Discussing “Maintaining Control Versus Maximizing Wealth” by Noam Wasserman
Written by Lance Hillis
What is your incentive in becoming an entrepreneur? Are you trying to save the world? Do you want to be the world’s first trillionaire (however unlikely that is)? Are you bored and searching for purpose? Do you want to build your vision, or do you want to be world’s next mogul? Maybe you’re thinking ‘yes’ to all of these questions; unfortunately, many of the driving factors that leads us towards entrepreneurship conflict directly with one another.
In the book, “The Founder’s Dilemmas“, the author and former Harvard Professor, Noam Wasserman proclaims through various studies that founders’ two most common motivations in creating a business are building wealth and having control, and how although it seems that both go hand-in-hand, the two motivations are actually at odds with one another, and usually require the tradeoff of one over another.
He argues this point, citing multiple studies, such as a Kauffman Foundation study, where 549 company founders (or entrepreneurs, which were used interchangeably) were surveyed, namely on success factors and motivations in becoming an entrepreneur. 74.8 percent of respondents indicated that building wealth was an important motivation in becoming an entrepreneur. Additionally, 64.2 percent of respondents stated that they had a strong desire to own their own companies, and an even stronger desire from respondents who came from a “lower-upper-class” background, which is defined as “individuals who are from ‘new money’, or have become rich within their own lifetimes”.
Wasserman discusses the two outcomes when making these decisions as a “rich outcome”, (greater financial gains, lesser control) as opposed to a “king outcome” (greater control, lesser financial gains). Knowing whether wealth or control is a founders’ primary motivation, he states, helps establish consistent decision making, and reaching your desired outcome.
Reflecting on the “Rich vs. King” Outcome Dilemma
I’d like to begin by diving a bit deeper into the rich outcome dilemma by asking, what is the purpose in cashing out financial gains, especially for a founder? Money can buy you a larger house, a nicer car, and designer clothes. Personally, I believe most founders to not be as motivated by those superficial perks of wealth, and for more of a pragmatic reason. In accessing a rich outcome, wealth acts as a store of value that locks in as your cash out, as opposed to the volatility that the financial value of a company and your personal equity in that company will face. As a medium of exchange, cashing in on your wealth provides you the opportunity to diversify your investments, such as providing capital for new startups, investing in the stock and bond markets, focusing on philanthropic efforts, and assuring stability and opportunity for your family. I imagine it’s also gratifying to see your efforts pay off, and by relinquishing some control for financial gain, it marks a great milestone in your entrepreneurial journey.
However, there is opportunity cost in pursuing a rich outcome as opposed to a king outcome. There are situations that will cost you both wealth and control, at least in the moment: for instance, attracting human, social, and financial capital in the form of adding cofounders to your company. In gathering necessary resources to grow your business, these capital costs demand relinquishing both control and equity for future prospects of wealth gain, as tasks and needs are delegated to respective co-founders. Wasserman further discusses this as the “resource-dependence effect” in a follow up article in 2016.
My initial instinct was that control would be the easier outcome to attain than wealth, but the data seems to indicate otherwise. Control is difficult to retain at scale, especially because of this resource-dependence effect. Wasserman gives examples of Bill Gates, Richard Branson, Anita Roddick and Michael Dell as wealth and powerful founder-CEOs, but those tend to be the very rare exceptions to the rule. Overwhelmingly, a high percentage of founder-CEOs are replaced, and typically against their will. One element I’d like to expand upon is a founder’s ability to have control over either outcome.
The Founder Control Matrix
In an article by IPOhub, author Rand Hawk demonstrates this tug of war match between control and wealth as a matrix with multiple quadrants (see Figure 1.1). This offers an expanded perspective on Wasserman’s “King vs. Rich” Outcome dilemma, and that the outcome isn’t always the founder’s decision, and most commonly isn’t. In the four columns, Hawk has the “Most Common” level of founder’s equity ownership and management control, which is very low.
According to the article, founders do not usually maintain majority ownership of their company and are often replaced by an outside CEO. When this occurs, founders will be faced with the decision to leave the company or take another role (i.e. golden handcuffs). Research shows that around 40 percent of founders stay on as directors, 23 percent report directly to the CEO, and 37 percent decide to leave the company.
This data reinforces Wasserman’s arguments in his book that, “…few founders of high-potential startups can achieve both wealth and power; most choose between one or the other and often end up with neither”.
The High-Potential Startup vs. The Low-Tech Small Business
There is much to learn from the experiences of these founders, however this book has a sharp focus on “high-potential startups” as Wasserman puts it. These datasets focus on technology and life science startups, which account for 48% of the IPOs during the timeframe that the data was collected (2000 – 2009), with over 70 percent of angel and venture capital investing in these two industries. Wasserman singles out the high-potential startups as, “the core of economic growth associated with entrepreneurship”, which is statistically correct according to his data, although I believe many of the following founder’s dilemmas are framed through a high-tech and life science framework for maximum economic success and impact. I do believe Wasserman has deliberately addressed the high potential startups as his focus for this book, but I may be slightly critical of the relevance of the data, and the likelihood of the king vs rich dilemma, to the entrepreneur who wants to start a bakery, a bar, a medical equipment company, or a wholesaler. I will say, moving forward, I found that a ton of the case studies he speaks on provide many pragmatic and actionable examples that relates to all of us, but this is one founder’s dilemma that I wish would speak more to the everyman.
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