10. An idea is not a business.
The Winklevoss twins claimed their “idea” was stolen. But they did not build a business because they failed to implement their idea. They also seemed sloppy about protecting their confidential information and in their hiring practices.
9. Initial $ contributions and ownership allocations can be a problem down the road.
Eduardo’s initial funding of $18K seemed like a lot of money at the beginning – but his 50% ownership of the company proved to be a problem down the road. To build a business, you need to lay a foundation for subsequent investors and participants.
8. Co-founders contribute at different levels.
Mark Zuckerburg focused intensely on getting the business up and running. Eduardo did other things and dropped in occasionally.
7. Co-founders disagree on the direction of the business.
Mark and Eduardo had different ideas about growing the business. Mark wanted users and Eduardo wanted advertisers.
6. Sweat equity – critical and hard to quantify.
Dollar investments are easy to quantify. Sweat equity – the hard work of building the product or service – is much more difficult to quantify. To build a business, you need to inspire sweat equity since most early-stage companies cannot afford to pay competitive salaries. You need a framework for valuing and rewarding contributions to the company’s growth. To avoid misunderstandings (and lawsuits) , it is important to outline the terms for incentive comp plans and stock options/ownership.
5. Dilution happens – plan for it.
It is highly likely that additional investment will be needed. It’s important to anticipate how additional investors, management team and employees will be handled. If you don’t plan ahead, this can get really ugly – as Eduardo found out.
4. Bringing in new players.
To build a successful company, you need to build a team and bring in experienced people. Building an advisory board can help founders understand the needs of their growing company.
3. The initial plan is not the ultimate plan.
Growing companies evolve based on customer feedback. Eduardo seemed to cling to the old model, while Mark embraced the user feedback. The founders need to be flexible and adapt their plan to the market conditions.
2. Expect growing pains.
Growing companies experience predictable patterns – Forming, Storming, Norming, Performing (for more, read my post on Predictable Stages of Business Relationships).
1. If you are successful, others will claim a piece of the pie.
When a company is successful, it’s amazing how many “arm-chair” entrepreneurs come forward to claim a piece of the prize.
Many of these “classic mistakes” can be avoided and the risks reduced with some practical business practices and legal documents.