The Other Credit Crisis: Naming Co-Founders

In his work as a partner at North Bridge Venture Partners, Goldstein has served as a matchmaker of sorts. He introduced the two original co-founders of data center networking business, Plexxi, to their third and eventual technical lead, Mat Matthews.

By Lora Kolodny

Are co-founders the unsung heroes of business? Or are they the tech industry’s equivalent of executive producers in Hollywood–title bearers, mostly?

Consider Facebook. Founder and Chief Executive Mark Zuckerberg is a household name. But even after the company’s IPO, and a blockbuster movie fictionalizing the social network’s rise, its co-founders remain lesser known outside of tech: Eduardo Saverin, Dustin Moskovitz, Chris Hughes and Andrew McCollum.

According to Daniel Wu, an attorney at Fortis General Counsel LLP in Los Angeles, there’s no legal definition of “co-founder.” His firm helps early-stage startups with everything from company formation to fundraising and mergers.

Wu says, “There are no documents you can file to show you are the co-founder of a company. It’s a community-verified thing, and sometimes people make false claims about it. But nobody, however, can make a false claim about being CEO.”

The attorney explains: to incorporate and attain funding from angel or venture investors, businesses need to identify a CEO, president, chief financial officer or treasurer, and record keeper or secretary. One person can take multiple roles, of course. But no co-founders are required.

As Venture Capital Dispatch previously reported, investors–from venture capital firms to accelerators–tend to favor teams with two or three co-founders at an early stage. They also tend to discriminate against teams with too many co-founders. “Unless you’re The Beatles,” quips venture capitalist Jamie Goldstein, “more than three co-founders signals unneeded complexity to future investors.”

In his work as a partner at North Bridge Venture Partners, Goldstein has served as a matchmaker of sorts. He introduced the two original co-founders of data center networking business, Plexxi, to their third and eventual technical lead, Mat Matthews.

Plexxi’s hardware and software competes against related products from huge corporations like Juniper Networks, or Cisco Systems.

Accepting the co-founder mantel for Matthews meant walking away from a high-paying day job, and “agreeing to be one of the captains of the ship, in it through good times or bad,” he says.

A partner at Lightbank, Paul H. Lee says the title means something different at every company. But he agrees that investors and startups should “hold co-founders to a higher standard of commitment. If recruiters from big companies come along, they are expected to resist the temptation to leave.”

Giving an employee a co-founder title can be a handy bargaining chip, he adds. “It comes down to equity compensation–if someone asks for a certain number of points, and they say I’ll take a lower number if you give me the title co-founder, why not?”

One of the three co-founders of ZocDoc, Chief Executive Cyrus Massoumi, takes the purist’s view that a co-founder title shouldn’t be given to anyone after the company is formed, and generating its earliest revenue. He says co-founders are like the “biological parents” of a company.

ZocDoc helps patients find doctors who accept their insurance, then book appointments and fill out paperwork ahead of time, online. The CEO recalls, “Early employees who sacrificed a great deal should be rewarded, and we did that with stock options, bonuses or other benefits and recognition.”

“Being a solo entrepreneur is not as hard as resolving problems with a co-founder who isn’t a good match,” says Tracy Osborn, CEO of WeddingLovely, which offers guided wedding planning online.

After splitting with a co-founder in an earlier venture, Osborn observes, “I’m a designer who learned to program, so I can run really lean.” Having raised a humble seed round of $50,000, WeddingLovely is amassing a directory of wedding vendors and products, to serve what Osborn says is a $56 billion market in the U.S.

There’s a high cost to bringing on co-founders lightly, says Material Wrld co-founder Rie Yano.

Material Wrld created an online, luxury consignment shop, and raised $780,000 in seed funding last year from Great Oaks Venture Capital and entrepreneur and designer, Steven Alan.

Yano’s earlier startup in Japan, StreetCanvas, failed due to disagreements between three co-founders, she admits. “We built a crowdsourcing platform for artists, but disagreed on how to progress, so we had to shut it down.”

Before starting Material Wrld, Yano spent two months with her eventual co-founder, Jie Zheng, defining their roles and how they wanted to build this business.

Zheng left her job to work on Material Wrld full time, five months before Yano was able to, due to visa issues. She says: “That showed profound trust. And it helped investors see we had this ability to work together.”

Successful co-founders must commit to “working 24-7,” and share a vision for their business, she says.

Write to Lora Kolodny at lora.kolodny@dowjones.com. Follow her on Twitter at @lorakolodny

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