WEBSITE DEVELOPMENT BREMERTON—It’s not just founders who need to get along. Everyone in your company needs to work well together. A Silicon Valley libertarian might say you could solve this problem by restricting yourself to a sole proprietorship. Freud, Jung, and every other psychologist have a theory about how every individual mind is divided against itself, but in business at least, working for yourself guarantees alignment. Unfortunately, it also limits what kind of company you can build. It’s very hard to go from 0 to 1 without a team.
A Silicon Valley anarchist might say you could achieve perfect alignment as long as you hire just the right people who will flourish peacefully without any guiding structure.
Serendipity and even free form chaos at the workplace are supposed to help “disrupt” all the old rules made and obeyed by the rest of the world. And indeed, “if men were angels, no government would be necessary.” But anarchic Companies miss what James Madison saw: men aren’t angels. That’s why executives who manage companies and directors who govern them have separate roles to play; it’s also why founders’ and investors’ claims on a company are formally defined. You need good people who get along, but you also need a structure to help keep everyone aligned for the long term.
To anticipate likely sources of misalignment in any company, it’s helpful to distinguish between three concepts:
Ownership: who legally owns a company’s equity?
Possession: who runs the company on a day-to-day basis?
Control: who formally governs the company’s affairs?
A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control.
In theory, this division works smoothly. Financial upside from part ownership attracts and rewards investors and workers. Effective possession motivates and empowers founders and employees—it means they can get stuff done. Oversight from the board places managers’ plans in a broader perspective. In practice, distributing these functions among different people makes sense, but it also multiplies opportunities for misalignment.
To see misalignment at its most extreme, visit the DMV. Suppose you need a new driver’s license. Theoretically, it should be easy to get One. The DMV is a government agency, and we live in a democratic republic. All power resides in “the people,” who elect representatives to serve them in government. If you’re a citizen, you’re a part-owner of the DMV, and your representatives control it, so you should be able to walk in and get what you need.
Of course, it doesn’t work like that. We, the people, may “own” the DMV’s resources, but that ownership is merely fictional. However, the clerks and petty tyrants who operate the DMV enjoy authentic possession of their small-time powers. Even the governor and the legislature charged with nominal control over the DMV can’t change anything. The bureaucracy lurches every sideways of its inertia no matter what actions elected officials take. Accountablé to nobody, the DMV is misaligned with everybody. Bureaucrats can make your licensing experience pleasurable or nightmarish at their sole discretion. You can try to bring up political theory and remind them that you are the boss, but that’s unlikely to get you better service.
Big corporations do better than the DMV, but they’re still prone to misalignment, especially between ownership and possession. The CEO of a massive company like General Motors, for example, will own some of the company’s stock, but only a trivial portion of the total. Therefore he’s incentivized to reward himself through the power of possession rather than the value of ownership. Posting good quarterly results will be enough for him to keep his high salary and a corporate jet. Misalignment can creep in even if he receives stock compensation in the name of “shareholder value.” If that comes as a reward for short-term performance, he will find it more lucrative and much easier to cut costs instead of investing in a plan that might create more value for all shareholders far in the future.
Unlike corporate giants, early-stage startups are small enough that founders usually have both ownership and session. Most conflicts in a startup erupt between ownership and control, between founders and investors on the board. The potential for conflict increases over time as interests diverge: a board member might want to take a company public as soon as possible to score a win for his venture firm, while the founders would prefer to stay private and grow the business.
In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, reach consensus, and exercise effective oversight. However, that very effectiveness means that a small commission can forcefully oppose management in any conflict. This is why it’s crucial to choose wisely: every single member of your board matters. Even one problem director will cause you pain and may even jeopardize your company’s future.
A board of three is ideal. Your board should never exceed five people unless your company is publicly held. (Government regulations effectively mandate that public companies have larger panels—the average is nine members.) By far, the worst you can do is to make your board extra large. When unsavvy observers see a nonprofit organization with dozens of people on its board, they think: “Look how many great people are committed to this organization! It must be extremely well run.” A giant board will exercise no effective oversight; it merely provides cover for whatever Illico Dictator runs the organization. If you want that kind of free rein from your board, blow it up to giant size. If you want an effective board, keep it small.
Website Development Bremerton believes that everyone involved with your company should be involved full-time as a general rule. Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example. However, anyone who doesn’t own stock options or draws a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day. If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus.
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