"Founders' Dilemmas" Course, Part 1: Introductory Case and "When to Found" Module

As promised, this post outlines the first three cases of my “Founders’ Dilemmas” MBA course (see my previous post for the course overview).

This post covers the Course Introduction case and the two cases from the “When to Found” module, and provides for each case the official case description, a list of the case’s core issues, and a link to the HBS Publishing entry for that case. As mentioned before, case studies are often invaluable for helping founders, employees, and investors understand the issues they are facing or will be facing in the future (or even help them gain insights into their past experiences!), so if you want to see any of the full cases, you can get them from the HBS Publishing site via the HBSP links below.

COURSE INTRODUCTION – Provide an overview of key issues from across the course.

• Case: "Apple’s Core" (HBSP entry)
  
  Case description: “Steve Jobs and Steve Wozniak are best friends who enjoy pulling pranks together and talking about electronics. After several small collaborations, Jobs pitches Wozniak on starting a company together to sell computers based on Wozniak's design for a personal computer. Wozniak faces decisions about whether to quit the job he loves at Hewlett-Packard to join Apple Computer, how to define his role within Apple, whether to take on Jobs as his co-founder, whether to accept a third co-founder proposed by Jobs, and how to split equity with his co-founders. Early on, they add an outside investor who changes the company's trajectory and who brings in a new chief executive. Later, tensions rise between the two founders as their strategic visions diverge and as the company grows. Wozniak has now learned some disturbing news about his co-founder and has to decide whether that news will affect his continuing collaboration with Jobs.”
  
  Core issues: When to leave a comfortable corporate career, Founding with your best friend, Taking on a third co-founder, Shaping a new venture as an (active) outside investor, Growth tensions, Exit issues.
  

MODULE #1: “WHEN TO FOUND” – Should I start a company now, or work elsewhere first? What are the pros and cons of different career paths vis-à-vis my ability to successfully start and run a new venture?

• Case #1 (Early career decisions): “Humphrey and Cecilia” (revised video case, based on original case by Monica Higgins)
  
  Case description: “Addresses the career decision-making process of Humphrey Chen as he graduates from HBS with an MBA. In choosing between an offer from a top-tier consulting firm and launching a start-up entrepreneurial venture, Chen must weigh the expectations of many people--family, fiancee, friends--as well as his own desires.”
  
  Core issues: Founding early in a career, Founding with a technical background, Personal career management, Self-evaluation.
  

• Case #2 (Late career decisions): “Big to Small: The Two Lives of Barry Nalls” (HBSP entry)
  
  Case description: “Barry Nalls describes lessons learned during his 25-year career--his rise at GTE and shorter-lived ventures--and how these prepared him to found MASERGY, a telecommunications start-up. Even as a young boy in a family of entrepreneurs, Nalls had a reputation as a hard worker, but instead of becoming an entrepreneur himself, he built a long career at 'the biggest company around,' GTE. After years of working there in sales and marketing, he decided to venture out on his own. His GTE experiences armed him for some entrepreneurial challenges, but also caused additional problems as he tried to start, build, and grow MASERGY. Four years after founding the venture, he now feels that he should have 'taken the entrepreneurial plunge' much earlier in life.”
  
  Core issues: Founding late in a career, Founding with a sales-and-marketing background, Founding with big-company experience, Personal career management, Learning how to manage a board of directors, Scaling a high-growth venture.
  

(Note: The third session in the “When to Found” module is an in-class Careers Panel.)

Up next: The “Building the Team” module

Topics Covered in This Blog (So Far)

Here's the updated "thematic index" to the entries and links in this blog.

Rich vs. King: The Entrepreneur's Dilemma

NEW Article: New Article in Harvard Business Review: "The Founder's Dilemma"
Post: Rich vs. King, Around the World
Post: Your Thoughts on Achieving Rich&King?
Post: "Rich vs. King" in HBS's Working Knowledge
Post: "Rich versus King": Charts and Impressions
Post: "Rich versus King": The Core Concept
Paper: Rich versus King (Academy Proceedings 2006)

Co-founder Issues

NEW Post: New: "A Note on the Legal and Tax Implications of Founders' Equity Splits"
NEW Post: The Idea Premium: How Much (Equity) is Your Idea Worth?
NEW Post: Idea People and Their Initial Roles Within Founding Teams
NEW Post: A Second Look at "Idea People" as CEOs: Should vs Do
Post: Equity-Split Results, Part 2: Implications for Team Stability
Post: Equity-Split Results, Part 1: When Do Teams Split Equally?
Post: Splitting the Pie: Jumping the Gun?
Post: Splitting the Pie: Founding Team Equity Splits
Post: Neverland, or Dictatorship?
Post: Founding with Friends, Founding with Strangers?
Post: Equity-Split Adjustments: Not Painful? (third bullet)
Case: Ockham Technologies: Living on the Razor's Edge

Founder-CEO Succession

Post: Yahoo's New Founder-CEO
Post: Interview about Founder-CEO Succession
Post: Bridge CEOs, Revisited
Post: Doomed CEOs and Bridge CEOs
Post: Nike, Cyberposium, and Jim Estill: 3 Takes on Founder-CEO Succession
Post: Succeeding at Founder-CEO Succession? (first bullet)
Post: After the Firing: Initial Research Questions
Post: Founder-CEO Succession
Paper: Founder-CEO Succession (Org Science 2003)
Case: Founder-CEO Succession at Wily Technology

Career Issues

NEW Post: The Gender Gap in Startups, Part 1: Women in IT and Life Sciences Ventures
NEW Post: The Gender Gap in Startups, Part 2: Compensation
Post: The Perils of Being a (Successful) Serial Entrepreneur
Post: Harvard Business Online: "Don't Wait Too Long to Become an Entrepreneur"

Entrepreneurial Compensation

Annual survey site: Compstudy.com (for IT and Life Sciences ventures)
NEW Post: The Gender Gap in Startups, Part 2: Compensation
Post: New Items on Entrepreneurial Compensation
Post: Founder Discounts in "Working Knowledge"
Post: Executive Compensation and the Founder Discount
Post: Changes in Founder Attachment (second bullet)
Paper: Founder Discount paper (AMJ 2006)
Paper: Entrep. Compensation paper (Academy Proceedings 2004)

Vesting and Other Equity Issues

Post: Unlocking Your Golden Handcuffs: How Common is Accelerated Vesting on Change of Control?
Post: Golden Handcuffs and Vesting: Initial Interpretations
Post: Golden Handcuffs and Vesting: Early Analyses
Post: Golden Handcuffs: Summary of Vesting Data

Hiring Issues

Post: Investors (and Managers) as Headhunters: Sources of New-Venture Executives
Post: Hiring Into -- and Demoting Into? -- Executive Positions
Post: Hiring Frustrations: Can Goliath Work in a David-Venture?
Post: HR 101: Hiring and Scaling Challenges

Building a Board

Post: Board problems: Even numbers? Multiple founders?
Post: “Do I Have an Effective Board of Directors? (How Can I Tell??)"
Post: Building a Board: Mentorship? Monitoring?
Post: Building a Board: The Impact of Company Stage
Post: Building a Board: Composition by Company Stage
Case: Ockham Technologies: Living on the Razor's Edge

Investor Issues

Post: Due Diligence As a One-way Street
Post: Due Diligence on Your Investors, Revisited
Post: Thanksgiving Dinner ... With Your Investors (or, "Funding from Friends and Family")
Series: "Upside-down VCs" (internal VC structure and hiring decisions)
- Part 1 (The "First Morning" That Sparked It)
- Part 2 (The Costs Versus Benefits of Junior Hires)
- Part 3 (Synthesis of Comments)
- Part 4 (Other Factors, and Performance Implications)
Series (by Matthew Louie and Cali Tran): "Investor/Entrepreneur Value Expectation Gap"
- Part 1 (Project Overview)
- Part 2 (Entrepreneur Results)
- Part 3 (Entrepreneur vs. Investor)
- A Postscript (Entrepreneur-Investors)

Other Topics

Post: Looking for (Movie) Suggestions: Your Favorite Founder Scenes?
Post: A Look Back, A Look Forward ... and a Request
Post: A Note on My Research Approach and Data

Thanks again to everyone who has been actively participating in this blog-dialogue -- I really appreciate your input!

Course Overview for "Founders' Dilemmas"

Educating founders about the upcoming decisions and challenges they will face

Last week was HBS Graduation Week, marking the official end of the debut semester for my “Founders’ Dilemmas” course. I had a great semester with a terrific group of very sharp students (who generously bestowed on the course the 2009 HBS Teaching Award). In honor of those bold, risk-taking students who were willing to bet on a new course, I’m going to devote my June posts to outlining the course’s structure and content and to delving into the case studies I developed for it. In addition to their being useful for educating the future founders in my classroom, I have also found that these case studies are useful for educating current and future founders who are already off campus.

Below is the official course overview. The bottom half describes each of the course’s four “modules.” Each of my next four posts will describe the cases in those modules. In the meantime, I would love to get any comments or feedback on the high-level structure or any of the rest of the content!

Founders' Dilemmas: Money and Power in Entrepreneurial Ventures
Associate Professor Noam Wasserman
20 sessions + Paper

CAREER FOCUS

For students who plan to become involved in new ventures now or at some point in their careers. This involvement can occur in any of the following ways:

1. As founders of a new venture
2. As early hires, early advisors, or board members in new ventures
3. As potential investors (e.g., VCs), customers, partners, or acquirers of new ventures

This course was designed to help these potential founders, hires, and investors prepare for the decisions they will face both before and during their involvement with new ventures.

EDUCATIONAL OBJECTIVES

This course examines the early decisions that have important long-term consequences for founders and their ventures. Potential consequences include losing control of their ventures, breaking up of the founding team due to tensions between founders, and jeopardizing the financial gains from their hard work and innovative ideas. The course’s goal is to help students be much more informed about those long-term consequences before they make the early choices that can lead to them. The course also arms students with tools and frameworks with which to assess potential outcomes and avoid common mistakes.

We will focus on “people” issues (i.e., the key challenges faced when deciding when and how to involve other people in the venture) and on “universal” issues (i.e., those issues faced by founders regardless of the industry, geographical location, or period of time in which they are founding their ventures). The cases emphasize high-potential ventures (as opposed to “mom-and-pop shops”), where the choices we examine have the most impact on the future success or failure of the venture.

COURSE CONTENT AND ORGANIZATION

The course is comprised of four major modules:

1. When to Found
   Should I start a company now, or work elsewhere first? What are the pros and cons of different career paths vis-à-vis my ability to successfully start and run a new venture?
2. Building the Team (Co-founders and Hires)
   Should I be a solo founder, or should I try to attract co-founders? If I attract co-founders, who should they be (e.g., my good friends?); how should we split the roles; and, how should we split the equity? Once I start hiring non-founders, should I hire “right” or “right now” employees?
3. Beyond the Team (Investors and Other Outside Resource Providers)
   What are the tradeoffs involved in attracting outside resources? How will my decisions affect my ability to keep control of my venture and also build its value? How should my motivations for becoming a founder affect the choices I make?
4. Achieving the Entrepreneurial Ideal
   How have some founders managed to build valuable ventures while still maintaining control of them? What general lessons can we learn from these founders about the decisions we should make at the outset and throughout the building of our ventures?

Most classes are structured around cases, but we will also feature video clips, a negotiation exercise, a panel discussion, and guest appearances from case protagonists to enhance the classroom experience.

Founder Cases in the News: Evan Williams (Twitter) and Apple

One of this week’s more intriguing (and controversial) rumors in the IT industry was about Apple's possible interest in acquiring Twitter.

I was planning to use my next blog-post to give an overview of my new MBA course ("Founders' Dilemmas: Money and Power in Entrepreneurial Ventures"), followed by posts on its individual case studies. However, given the Apple-Twitter rumors, I decided to jump the gun regarding two individual cases.

As it turns out, the course’s introductory case is about the early founding fireworks at Apple, and the middle of the semester features a case looking at Evan Williams' approaches to founding Blogger and to founding Odeo (which evolved into Twitter). If anyone is interested in seeing those cases, they’re available on the HBS Publishing site, with "Apple's Core" here and "Evan Williams: From Blogger to Odeo" here.

The broader course overview will be coming up soon!

Just Launched: 10th Anniversary Compensation Survey

Our annual Entrepreneurship and Compensation surveys are under way right now. Do you want to participate and get free access to compensation data?

The surveys focus on private companies in the Information Technology and Life Sciences industries. We have conducted them annually since 2000, making this the tenth year of the survey. I collaborate on the surveys with three professional services firms: executive search firm J. Robert Scott, Ernst & Young LLP, and law firm WilmerHale.

To mark the tenth year, we are introducing several (very positive) changes. Two of the major ones are as follows:

• Going global -- Not only are we surveying private ventures based in the US/Canada, but we are also expanding to include ventures based in the UK, India, China, and Israel.
• Sophisticated tools -- We are introducing a fully revamped survey site that will give survey participants multiple tools with which to slice and analyze the position-by-position data and other items from the surveys.
  

As in past years, survey participants will receive free access to all of the detailed compensation tables, including salaries, bonuses, and equity holdings for C-level and VP-level executives. However, this year, access to the tables will be through the much more sophisticated analysis site (rather than through paper or PDF versions of a static Compensation Report, as had been done in the past).

To qualify for the free access, please complete the questionnaire by May 29, 2009. Click here to go to the survey site.

If you participated last year, we should be able to pre-fill some of the data that would not have changed, making it quicker for you to participate now. (If you did not participate in the past, participating now will make it quicker for you to do so next year!)

Potential slices at the company-status level will include:

• # of financing rounds completed
• Company revenues
• Stage of product development
• # of employees
• Geographic region
• Industry segment

You will also be able to break out the data by founder vs. non-founder (a.k.a. "founder discounts") and other relevant dimensions, to delve into board compensation, and to examine how things change as ventures evolve.

All survey submissions are kept completely confidential; submitted information is seen only by me and the core research team, the analysis site will only show slices for which we have multiple data points, and we do not even list the names of participating companies.

So if you're a senior executive in a private IT or Life Sciences company and are interested in participating, please click over to the survey site, select your country and industry, and click on "Start Survey."

If you're an investor (VC, angel, etc.) and you get your portfolio companies to participate, both you and the participating companies will get free access to the site.

As I described in my inaugural blog post, the core of my research data -- e.g., all of the charts I post here and the econometric tables in the journal papers that underlie my blog-posts -- comes from these surveys. So participating in the survey will help you get scarce private-company compensation numbers, provide data for future blog posts about issues you're facing, and help me continue doing the research that serves as the foundation for this blog!

New: "A Note on the Legal and Tax Implications of Founders' Equity Splits"

In January, I debuted a brand-new MBA course based on my research on founders. The theme of the course should be familiar to readers of this blog: the tough, early choices founders face that have important, long-term implications for them and their ventures.

For the course, I wrote 15 HBS Cases about the challenges faced by founders as they decide: when to make the leap into founderhood, whether and how to build their founding teams (e.g., is it a good idea to found with your best friend?), how to split roles and the equity with their co-founders, how to make early hiring tradeoffs (e.g., hire "Mr. Right" or "Mr. Right Now"?), and how to think about the costs and benefits of taking outside capital.

As I’ve mentioned in the past, people (here, founders, new-venture employees, investors, and others involved in new ventures) often find HBS Cases useful for helping them think through the challenges they are currently facing or may face down the road. Thus, in the coming weeks, I will be posting overviews of my new cases and of the course’s modules.

A central issue in the early part of the course is splitting the equity within the founding team. (On this blog, the equity-split posts are consistently among the most popular items. For those posts, see the "Co-founder Issues" section of the blog index.) In several of the course's cases and in a hands-on negotiation exercise, we tackle the relevant business considerations. However, there are also some critical legal and tax issues that should be considered when splitting equity and setting up the ownership structure.

To cover some of these legal and tax issues, I created an 8-page HBS Note entitled (very creatively) “A Note on the Legal and Tax Implications of Founders' Equity Splits.” (The note was co-authored with Lauren Barley, and taps the expertise and wisdom of Allison Berry Spinner of Wilson Sonsini Goodrich & Rosati; Raj Kapoor of Mayfield and founder-CEO of Snapfish; Bill Fenwick of Fenwick & West; serial entrepreneur Mike Cassidy; and Steve Berkley, former chairman and CEO of Quantum Corporation.) The issues covered in it include:

• The need to make timely and valid Section 83(b) elections if the founders adopt vesting as part of the equity split.
• The importance of considering intellectual property (IP) issues when splitting the equity and the need to do so consistent with Section 351 of the Internal Revenue Code.
• Reasons why founders should not delay splitting the equity, and whether they should involve an attorney or accountant when they do.

It also includes a sample restricted stock purchase agreement and a sample 83(b) election document.

In case it’ll be useful to anyone dealing with those issues in the near future, the Note is available on the HBS Publishing site as of today.

Feel free to post comments about the Note (e.g., issues that you feel should be covered more extensively) here.

More details on the course coming soon!

The Gender Gap in Startups, Part 2: Compensation

Is there a Gender Salary Gap in private ventures?

My previous post showed the percentages of men versus women in IT versus Life Sciences executive teams, across various VP-level and C-level positions. In this post, I focus on salary differences by gender, first describing the overall results using our full 2008 survey results, then delving into various subsets of the data.

The regressions included data on 2,200 executives from almost 480 private IT and Life Sciences ventures. The regressions controlled for differences in the following factors:

• Positions -- separate variables for each of 15 VP-level and C-level positions
• Company maturity -- rounds of financing raised, number of employees
• Industry -- IT vs. Life Sciences
• Geography -- whether the venture is located in each of the two "hubs" of start-ups (California and Massachusetts) or not
• Executive backgrounds -- founder versus non-founder status, years of prior work experience, years working in the venture, educational background (i.e., advanced degrees)
• Executive's equity holdings -- percentage of the venture's equity held by the executive
  

(Note: Where appropriate, some variables were log-transformed or square-root transformed.)

The table below summarizes the gender-salary gaps that were statistically significant (p<.05) after controlling for the above factors. The sections that follow describe the results, followed by auxiliary results analyzing whether the gap is different if the CEO is a woman, and analyzing gender differences in equity holdings.

In short, there is indeed a gender salary gap within private ventures, but that gap is greater in IT ventures than in Life Sciences ones, outside the "hubs" of California and Massachusetts, and in later-stage ventures.

It is important to note that, compared to the 20-25% gender wage gap consistently found in studies of large companies, these gender gaps in private ventures are much smaller (less than 10%). Small, private ventures may indeed be a good place to escape the factors that cause wide gender gaps in large companies.

Overall Salary Differences

I first focused on whether there are overall differences in salaries between men and women. This initial regression showed that overall, men made $10,200 more than women (with very high statistical significance of p=.005). The other very significant factors affecting the salary gap were number of employees, founder status, years of work experience, position differences, geography (CA and MA higher than elsewhere), and industry (IT lower than Life Sciences).

IT vs. Life Sciences

I then ran the analyses separately for each of the IT and Life Sciences industries. In IT, there were 1,464 executives from 313 ventures, and in Life Sciences there were 709 executives from 163 ventures.

After controlling for all of the factors listed above, in the IT model men made $13,300 more than women (very high statistical significance of p=.001). In the parallel model for Life Sciences, the difference between the genders was not significant (p=.328).

Geography

The next models separate California and Massachusetts from the rest of the country. For California, there were 630 executives from 146 ventures, for Massachusetts there were 344 executives from 74 ventures, and the rest of the country included 1,199 executives from 249 ventures.

After controlling for all of the factors listed above, in the California model there was no statistically significant difference between the genders (p=.914). In the parallel Massachusetts model, the difference between genders was of borderline significance (p=.06). In the rest of the country -- outside California and Massachusetts -- men made $16,300 more than women (very highly significant at p=.002).

Stage of Venture

The next models separate early-stage ventures (2 or fewer rounds of financing) from later-stage ventures (3 or more rounds). The early-stage model included 892 executives from 220 ventures, and the later-stage model included 1,281 executives from 246 ventures.

After controlling for all of the factors listed above, in the early-stage model there was no statistically significant difference between the genders (p=.254). In the parallel later-stage model, men made $12,300 more than women (very significant at p=.009).

Any thoughts on these gender differences (and non-differences)?

For instance, why does the gap widen as ventures grow? Why is the gap higher in IT than in Life Sciences?

Auxiliary Analysis #1: Female CEOs vs. Male CEOs

Does it make a difference if the CEO of a venture is a woman? Given the low percentage of female CEOs in these ventures, it's a little hard to draw definitive conclusions, but the data do suggest that it does make an important difference. I ran separate models for ventures with female CEOs (this model included 92 executives) versus male CEOs (the other 2,019 executives in the dataset).

In ventures with female CEOs, the difference between the genders is not statistically significant (p=.223), though directionally, the model suggests that women make more than men in ventures with female CEOs. In ventures with male CEOs, men make $13,900 more than women (extremely high significance at p=.000).

Auxiliary Analysis #2: Differences in Equity Holdings

Are there also gender differences regarding equity holdings, the other major element of compensation in private ventures? Regression models using the percentage of equity held by each executive (square-root logged) indicate that overall, men do hold more equity than women (high significance at p=.007).

Looking at the different industries, the gender equity difference in IT ventures is not significant (though it's not too far from significance, at p=.106), and in Life Sciences it is of borderline significance (p=.051). Geographically, the differences mirror the salary differences: no difference in California, some difference in Massachusetts, strong difference outside those hubs. Regarding stage of the venture, there are borderline-significant differences in both early-stage and later-stage ventures, each in favor of men.

Are there differences across the genders that are not captured by the control variables used in the models above? (For instance, are there more part-time executives in later-stage ventures than in early-stage ventures, in IT than in Life Sciences, or in non-hubs than in "hubs"?) Do you have any other explanations for these differences?

The Gender Gap in Startups, Part 1: Women in IT and Life Sciences Ventures

What are the actual percentages of women in startups? Do the numbers differ by industry, stage of venture, or position? And, are women and men paid differently in startups?

On a regular basis, I read articles that refer to or lament the imbalance between men and women in startups. For instance, this Forbes article states that only 4.08% of venture funding in 2006 went to tech startups with female chief executives. But what is the actual percentage of women in these startups? Do imbalances exist more in some areas than in others?

In this year's CompStudy survey we added a gender question to our Executive Backgrounds section in both the IT and Life Sciences surveys. The resulting data include 2,202 C-level and VP-level executives from 459 private ventures (i.e., the average top-management team was comprised of 4.8 executives per venture). Of these ventures, two-thirds are IT and one-third are Life Sciences ventures.

The percentage of women across all of these ventures was 12.9%. However, this differed significantly between IT and Life Sciences: IT was 10.7% women, Life Sciences 17.6%.

I also examined the data by stage of venture, geography, and position. First, the chart below shows the differences by stage of the venture -- in particular, between ventures that had raised 2 or fewer rounds of financing (i.e., earlier-stage ventures) and those that had raised more than 2 rounds (later-stage ventures). The percentage remains pretty steady in IT ventures across these stages of financing, but drops slightly in Life Sciences ventures.


Geographically, 29.4% of the executives were from ventures with their headquarters in California and 16.8% were from Massachusetts-based ventures, giving us a total of 46.2% from these two "hubs" of venture activity. (No other state had more than 5.5% of the executives.) As shown in the chart below, in Massachusetts, there were similar percentages of women across IT and Life Sciences, but in California and "non-hub" states, IT had much lower percentages of women.


INITIAL QUESTIONS: Why does IT tend to have far fewer women than does Life Sciences? Any reactions to the differences across these specific locations (or stages of ventures)?

The percentages differed dramatically by position within the firm. First, the chart below shows the percentages for C-level executives. Compared to Life Sciences ventures, IT has a higher percentage of CFOs, but lags in the other C-level positions.


Finally, the chart below shows the percentages for VP-level executives, where the HR position is the obvious outlier.


QUESTION: Any thoughts on these position-by-position differences? Why do they differ between IT and Life Sciences?

Coming in my next post: "The Gender Gap in Startups, Part 2: Is There a Gender Wage Gap?"