Entrepreneurial Death Traps

I was reading this article called “Entrepreneurial Death Traps – How to avoid the classic entrepreneurial mistakes”. If you are ever going to start your own business in the future then you should read this article and take into account the advices given. Because you don’t want to repeat those problems.

Friend as a Co-Founder

It discusses about the partnership issues that start with a simple trust between friends and turns into a major problem later on. For example: Two friends launching a start-up together with 50/50 share. After few years one works and another simply looses interest and doesn’t work. The one who does not work still gets paid every month, and owns 50% of the company. Without his consent no major decision cannot be taken, and that includes firing him. So they are trapped.

Second example:

What about the three (or four) (or five) musketeer’s death trap. Although in one sense it’s a corollary of the 50-50 partnership deathtrap, in some ways it’s even more insidious. You know the story. Three friends decide to start a company. They split the ownership absolutely equally, they draw identical salaries, they’re going to make decisions “by consensus.” It’s the logical, “fair” thing to do. One of them (perhaps the oldest or the one whose idea it was originally) reluctantly assumes the presidency because state law requires there to be one.

What a recipe for failure! There are three primary problems with this set-up. First, this company has no leader, no one ultimately responsible for its success or failure. Second, sooner or later a major, honest difference of opinions will arise. What do they do then? Third, the reluctant president will almost inevitably come to see himself as “a little more than equal.” If they have any success, for example, and get written up in the local or trade press, guess whose picture the reporter will want? Guess whose quotes will be plastered all through the story? Guess which other two people are going to hang the article on their family room dart board?

The solution? Pick a CEO and treat him like one. Give him the largest equity position and salary, even if they are only symbolically larger. Somebody has to sit where the buck stops.

There are many more advices and examples, read the full article at http://www.vcinstitute.org/bookstore/deathtraps.html

I think it’s really important to make everything clear before you set out for a business with your friends. Discussing all the financial things might sound a bit money minded first, but that can actually save your friendship later on. What do you think?