Founders need to discuss personal finances
I’ve had several young and (hopefully) up-and-coming startup founders ask me for advice about starting their business.
Sometimes it’s about how to find product market fit. Sometimes it’s about how to “scale”. Mostly, it’s about raising money.
I definitely have thoughts on all of these. But since I’ve only raised less than $1m from outside investors and my former business Greenline was at $4m ARR at the time of acquisition, there’s only so much I can say about scaling and raising money. There is lots of free advice about this stuff online from very smart people who have been there and done that.
But there’s one point I make sure to bring up that nobody ever asks me about. But they shoud. It’s about being aligned on finances with your co-founders.
Talking about money
In the west, it appears that we don’t like talking about money. It’s understandable - most people know nothing about their parent’s finances. If you ask anyone what their family financial background is, they’ll either say that they “don’t come from money” or are “middle class”.
But if you truly want to get on the startup ship with someone, you need to talk seriously about money. And from what I see, pretty much nobody does it.
You need to get over the unease about talking about money. But even more so than that, you need to get over the extreme unease about talking about your parent’s money. Because at the end of the day, to varying extents, their money influences the types of decisions you make.
Understanding different financial backgrounds
Believe it or not, people come from an enormous range of financial backgrounds.
If you are young, chances are that you personally don’t have a lot of funds. You might be lucky to have $5000 in your bank account, and most of those could be loans. This is very common in university, but you can’t just take someone’s word that they’re “broke”.
That same person can come from a family who has a net worth of $10 million. The dad might simply want the child to not grow up spoiled, so they never told the kid how much assets the family holds nor what their inheritance will be. They encouraged the kid to take out student loans and pay it off themselves. All the kid knows is that they never have to worry about their parents.
But another person may not have a safety net to fall back on. In a way, they family depends on them succeed, because there are no retirement funds. The parents way have given up on “success” a long time ago and are just trying to provide the best for their children with what they have and what they know. The family could be dysfunctional.
They say that building a startup with someone is like getting married to them. I generally agree, but many people don’t have great relationships with their own spouses, so it’s hard to take their advice. Many couples struggle to talk about money.
If you want to make a startup with someone, you must truly and deeply understand not only each other’s personal finances (income, assets, liabilities), but also their parents. As I’ll talk about shortly, your financial background is a key determining factor in how you’ll resolve certain “pressure points” that will emerge throughout your startup journey.
Only you can determine your risk tolerance
I grew up in a “we don’t come from money” family. After my family immigrated from South Korea to Canada in 1999, my dad struggled to hold his software engineering jobs, eventually succumbing to various forms of mental disorders and paranoia that prevented him from holding a full-time job again. My mom, who used to be a medical lab technician in Korea, struggled to obtain equivalent credentials here and worked at minimum wage restaurants and factories until her retirement just last week. She is able to retire because I am now able to financially support her, but would not be able to otherwise.
Because our family lacked “starting capital”, we were never able to put a down deposit down on a home here in Canada, which is unfortunate because house prices have run up by enormous multiples during our lives here. Many immigrants have been able to get by with modest incomes due to their housing assets increasing in price, but my single-income household was not.
My risk tolerance was low. I was still more than happy and excited to fully commit to a startup, but in my calculations I was only okay to do that when:
- I had a university degree
- I was close to paying off my student loans
- I had at least $20,000 in the bank
- I was able to get a decently-paying software job if times got tough
When I checked these boxes, I was ready to go. However, if one have a greater security net, your risk tolerance may be much higher. You may not feel the need to have a university degree. And you may never have questioned your ability to get a high-paying job based on your confidence, abilities, and contacts.
There is no right and wrong when it comes to risk tolerance. Truly. Nobody else can tell you what that should be. It is a deeply personal thing based on your personal story and experiences. Never let you or some random blog telling you to “go big” tell you otherwise. If you don’t know what your true risk tolerance is, I encourage you to find out. Run through the scenarios in your head. Think in terms of decades, not years. Think about your family and your loved ones over that time period.
The financial “pressure point” will come
All startups will have various “pressure points” as I call them when it comes to founder finances. This is regardless of if the business is doing well or not.
Early on in the business, you and your co-founder will have to make a decision about raising money, and if so, how much. You may have to decide between raising $200,000 and maintaining control of the company and exit options, or raising $5,000,000 and locking yourself into going big or bust. The more money you raise, and the more equity you give up, the fewer options you’ll have when it comes to potential acquisitions.
If the business is doing very well, there may come a time when someone wants to buy you out. A company might approach you with a $1,000,000 acquisition offer (at least, the cash portion). If you and your co-founder each have 40% of the company at the time, that could be $400,000 each. Is that an exciting amount of money for you? For one, that could be a life-changing amount of money for them and their family. For the other, that might not be worth it.
If the business is not growing, there may come a time when the business is running out of funds. You may already be several years into building the business, and now you need to decide what you want to do with it. You both see long-term potential. Your customers are happy, you just need more time. But one founder may be out of runway and no longer be able to commit full time. Consulting and side gigs can help. Maybe they need a full-time job and income. The other founder may be able to get by for another year or two to see this business through. But they don’t want a part-time co-founder. That rarely works out.
Scenarios like what I laid out above are inevitable. Again, they’ll happen regardless of if your business is doing well or not. The more each co-founder understand each other’s personal story and finances, the less friction there will be at these pressure points. In fact, if you understand each other perfectly and telepathically, all of these conflicts can be preemptively avoided with decisions ahead of time.
Of course, in real life we’re not like that. If you haven’t known and worked with your co-founder for years ahead of time, chances are you know very little about each other. And circumstances change. It’s not worth making all these decisions ahead of time, but it is absolutely worth knowing what type of decision the other person would make at any given time. It needs to be one of the pillars of your personal relationship.
Different financial background are okay
This is not to say that founders from different financial background cannot work together. Far from it. But it is important to know what decision the other person would make when the pressure point hits.
If you can predict each other’s financial moves almost instinctively, then this co-founder relationship won’t break down due to personal finances. Of course it can still break down due to various other factors, but I’m writing this blog to discuss what I think is an enormously under-discussed topic. My hope is that someday, some startup founders read read this, sit down, discuss, and learn something not only about each other, but about themselves. And set the business up for success.