That’s what this is, the governance of the average of my readings and experience on many successful and unsuccessful SMEs, Non-profits and romantic relationships. There is probably no organization with exactly this structure. But when I was running a company it was confusing. Whether you are running a for profit, non profit or even an organization that is not registered with the government or even romantic relationship, you want to set policies in place when you are “emotionally sober” before you have a disagreement. Emotionally drunk adults who are already distrust each other will have a hard time putting policies in place.
This seems like something that can wait. When you are starting a business you have lots of things to do. There isn’t time for making policies. I understand. I’ve been there. And even after I learned the hard way from experience I still forget to create policies upfront. There is always a good reason to put it off. So I suggest, right now, before reading any further, put an event in your calendar in the next week to talk to your partner(s) about this. That is, put an event that says “talk to [cofounder] about when we can have a talk about governance” during which time you talk with [co-founder] and agree on a time (1 hour to start with) to talk governance, which will likely take several meetings to work on. If your partner(s) are unwilling to take the time that is a red flag.
You might say, “but I don’t have the time for all that.” Well, if your house is built on a bad foundation it’s not gonna last long…
You might say “but I don’t know what governance structure I want.” That might be a good thing. Going into the conversation with a fixed point of view can be dangerous. This is a sensitive conversation that will bring up childhood insecurities, etc. Going through this without a preconceived notion about what is “right” might be beneficial. Share this article with your partner(s) so you have a common language to speak.
Beginnings are special. Peter Thiel, first investor in Facebook says “a startup broken at its foundation cannot be fixed.” Here are more details on Thiel’s Law. This is a moment where it is easy to make huge changes that will be impossible later. That Montana has as many senators in the US as California is something of a bug, but we are stuck with it. There is no way Montana will ever agree to have less senators. In a company, this is the chance to set up your governance. Down the road, I guarantee, it will make or break you. Beginnings are special so take advantage of moulding the clay while it’s still soft.
The Recipe for the idealized organization structure:
The confusion between Directors and advisors.The board of directors can hire and fire the CEO (and usually C-level employees like COO and CTO). The directors in an organization registered with the government (for- or non-profit) have a fiduciary responsibility and if the product you sell is a scam, the customers could go after the board of directors.
Advisors are often unpaid (they might receive shares). They are mentors to the CEO and are a phone call away. They are sometimes there only to look good. I recommend having a board of 2 to 5 advisors because they can instantly and cheaply increase your perceived and actual experience in a way that a young team is sorely missing. But there is a big difference between advisors and directors.
For further confusion, Directors or partners in a law firm often have to buy in. In SMEs usually not. In brittish commonwealth countries there is one further confusion: C-level staff are often called directors, like the Managing Director (same as CEO). While in any country, staff below the VPs are often called directors, like the Director of Communications. The latter is not on the Board of Directors (usually).
The Chairman leads the board of directors, organizes the meetings, breaks a tie on the board in the case of a tied vote and in the US is usually the same person as the CEO, while in the Commonwealth countries is usually NOT the same person as the Managing Director.
When you register a company some of these items are laid out, but usually, and any good investor will require it, a Shareholder’s agreement is also signed by all shareholders and often directors. It states how you can vote on things. Do you need a simple majority or a super majority of 75% to sell the company? Etc.
Personally I believe that you should agree on these things first without getting a lawyer involved. Only involve lawyers for the last step of figuring out the legalese (there may be some back and forth required, but generally, make sure you understand each other and agree to terms in good faith, not being manipulative. An organization, as a default setting, should be designed to last 10 years. Maybe the market is good and you can sell it earlier, but most likely you’ll have to work together for 10 years before you can get liquidity.) If you are not creating a legal entity then you might not need lawyers at all, but it is still important to hash out these items while you are emotionally sober. You may think you’ve agreed to the same terms verbally, but I guarantee you that in 1 year, much less 10, you will both believe you have agreed to completely different terms. Get it in writing.
Here are the general terms to hammer out:
Once you have this figured out, get this signed. Here’s why...
When I was running my first company, my co founder surprised me with a decision. I said, “no.” He said, “but you agreed to it already.” I said, “what?” He said, “yeah, see this email I sent you last year? This is what we agreed to in the meeting last year.” I said, “I don’t remember agreeing to it, I didn’t sign it and I didn’t respond to your email saying I agreed to it. So therefore you don’t have that right.”
We spent the next month trying to resolve our differences and eventually split up. By that point we didn’t trust each other to act in good faith. We were no longer emotionally sober. However, the real cause of the break up might have run much deeper. 6 months earlier we had stopped having one-on-one meetings because we would argue too much. That should have been a red flag. You need to be able to argue in good faith. And a signed agreement (or acknowledged by email) could have saved us and we could have dissolved our company in a peaceful way. Instead it was a mess.
How to talk with each other
“What you do speaks so loudly I cannot hear what you say”
Watch this talk on Non-violent communication with your co-founder here from the Y Combinator MOOC https://www.youtube.com/watch?v=30a5yFBd7Fo
How do you want to resolve differences?
This is the heart of the matter and perhaps more important than anything else in this doc. If you are clear on this you can figure out the rest. Inevitably you are going to have differences. Any shareholder agreement can’t anticipate every possible eventuality. This is more art than science, as far as I know. Monthly one-on-ones are a good place to start, perhaps with the McKinsey format of: Issue, example, effect, agreement and action item. Maybe you like criticism sandwiches. (I thought I would like more direct feedback, but it turns out I like criticism sandwiches. Others find them patronizing.)
Often the language of logic is not enough. Your partner is against your idea even though it’s in his/her best interest!
Is your romantic partner really angry that you forgot to buy paper towels or is he/she scared that his/her father is going to die and wants a hug and consolation. Use the emotional language instead of logic about why you forgot to buy paper towels. The same in business.
There is an idea that there are 5 Languages of Appreciation, which apply just as much in romantic relationships as the office. The theory is not perfect, but it goes a long way to helping you figure out how to communicate with someone when logic isn’t working. The languages of appreciation are:
Another strategy is to block off time on a regular basis to talk with your partner(s). I find one-on-one works for me.
What’s your partner(s) personality type?
There is some debate about whether MBTI and other personality type indicators are accurate or have clinically relevant levels of utility. I don’t know. Understanding personality is at the stage medicine was at in the 1800s. “Let’s put a leech on him and drain some blood out. That might help.” We have a long way to go to understand how people’s minds work. MBTI, Big Five and Attachment Theory aren’t as bad as leeches. And they aren’t as effective as vaccines. But they are better than blindly trying to establish a 10+ year relationships with your partner(s). At the very least, my big insight is that people have VASTLY different personality types, internal worlds and emotional needs. That was eye opening.
Might be worth creating a document that describes how you like to work, like your personal operating manual. You can share it with your co-founder. And when you hire new employees you can share it with them so that you don’t have to repeat yourself as much. I created one here: https://docs.google.com/document/d/1sGI8s7L6edN2wykgTLq1LjTUYmjYyoo1OgRb5oZuI_Q/edit?usp=sharing
Winning?“You can be right or you can be effective; you can’t be both.”My coach taught me this recently when I was arguing with my girlfriend. What was I optimizing for? Did I want to win a he-said, she-said argument about who asked who to pick up what at which grocery store? Or did I want to have a great relationship with beautiful kids and a wonderful spouse? (I’m getting tears in my eyes just writing this.) I mean, obviously, I want to be effective.
The same with a business: Do you want to change how rural farmers have access to water? Or do you want to be right about who left the coffee out? You might win every argument about the coffee pot but create so much ill-will that the company fails.
Relatedly, in experiments with rats, researchers found that when two young rats play-fight, the bigger rat will often let the smaller rat win. This is odd because a rat that is 10% bigger can always defeat a smaller rat. The reason is simple: the smaller rat will stop playing if it doesn’t win at least 30% of the time. And the bigger rat wants to keep playing. So think about that in your company. What are you playing for? Do you want to win every debate or create a great company? If you have more business experience than your partner or are more intellectual or even have a higher IQ, you might be able to win 100% of debates, if you want to. But perhaps it’s important for your partner(s) to win sometimes so that you can keep playing “games” together.
I noticed this with a former co-founder. He was 38 and brilliant and I was 26. He had 4x more work experience than I did and essentially won every argument. It wasn’t fun and we didn’t last long together. It wasn’t even that he was right; he had just thought through his arguments more than I had.
Benevolent DictatorsFounders and CEOs often believe they know best. Sometimes they literally see themselves as benevolent dictators. Fun fact: all dictators of history believe they were benevolent. No one ever said “I want to be evil.” “Benevolent dictators” for the “good of the people” have removed anyone who didn’t have fair hair and blue eyes in Germany, killed the “evil” intellectuals and doctors in Khmer Rouge Cambodia and Mao Tse Dong herded millions to collectivist farms in China where millions died of starvation.
Operational vs. Board level decisions. Two people who deeply care about a company will often disagree on a decision. It is important to establish roles and responsibilities so it’s clear who decides.
Who gets to decide what? Take a look at these hypothetical situations:
When a decision needs to be made ask “If it goes wrong, who will be on the hook?” That’s usually the person who should be responsible, in most cases.
Decision by committeeA great way to kill an organization with lots of potential is to get things stuck in committee. This is the opposite of the Benevolent Dictator problem where you have too many people deciding. A group of people is more risk averse and slower than an individual, usually. That’s why the only committee should be the 3 member board of directors. Otherwise, figure out who is responsible if things go badly and that person is responsible for the decision. They have Skin in the Game, as the saying goes.
There is a temptation for the Benevolent Dictator CEO to say in #1 “if the VP of sales doesn’t meet his sales target then I’m on the hook therefore I should decide who he/she hires.” No. The VP of sales needs to make this call (with the advice of the CEO and other stakeholders, of course.) The VP of sales has many ways of closing the sales gap including making other members more productive or closing sales him or herself. If this still doesn’t work and the VP of Sales misses the sales target then the CEO can fire the VP of sales (with approval from the board as per #4, if required).
A related rule is the Two pizza rule: Any team that is too big to be fed by two pizzas should be split into two teams.
Chain of Command#3 is an example of chain of command. There is not time to debate every decision. Which customers to sell to affects the whole company--COO, Customer Service, etc. In the field of battle, with limited visibility with limited information and limited time, the commander in chief, the CEO, has been chosen for their ability to make good gut calls.
Similarly if the VP of Sales wants to use a new sales tactic, the sales reps must follow the chain of command (of course, with feedback from the sales reps and communicated in a non-violent manner that suits the personality type of the sales rep). The sales rep always has the option of resigning.
Everyone one has their One ThingInstead of a shopping list of KPIs, each person should be in charge of their One Thing, which doesn’t overlap with anyone else’s One Thing. Director of Customer Success’s One Thing is to make sure all customers have their needs met, as promised when when they signed up. East Coast Customer Success Rep’s One Thing is to make sure all customers under their care on the east coast have their needs met. The VP of Sales’ One Thing is to hit the company wide quarterly sales target. Etc. Everyone’s One Thing morphs over time, but each month their One Thing is clear.
Can this be applied to Romantic Relationships?
I’m biased here. I’ve never had a relationship I didn’t think could be spiced up with a little bit of business wisdom. So here goes...
In a romantic relationship you can have the same roles. Often they are implied but why not spell them out. One person has more say on how the money is made (the breadwinner), one person has more say in how the money is spent. Often a “board level” decision is made about how much to spend per month on household expenses but the house wife or house husband has discretion about how exactly to spend that money. That is, there is no micro managing in a healthy relationship. Another person is more in charge of where the kids go to school. Who packs lunch. Who makes sure the bills are paid.
A temptation is to say “how do we divide this up 50/50?” But this comes from a scarcity mindset and a belief that the other person won’t do their job. The only way to be sure of having a successful relationship is 100/0. An easy way to divide this up, instead is to say “what do I care about/like doing/am good at?” If I like having a clean house then maybe I should be in charge of making sure the house is clean. Why expect my partner to do that if they don’t care about it? If you enter this with a mindset of plenty, you will realize your partner(s) are doing other important things that you hadn’t considered. And your relationship becomes 100/100. Which is much better than 50/50.
My best friend from college would often forget to clean his dishes. No matter how often I reminded him. I could have gotten angry, but I just cleaned them because I wanted the sink to be clean. If I had gotten angry I would have missed out on everything he taught me about typography, hiking from Mexico to Canada and a conversation we had on a train to Providence, RI which was the impetus for me starting a biogas company in Kenya which I ran for 5 years. In retrospect, I got the better end of the deal. Cleaning about 100 plates in exchange for the motivation to follow my dreams.
Making it workNow all of this is very exciting. At least it’s exciting to me. And there can be a tendency to try to cover everything. That is impossible. As you add more clauses you open up more loopholes, which require more legalese, ad infinitum in a vicious cycle which is why these documents for public companies are hundreds of pages long. We don’t want that. There is a truism:
“what you gain in legalese you lose in goodwill.”
If you are reading this article you are not running a public company. You have a small organization, perhaps with big dreams and, for the foreseeable future, this organization will be a labor of love. If it does have a financial payoff it won’t be for a long time. So you gotta make it fun. Avoid the temptation to make the perfect governance system. Keep the document to 1 page, 1” borders with 12 point Times New Roman and you’ll know it’s not too long. The most important things to get right are: