Wednesday, November 4, 2009

Four Reasons to Keep Your Founding Team Small (and Two Reasons Not To)

The conventional wisdom is to limit Internet startup to three or fewer founders. However, successful companies do exist that have started with four or more founders. Here are some advantages and disadvantages of capping at the magic number three.

(Aside: most policies have both pros and cons. Even if you believe strongly in one side of an issue, you might benefit from the exercise of writing down the best arguments for both sides of the issue, to avoid the Confirmation Bias.)

Reasons to stay at three founders:

1. Increased Motivation

Even at four people, we start to see visible social loafing; overt reduction of effort begins to manifest itself. This "free-rider problem" can diminish productivity and increase tension. A smaller team means more equity per person, and therefore an increased rational incentive to apply full effort.

2. Better Communication
A greater size increases the likelihood someone on your team is doing something you're not aware of that will conflict with the execution of your strategies. Smaller teams are easier to keep track of.

3. Faster Decisions

If more people are required to sign off on something, or if more people are chiming in with input, decisions will take longer to make and it will be more difficult to alter course in the face of new data. Smaller teams can often move faster.

4. Reduced Conflicts

In a team of size n, the number of dyads (distinct pairs) among team members is equal to n(n-1)/2. A team of three only has three pairs of people who might not get along; a team of five has ten!

In contrast, here are two reasons to add more founders:

1. More Available Man-Hours.

While nine people can't have a baby in nine months, it is true that even a three-person team can be overwhelmed with the number of tasks necessary to make their startup successful. Additional people mean fewer tasks per person.

2. Better Division of Labor.

As the number of founders goes up, the total skill-set increases, reducing the frequency in which a founder is called upon to execute tasks outside his specialties. As a related benefit, the number of contacts available to the founders increases as well.

Tomorrow: My surprising verdict on optimal team size.

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