15.394: Dilemmas in Founding New Ventures
Spring 2011 (9 Units)
Section A: Tuesdays and Thursdays 10-11:30am, E51-149
Section B: Tuesdays and Thursdays 1-2:30pm, E51-151
Professor Matt Marx
E62-478, 617.253.5539
mmarx@mit.edu
Office hours: between Section A and Section B, Tues/Thurs 11:45am-12:45pm or by appt.
Assistant: Adel Donegan (adonegan@mit.edu, 617.258.8360)
Teaching Assistants:
Section A: Allan Jaenicke
Section B: Miro Kazakoff
Course overview/objectives:
The purpose of this course is to increase students’ chances of success in their early stage
ventures by helping them avoid common team-related mistakes. We explore specific dilemmas
that founders face—decisions that arrive early on, can be uncomfortable, and that need to be
made with minimal information—but can have far-reaching consequences. Whether the
founding team stays together, whether the venture achieves an attractive exit, and the extent to
which the founder(s) share in those rewards can all be largely determined by early-stage
choices.
You can think of this course as being “beyond the business plan” i.e., the elements of
entrepreneurial execution. As such, 15.394 is an excellent complement to New Enterprises.
We will focus primarily on “people” issues as well as the trade-offs involved with enlisting
outside resources to accelerate growth (e.g., VC funding). It is composed of three modules:
1. Assembling the Founding Team. Do I want to “go it alone” or recruit cofounders, and
if so, who (friends/family/coworkers)? How do we allocate the equity among ourselves?
2. Scaling the Team. When hiring, do I target proven stars or raw talent? Should I hire
“right” or “right now” employees? How do we keep the startup culture as we grow?
3. Tradeoffs in Scaling the Venture. What are the trade-offs involved in attracting
outside resources? How should my personal motivation guide my choices here?
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Course requirements:
Class participation
Case memos / polls
Group project
50%
20%
30%
Class Participation
15.394 is a case-based class. Therefore constructive class participation is the most important
part of your grade. Your participation grade will reflect our assessment of your total contribution
to the class discussion, with the most important factor the quality of your in-class contributions.
I expect to hear from you in nearly every class and will cold call students who are not
participating on a regular basis. Passing on a cold call hurts the participation grade.
Unavoidable absences due to illness, a death in the family, or religious holidays are excusable
and do not require prior notification. Any other absences count against the participation grade.
Group Project
The purpose of the project is for you to delve into dilemma faced by founders that is particularly
relevant to you. You may choose any topic as long as it involves important decisions faced by
founders (not including yourself or your own company). Groups should be 2-3 people and in no
cases more than 4. Solo projects require pre-approval.
The deliverable for this project is a paper of not more than 8,000 words. The paper should
begin with a rich description of the founder and dilemmas you are focusing on, and then move
to an analysis of how the frameworks from the course apply (or don't!!) in this setting. The final
section should relate the findings to your own entrepreneurial plans.
Write-ups are due Tuesday May 10th at 10am, with presentations then and Thursday May 12th.
Case Memos / polls
Case memos give you an opportunity to demonstrate your individual mastery of course material
and also facilitate deeper class discussions. They should be no longer than one single-spaced
page (~500 words) and should not just summarize the case facts but analyze one or more of the
study questions from the syllabus. Memos are due at 6AM the day of class.
Three memos are required in H1 for case discussions of your choosing but not the UpDown
equity-split simulation. Three memos are required in H2; do not pick Alex Robins, the firing
simulation, or Nantucket Nectars.
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COURSE SCHEDULE SUMMARY
Module 1: Assembling the founding team
Module 2: Scaling the team
Module 3: Tradeoffs in scaling the venture
TUESDAY
February 1: Introduction & Overview
 case: Apple’s Core
February 8: Founding with Strangers
 case: Savage Beast
February 15: Founders’ Agreements
 speaker: Dan Ryan, Trinity Law Group
February 22—Presidents’ Day, no class
March 1: Research data on Founding Teams
March 8: Equity-split simulation
 case: UpDown
 guest speaker: Michael Reich
March 15—no class/Sloan Innovation Period
March 22—no class/spring break
March 29: Hiring Tactics
 case: Cypress Semiconductor
April 5: Firing
 case: Alex Robins
April 12: Creative Hiring and Firing
 guest speaker: Blade Kotelly
April 19—no class/Patriots' Day
April 26: Control Choices Across Ventures
 case: Evan Williams
May 3: Serial Founding Team
 case: FeedBurner
May 10
 project presentations
 deadline to submit course projects
THURSDAY
February 3: Founding with Classmates
 case: Smartix
February 10: Founding with “Family”
 case: Sittercity
February 17: Serial Founder
 case: Frank Addante
February 24: Dynamic Equity Splits & Boards
 case: Ockham Technologies
March 3: Joining the Founding Team
 case: Les Is More
 speaker: Les Trachtman
March 10: Wrap up first module & Preview of
“Scaling” module
 Hiring & non-compete agreements
March 17—no class/Sloan Innovation Period
March 24—no class/spring break
March 31 (Not Mis)managing Performance
 case: Wolfgang Keller
April 7: Firing simulation
 deadline to form teams
April 14: Keeping Control
 case: Segway
April 21: Relinquishing Control
 case: Wily Technology
 project check-ins this week
April 28: Franchising
 case: Rubbish Boys
May 5: Exits
 case: Nantucket Nectars Exit
May 12
 project presentations & wrap-up
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CLASS-BY-CLASS DETAILED ASSIGNMENTS
Feb 1
Case
Course intro/overview
Apple’s Core
Steve Jobs and Steve Wozniak are best friends who enjoy pulling pranks together and
talking about electronics. Jobs pitches Wozniak on starting a company together to sell
computers based on Wozniak’s design for a personal computer. Later, tensions rise
between the two founders as their strategic visions diverge and as the company
grows. Wozniak has now learned some disturbing news about his co-founder and has
to decide whether that news will affect his continuing collaboration with Jobs.
Study questions:
1. Is this a good founding team?
2. What qualifies a person as a true founder? Which person—Jobs or Wozniak—
is the “real” founder of Apple computer, or are they equal founders? Could
others be classified as founders?
3. What should Wozniak do now?
Feb 3
Case
Assembling the Founding Team (I): Founding with Classmates
Smartix
Vivek Khuller has built Smartix by attracting classmates to cofounded with him,
learning how to pitch it to top VC firms and potential strategic partners, and honing the
concept and business model by testing it in smaller venues. Now, he is facing the
implications of the choices he has made in each of these areas and has to decide how
to manage those implications.
extras
Feb 8
Case
Study questions:
1. Is this a good founding team, and why?
2. What are the pros and cons of Vivek’s approach to splitting the equity within
the founding team?
3. Do you agree with the Vivek’s decision to target only the top five VC firms that
only the best venue?
Ruef, Aldrich, and Carter, “The Structure of Founding Teams: Homophily,
Strong Ties, and Isolation Among US Entrepreneurs”
Assembling the Founding Team (II): Skill-based Founding Teams
Savage Beast
For several months, things have been spiraling downward set Savage Beast, the
music-recommendation company started three years before by Tim Westergren. The
company's founder/CEO recently left into pressures both at home and within the
venture, dozens of investors have turned thumbs-down on the venture, salaries have
been cut, and tensions have risen within the founding team. Now Tim, the founder
who has taken over as CEO, is facing even deeper pressures as he finds out about a
lawsuit filed by former employees. He is wondering if it is time to give up on ever
achieving his vision.
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extras
Study questions:
1. Is this a good founding team, and how does it compare with the Smartix team?
2. was Jon right to quit? Should Tim quit now?
Noam Wasserman, “The Founder Discount: Agents, Stewards, and Executive
Compensation in Small Ventures.”
Feb 10 Assembling the Founding Team (IV): Founding with Family
Case
Sittercity
In August 2006, Genevieve Thiers, founder and CEO fo Sitter.com, looked over at Dan
Rather, Sittercity’s vice president and her boyfriend of five years. It had taken her six
long years to build Sittercity into the nation’s leading babysitting web service. Thiers
wondered what challenges she and Rater would face as she continued to grow her
venture.
Study questions:
1. What were the riskiest decisions Genevieve made while building Sittercity?
2. What issues should Genevieve be most worried about now?
extras
Jason Greenberg, “Lifeblood or Liability?”
Feb 15 Guest speaker: Dan Ryan (Trinity Law Group) on Founders’ Agreements
Feb 17 Assembling the Founding Team (III): Serial Founder
Case
Frank Addante
Frank is a 28-year-old serial entrepreneur who is in the process of building his fifth
century. Of his first four ventures, two were sold, one went public, and in the last he
decided to close the venture and return unused capital to its investors. With the
passing of each venture he has learned something about forming founding teams,
splitting equity with his cofounders, hiring executives to work for him, and when to take
outside funding. Now he's facing pressure from investors who aren't happy with how
he is building his current team and are questioning whether he should remain CEO.
Study questions:
1. Comparing Zondigo to StrongMail, what were the differences in how Frank
hired employees for each of those ventures?
2. With StrongMail, what lessons should we learn from Frank's experiences hiring
all of his vice presidents of sales?
3. Has Frank changed across the five ventures? If so, how?
4. What should Frank do now?
Feb 22 President’s Day / no class
Feb 24 Assembling the Founding Team (IV): Dynamic Equity Splits
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Case
Ockham Technologies: Living on the Razor's Edge
Ockham technologies has grown to ten people in six months and has landed the
“dream” first customer. Ockam's success has caught the attention of several venture
capital firms, and the company is close to deciding which financing offer to accept.
Ockam's founder/CEO is hesitant to have a large board and is worried about losing
control of Ockham. Complicating the decision, tensions have been rising between him
and his remaining cofounder, who is currently vice president.
Study questions:
1. Have Ockham’s founders done a good job of splitting the equity?
2. Why have tensions been rising between Jim and Mike?
3. Should Ockham take the offer from the Texas angel ($10 million for 50% of
Ockham) or the offer from Noro Moseley ($2 million for 32%)? Why?
extras
Wasserman and Barley, “A Note on the Legal and Tax Implications of Founders’
Equity Splits.”
Mar 1
Research data on equity splits, founding teams, and introduction to UpDown
equity-split simulation
Mar 3
Case
Assembling the Founding Team (V): Joining the Founding Team
Les Is More…Times Four
“I've had enough! I decided that I need to resign,” read the mail from the founder of
Webpoint to the company's board of directors. Les Trachtman, the CEO of Webpoint,
has to figure out how to react to the founder’s ultimatum.
Study questions:
1. Across his four experiences replacing founders, what has Les Trachtman done
well? Done poorly?
2. What should he do now?
Mar 8
Case
Assembling the Founding Team (IV): equity split simulation
Negotiating Equity Splits at UpDown
Michael Reich is having severe doubts about how he split the equity with his
cofounders two months ago, when they completed a one-page “November
Agreement.” Since then, Michael has found an angel investor and has worked
nonstop on the business while one cofounder was off enjoying the winter break with
his family and the other worked on lucrative consulting contracts for other companies.
Michael has just sent his cofounders of proposal that would reallocate the equity within
their founding team, and all three founders are getting ready to reopen a negotiation
they thought had been finalized.
Individual preparation:
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1. Read the “Negotiating Equity Splits at UpDown core case.
2. Read YOUR confidential information and prepare for the negotiation.
3. Fill out your “pre-negotiation poll” before your group gets together to conduct
the actual negotiation.
4. Please do not discuss this case or the exercise with other students before you
do the actual negotiation.
Group negotiation:
3. Negotiate with your group, wherever you want.
4. Complete the “post-negotiation poll” by 5 PM the day before class.
5. The “Michael” in each team must complete a second, “agreement terms” poll.
extra
Frank Demmler, “The Founders’ Pie Calculator”
(http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%20Calcul
ator.htm)
Mar 10
Intro to hiring and firing: research data on non-competes
Mar 29
Case
Scaling the Team: Hiring Tactics
Cypress Semiconductor
In the fast-moving area of semiconductor development, Cypress strives to stay ahead
by recruiting and retaining top-notch talent.
Study questions:
1. How would you describe TJ Rodgers approach to achieving results?
2. Are his policies and practices at Cypress aligned with the strategy? Are they
a source of competitive advantage? Why or why not?
3. How is the culture being developed and maintained?
4. At the end of the case TJ Rodgers is wondering whether he should make any
changes. What are your recommendations?
extras
Malcolm Gladwell, “Personality Plus”
Pierre Morneau, “Zero Defect Hiring”
Mar 31
Case
Scaling the Team: (Not Mis)managing Performance
Wolfgang Keller at Koenigsbrau
Wolfgang Keller finds himself dissatisfied with the performance of a new hire test with
opening a new branch of an old company. What comes next?
Study questions:
1. What is your analysis of the situation facing Keller as he returns to Athens?
What is your assessment of Brodsky's performance? Please be specific
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2. How effective has Keller been as a coach to Brodsky? Why, and could you
have done better?
3. What are the underlying causes of Brodsky's performance problems? What
specific action should Keller take upon returning to Athens?
Apr 5
Case
Scaling the Team: Firing
Confronting a Necessary Evil: Firing Alex Robins
Dale Horvath’s first assignment at work is one that many would gladly pass on to
others. In this case he wrestles with both emotional and practical aspects of
terminating someone.
extras
Note on Terminations
Jerome Groopman, “Dying Words” (http://www.jeromegroopman.com/articles/dyingwords.html)
Scott Reeves, Firing a Worker (http://www.forbes.com/2006/04/25/business-basicsfiring-cx_sr_0427fire.html)
Apr 7
Firing simulation & module wrap-up
Apr 12
Creative Hiring and Firing
Guest speaker: Blade Kotelly
Apr 14
Case
Trade-Offs of External Resources (I): Keeping Control
Segway
For eight years, Dean Kamen has been developing the technology that underlies
Ginger, a self balancing human transporter that he later renamed the “Segway.”
Kamen has decided to spin off Ginger as a separate company, has hired the former
president of Chrysler Europe as CEO, and has spent two years building the company.
However, major tensions have developed between Kamen and Ginger senior team,
and the company is facing problems with shipping the product.
Study questions:
1. Would you want to work for Dean Kamen?
2. Has been done a good job of getting Ginger/Segway off the ground?
extras
Tom Patterson, “Segway inventor reveals toughest question”
(http://www.cnn.com/2009/LIVING/worklife/01/12/entrepreneur.psychology/index.html)
Apr 21
Case
Trade-Offs of External Resources (II): Relinquishing Control
Wily Technology
Before he accepts the new CEO position, Richard Williams wants founder Lew Cirne
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to step down as chairman of the board. While considering Williams incredible
demand, sir and reflect on everything he has already given up to get wily technology to
this point. Cirne wonders what he could have done to be pushed to the side like this,
and what he should do now.
Study questions:
1. Has Lew Cirne been a good CEO so far? Why or why not?
2. As Lew Cirne, why would Richard Williams want to replace you??
3. As David Strom, if Lew rejects Richard Williams demands and threatens to
leave Wily, what should you do?
extra
Noam Wasserman, “Founder/CEO Succession and the Paradox of Entrepreneurial
Success.”
Apr 26
Case
Trade-Offs of External Resources (V): Control Choices Across Ventures
Evan Williams
For several months, founder/CEO Evan Williams has felt trapped, unable to control
Odeo and its strategic direction. He longs for the “simple” days of Blogger, the
previous venture he had cofounded. A vote is blogger experiences have included a
major blowup with his cofounder that had resulted in legal proceedings, a brush with
near-bankruptcy, and the laying off of his entire team, Williams has become even more
disillusioned with his current venture, Odeo.
Study questions:
1. How has Evan Williams gotten himself into this mess?
2. What should he do now?
extras
Noam Wasserman, “Rich Versus King: the Entrepreneur's Dilemma.”
Apr 28
Case
Achieving the Entrepreneurial Ideal (I): Franchising
Rubbish Boys
It looked like founder/CEO Brian Scudamore might not be able to pursue franchising
as a growth option or his junk removal business after all. Over the years he had
overcome many hurdles, including buying out his cofounder, firing all of his employees
so he could start all over again, and a previous failed experiment with student
franchising. Now looking to expand within North America, he had turned to a
professional franchising model and developed a new branch help grow the business.
Study questions:
1. If you just had one or two words with which to describe Brian Scudamore, what
would they be?
2. What was at stake in the negotiation between Brian and Paul died over the
franchising agreement?
3. What should Brian do now?
May 3
Achieving the Entrepreneurial Ideal (II): Serial Founding Teams
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Case
FeedBurner
“Is this the right time, or is it still too early?” Dick Costolo wondered as he reflected on
the latest acquisition offer. He had been building FeedBurner with his three
cofounders for almost 4 years and was staring at the details of an acquisition offer
from Google. He had his cofounders had founded three prior ventures together, each
of which have had increasingly attractive outcomes, but none of which had reached
their full potential.
Study questions:
1. What mistakes did Dick Costolo in his cofounders make during their first three
ventures? How have those experiences shaped their approach to founding
and building FeedBurner?
2. What should Costolo do now?
May 5
Case
Achieving the Entrepreneurial Ideal (IV): Exits
Nantucket Nectars
The founders of Nantucket Nectars are trying to decide whether and how to
sell the company.
Study questions:
1. If you are Tom and Tom, what is the minimum price you except for
Nantucket Nectars?
2. If you were a potential acquirer, how could you convince the founders
of Nantucket Nectars to sell their company to you?
3. Prepare to be a potential acquirer who is pitching Tom and Tom
to accept your offer. We will role-play this in class.
May 10
Project presentations (projects due)
May 12
Project presentations & course wrap-up
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