofounder is not the only way to manage the stress of being a founder. There are many ways to handle stress, including meditation, mindfulness, leaning on friends and advisers, and forming relationships with other founders who are going through the same thing. It’s important to realise that your startup doesn’t fail the moment you take a day or two away from it, and you often come back to it with a much clearer outlook if you do this regularly.

As mentioned earlier, hiring the right people in senior roles fills most of the gaps that might exist because of the lack of cofounders. Mental stress is no different, and the title of founder is not required for someone to care deeply about your startup and take on some of the mental load. It’s very possible to find senior employees who do a better job of relieving mental stress for a founder than many cofounders do. In fact, it could be argued that an employee has less of their own mental stresses to begin with so they have more capacity to take some of the load off you, relative to a cofounder who already has their own founder stress to deal with (and who may even need more support from you than you can get from them!)

To be clear, if you have the right cofounder(s) taking on their share of the mental load it can be a wonderful thing, but just having a cofounder is not a magic bullet for the very big issue of founder mental strain.

Perception

Here we are - the big one!!

It’s going to take a lot more than this article to change the perception that multiple founders is better than sole founders.

I mentioned that hiring good people is usually the way to offset the lack of cofounders. However, hiring people requires money and, unless the business is able to quickly generate significant revenue or is started by a wealthy founder, it is almost certainly investors that are required to provide that money.

We have a bit of a catch-22, as investors may hold they key to building a great team and reducing the need for multiple founders, but some investors will only invest when there are multiple founders.

Hopefully we can start to change this perception because I am sure there are some great founders with great skills and great ideas that have the potential to build great startups, but they just don’t happen to have someone in their life who would make a great cofounder and who is in the fortunate position of being able to join them at exactly the right time.

We all know the world is missing out if we don’t give a lot more minority founders a reasonable opportunity to start a company, and this is slowly being addressed. We need a lot more female founders, and many people are working on addressing that imbalance, too. There are many great founders outside California and investors are now actively looking at those opportunities.

Maybe it’s time we realise that the bias away from sole-founders is either forcing some founders into cofounder relationships that could be detrimental for the startup, or is simply stopping some great startups from ever being built.

(Just to avoid any misunderstanding, I am not trying to equate a bias against sole-founders with discrimination based on factors such as sex or ethnicity. All I am saying is that biases in decision making lead to sub-optimal outcomes, even if those biases are not as obvious or harmful as outright discrimination. Also, this is not an article about getting more investment in sole founders in the name of fairness, but because many great opportunities might be otherwise missed).

Sole Founder or Multiple Founders - Which is Better?

The only correct answer is “it depends”.

It depends on the founder(s)

A strong founder with a clear vision and a lot of the necessary skills is going to have a better time as a sole founder than someone who lacks experience, confidence and skills. To think that all founders have an equal need for a cofounder simply doesn’t make sense.

It depends on the product

Some startups are complex, others are simple. Some will take years to build, others can find rapid success. Some require a broad range of skills while others might only need a very specific set of skills. In other words, no two startups are the same meaning not all startups have the same requirements from the founders.

It depends on the stage of the startup

In the early stages it helps to have multiple founders for the simple reason that there are more people working on the startup who don’t expect to be paid a salary, and more can be achieved before investors and/or revenue are required. The further advanced the startup, the more will be done by paid employees regardless of how many founders the startup has.

It depends on the founder’s ability to raise capital

Given that hiring employees is the obvious way to reduce the need for cofounders, the ability of a founder to raise capital (in the absence of significant revenue or personal wealth) will directly impact how quickly they can start building the team that they need to succeed.

Summary

There is clearly no correct answer, and founders and investors should decide what is best for every startup on a case-by-case basis.

I hope this article helps some founders be more confident about going it alone rather than partnering with someone who they don’t really know, or giving up because too many people reject them because they are a sole founder.

More importantly, I hope that more investors realise that the question is more complex than they might have thought, and will be willing to look at every startup on a case-by-case basis rather than having a blanket rule that multiple founders are better than sole founders in every situation.

Investors want to invest in startups with founders who, among other things, can analyse information, be open to new ideas, admit when they were wrong, and make the best decisions about how to move forward.

Founders have every right to want investors who can do the same, and that includes being open to the idea that every startup is different and a sole founder might be a much better option for many startups, not just an obstacle to overcome.