A Guide to Co-Founding Tech Startups for Non-Technical Executives
This guide is written for executives without an engineering background or prior startup experience. It is the result of six years of Silicon Valley startup mentorship plus my personal journey as a tech startup co-founder.
What we will cover:
Part 1: Should you even do a startup?
Part 2: How to gather early-stage startup experience
Part 3: How to find co-founders and build your team
Part 4: Your startup checklist for the first 90 Days
Part 1: Make a Decision: Should You Even Co-Found a Startup?
Skip this part if you have already made a final decision.
Let’s first look at some tough facts:
· Over 80% of all startups fail. It is therefore likely, that your startup will also fail. Even if your startup doesn’t fail, it is unlikely that you will make a lot of money. A lot of startups scale unprofitably which requires them to keep fund-raising. Often at flat or reduced valuations. This can reduce the founder equity shares substantially over time.
· Founder salaries are typically a fraction of what hired executives earn.
· Founders regularly face challenges which are existential for their company. This makes startups much more stressful than a regular employment.
On the other hand, startups offer some unique benefits and opportunities:
Working in a startup allows you as you focus on most value-generating activities and thus maximize your impact and potential. One year of building your own startup can typically teach you more than three to five years working for someone else. Startups can open doors to an incredible network of other entrepreneurs, VCs, and Advisors.
So what is the bottom line? Leo Tolstoy’s famously recommended writers: “if you can stop writing, then stop writing”.
If you CAN stop doing a startup then you should stop doing a startup.
Part 2: Gather Early-Stage Startup Experience
If you don’t have startup experience, start by gathering some. This can be done part-time as a side-project or as advisory work. Startup experience will help you better understand what problems you like working on and how to identify high potential startups.
Research technologies that excite you. Don’t limit yourself to industries where you have experience. I once helped a life sciences startup for two years based solely on my fascination with their team and technology. Follow tech sources such as TechCrunch, Hacker News, and the A16Z blog for initial ideas on innovative technologies. Once you come across an interesting technology or idea, think of what a “derivative” or “consequence” of that technology could look like. For instance, if we could have self-driving taxies ready to pick us up at a moments notice, we could eliminate a lot of parking spaces. Next, we could convert these spaces into restaurants and malls. So maybe you should invest in restaurant-related tech.
Find Hight Potential Startups
Once you have narrowed down technology, it’s time to find great startups in that space. Look out for a strong team plus proprietary company tech (or process know-how) that can be applied to solve a big customer pain points. As the second step evaluate your personal ability to deliver strong value to this company.
How do you assess the strength of technology? For execs with no tech skills, I recommend initially advising early stage (Seed or Series A) startups with solid Venture Investors. This ensures that professional investors have already pre-vetted the technology.
Accelerators such as Y Combinator, Berkeley Skydeck, Alchemist, Plug and Play, TechStars, and IndieBio also have amazing startup alumni companies. Startups that get accepted to these accelerators get pre-vetted by the accelerator team. You can reach out to startups directly as well as to the accelerator stuff members. Often, accelerators are looking for experienced mentors.
Crunchbase and Angellist are great places to start looking for startups. You can ask your engineering friends to interview the co-founder team for you.
Finally, use startup pitch competitions to meet great companies directly. Such events are often free or almost free to attend. After such events, I often approach my favorite teams with a short elevator pitch along the lines of:
“Hi, I’m Julia, a Sales and Operations startup mentor. I am currently looking to mentor startups with [sales, pitch training and operations]. I was impressed by what you are building at xyz because of zxy. Can we sync up after the event?”
Deliver Real Value
Successful collaboration with a startup is all about proactive value delivery. Don’t wait for the busy startup team to reach out for help. Figure out what are the biggest problems for this company, brainstorm potential solutions and rank them. Prepare a workshop outlining how you could tactically approach each solution. Some of the most value-adding topics include sales and go-to-market, pitch training and general operations/hiring.
Once a relationship is established and you are delivering consistent value, explore the next stage of your relationship with the company. This could a be formal advisory role, a board role or simply a paid consultant role.
Part 3: Get Going: Find Co-Founders and Build Your Team
Find Your Co-Founders
Once you gather enough startup experience to understand what technologies excite you, ideas will start coming to you of problems you could be solving. Write down your top two or three ideas. Its time to start searching for your co-founder(s).
I recommend treating the co-founder search as an executive recruiting process with a two-three months mutual trial period. Approach the best talent you can find proactively. Ask your network for introductions and do direct outreach via Linkedin, AngelList etc. Be open about your search, and people will start recommending candidates to you. Pay attention to the following:
· Work ethic & motivation: look for someone with similar work ethic & motivation. Founder conflicts happen when one person feels that they are doing much more work than the other.
· Look for the most qualified person around you. Don’t settle.
· Keep a radically open mind: we subconsciously look for people who are like us. This reduces our chances to find a person bringing radically different skillset to the table.
· Trust the feedback from your gut
People will tell you that you need to know your co-founder for years before starting a company together. VCs often use this as a metric to determine how well teams will work together. I believe this is quickly changing as remote collaboration is the new norm. In 2021 I advised a startup where the founders had never met each other despite working together for over a year.
Before starting the trial period with your co-founder get to know each other over multiple mutual interviewing rounds. Don’t take shortcuts on technical assessment. Ask your engineering friends to interview your co-founder candidates for you.
As you find like-minded people, first design a two-tree weeklong experiment to test your working styles. If all goes well, continue working for two-three months before finalizing your collaboration terms. Treat this period as a self-organized accelerator. Set business goals and milestones. As an example, you could target having a first version of your product complete or a first iteration of ads running. During this period your should both answer the following questions:
· Are we enjoying working together?
· Can we both agree on a problem to solve?
· Are we hitting our deadlines?
· Is there a clear division of responsibilities that everyone is happy with?
· Are we iterating on our ideas?
· Are disagreements discussed openly and honestly?
Number of Co-founders
There is no such thing as a magical number of co-founders, but a few “wisdoms” apply to most startups:
· It is hard to build something alone. A co-founder brings additional skills as well as a different perspective on problem solving. Most startups tend to have at least two co-founders
· Having more than three- four co-founders tends to slow down decision-making in an early stage startup
· A standard composition of CEO + CTO works quite well. Some specialized startups might need other co-founders in the beginning (e. Chief Scientific Officer / Chief Marketing Officer / Chief Product Officer etc.) But most do not. These executives can be hired at a much later stage
Give your co-founders enough equity so that they remain motivated even if the company undergoes dilutive fundraising rounds (which reduce founder’s equity share). Most early co-founders start with at least a 30% ownership. CEOs often have 5–15 ppt more, although 50/50 splits are also possible.
50/50 splits are controversial because they can create a voting deadlock that is not easy to break. In his book “The Great CEO Within” Matt Mochary shares a perspective from Alex MacCaw, founder of Clearbit: “Two of my previous startups were destroyed by a 50/50 split.” I have personally found 50/50 splits to also have significant advantages as they remove potential trust issues in a co-founder relationship.
The CEO Title
First, determine who is best suited to be the CEO. CEO’s main role is to set the vision, bring in key resources (e.g. fundraise) and recruit great talent. Then make that person the CEO. End of story. Being a CEO is a full-time job. When CTO’s or CSO’s perform CEO duties “on the side” it typically hurts the company no matter how talented these people are.
Part 4: Get Things Going: Startup Checklist for the First 90 Days
Use this checklist for the main things to get done within the first ~90 days of incorporation:
Select a Legal Structure and Get Business Licenses
VCs are most familiar with Delaware C Corporations. Thus, if you are planning to fundraise you should incorporate as a Delaware C Corp.
Check if you need a State Business License and if you should register with the Secretary of State. Finally, if you are employing one or more people, check if you need to register with your state employment department.
Get Your Federal Employer Identification Number
Apply for a Federal Employer Identification Number (FEIN) with the IRS. A FEIN is required to open a bank account or process payroll.
Select a Law Firm/Corporate Counsel
Ask perspective law firm Partners if they specialize on tech startups and what stage companies they typically support. You also want to find out how much time the Partner with spend with your team. Some Partners hand off early-stage startups to Associates immediately after closing the deal.
Consider negotiating hourly rates of all your attorneys (Partners, Associates, Paralegals) as well as a deferral sum for your legal expenses. Law firm typically offer cost deferrals to Pre-Seed startups with sums ranging from $5k to $25k. The higher potential the startup appears the higher will the referral sum be. Payments are typically deferred until the startup closes a financing round or for up to one year. You want to specify with your law firm what qualifies as a “financing round”. For instance, if you raise $10k from your uncle will that qualify as a financing round?
Legal costs can creep up without founders realizing it. Ask in advance how much time each of your requests will take and request to be notified when the team is at budget.
Keep in mind that the role of your attorneys is to inform you of potential risks, not to make the decision on your behalf. Attorneys are incentivized to maximize their work and thus the number of issues they bring to your attention. One way to combat this, is it to have experienced business advisors.
Together with your attorneys, review and finalize your corporate documentation and filings, including but not limited to the following:
· Certificates of Incorporation
· Share Purchase Agreements
· 83b Elections (pay particular attention to the timing of these filings)
· Company Non-Disclosure Agreements
During this process, you will decide how many company shares will be issued (10 million is a typical number) and what their vesting schedule will be. Typical vesting schedule is four years with one year cliff. A cliff means that if someone leaves the company prior to the one-year mark, they will not have vested any shares.
Open a Company Bank Account
I recommend selecting a bank that understands a startup needs and the fundraising process (for instance the Silicon Valley Bank).
Select an Accountant or an Accounting Firm
Similarly, you want to choose a firm that works with startups.
· Spend time researching your favorite technologies. Follow your interests, don’t limit yourself to industries you know already
· Gather startup experience as a mentor or advisor in order to learn startup operations as well as understand how to calibrate various companies
· Find startups via accelerators, pitch events and direct outreach. Deliver pro-active value
· Reflect on the types of problems you like solving and formulate them as hypotheses for your future startup
· Build out a co-founder team and test your collaboration with a self-run accelerator style program
· Continue iterating!
Jared Friedman “How to get startup ideas”
Michael Seibel: “How to Get and Test Startup Ideas”
Matt Mochary The Great CEO Within
Auren Hoffman: Lets Talk about Founder Compensation
Y Combinator “matchmaking” platform: YCombinator Founder Matching Platform