5 pitfalls to avoid when joining someone else’s startup

George Deeb is the Managing Partner at Chicago-based Red Rocket Ventures, a startup consulting and financial advisory firm based in Chicago. 

Typically, entrepreneurs start their own business. But, from time to time, they will see a unique opportunity to join somebody else’s startup, either as investing CEO or as a new member of the executive team.

Here are five things you need to assess before making the leap:

1. Your fit with the founders

Your fit with the team in terms of skill set and personality is obvious enough. It is important you can get along with your new partners, giving the long hours you will be working together So, if you clash in style or personality, it will never work.

It is important that you each are bringing a unique and non-overlapping skill set to the table. If the company already has a strong tech leader and operations leader, maybe you bring strong marketing or financial skills to the table, to balance the team.

You don’t ever want to be in a situation where job roles are not clearly defined upfront, to avoid stepping on each other’s turf, especially when impassioned founders are involved.

2. Management control

Let’s say you have been made an offer to become the new CEO of the business. You need to be perfectly clear up front that you have the final decision making authority in terms of business direction, and that the founders are willing to follow your lead, even if it may be in a different direction than the company was currently heading.

This could even include making a change in management, if the CEO believes the founder is not the right person in that position. That said, you have to do this in a consensus building way, making sure you support any moves with hard numbers that back up your assumptions.

Since the founders will clearly need an education to make a material move from where they may have been heading, with firm and entrenched ideas there.

3.  Equity ownership control

Equity control is your option, whether you are willing to work with a majority or minority stake in the company. Your equity stake is typically dictated by your level of cash investment and importance of your role in the company.

But, if absolute control of the business is important to you, as a new CEO, for example, make sure you invest enough to get you over that 51 percent threshold. Or, if economically you cannot get there, put in a mechanic like super-voting shares to make sure no strategic decisions get made without your support.

4.  Board of directors control

Same story holds true for board control. If it is important to you as a new CEO to control more than 51 percent of the board, make sure at least 51 percent of the seats around the table are friendly to you and your cause. And, that most likely means these individuals will not be the founders or their investors to date, which will most likely be loyal to the founders.

So, get good outside board members or new investors that will have your back. And, worth mentioning, your board voice is typically in line with your equity position. So, if you want 51 percent board control, make sure you are prepared to invest enough to own 51 percent of the equity.

Have a read on how to structure your board of directors for a better idea of ways to implement this system.

5.  Corporate governance control

This last piece about corporate governance is the one that people typically forget about, especially in LLCs. There are scenarios where you may be the strategy leading CEO, with 51 percent equity ownership and 51 percent board control, and still not control the key change in control decisions of the company.

The operating agreement of an LLC, or the charter of a corporation, may have special rules in place around changes in control. For example, it may require the sole approval of a founder for any change in control, who may veto any deal that you are a proponent of.

So, get your lawyers engaged, and read the fine print in the corporate governance documents, to make sure nothing gets in the way of your long term desires.

I have run both my own startups, and other people’s startups, so have learned these valuable lessons first hand. Hopefully, you are now better educated on where to focus during your negotiations.