What’s the Difference Between a “Founder” and an early “Key Employee”?

One of the key things entrepreneurs need to think about is their co-founders. Who’s a co-founder and who is a “key” or even “founding” employee. It’s a highly subjective topic and there are tons of opinions on it that can be found around the web. The subjectivity starts with the fact that a “founder” doesn’t have any real legal implications (unlike “directors” or “employees”). If forced to define a founder, lawyers would probably say it is an individual who was issued common shares at the business’ inception for which the received consideration was not solely monetary.

That’s still a broad definition and in our entrepreneurially-charged culture, the phrase has become an honorific. So the question of the actual role becomes personal to the company…what do you want it to imply? Let’s assume that you are the “primary” founder who conceived the animating idea. How do you decide who is a co-founder and who is an employee?

Here’s how I think about it: there is a legal concept called fiduciary duty, which is vested in the board of directors and requires that they take care of the company and its stakeholders. But in a start-up, typically the board will be inadequate to fulfill this role. Founders, to me, are the people who practically (although not legally) step into this void and protect the stakeholders and fight for the existence of the business.

Their commitment is so complete that they will make significant personal sacrifices with little short-term regard to their own well-being. While it may sound discriminatory, they should come to the business with personal financial wherewithal to be chronically underpaid, occasionally unpaid and sometimes to even pay payroll or a vendor. The thought of a founder leaving a company prior to funding is, to me, the equivalent of a soldier going AWOL. Why? Because even the smallest company quickly develops other stakeholders and they have almost certainly acted based on their faith in the founders. I talk more about this duty in another post, especially with regard to angel investors.

By contrast, a key employee might be more experienced or talented than a founder and they may even work harder, but (despite the best efforts of lawyers everywhere to draft employment agreements) they are not morally committed to the business in the same way. They have a right to get paid on payday and they should not be expected to ensure the viability of the entity. Note that I’m implying that issues of compensation, prestige, title and even credit can, at least theoretically, be separable from the question of ‘founders’ vs. ‘employees’. Put it this way…employees can be indispensable because of what they can do, founders are indispensable because of what they choose to do.

As noted at the top, others emphasize different things and I recommend the reader chase down multiple perspectives. I’ve seen commentary emphasizing determining who a founder is based on a person’s intellectual capacity, their willingness to work long hours, their ability to attract capital based on their experience and personal brand, making sure that the collective founders have a broad set of skills and even using the title as a recruiting tool. I’d never question the strategies other entrepreneurs have successfully applied.

My definition of a founder has meaning for me because my experience, and the experience of the entrepreneurs I advise, is that building a business is so hard that the role of “founder” typically violates personal boundaries that “employees” shouldn’t be asked to suffer through (not that every founder doesn’t owe a debt of gratitude to every employee who subjects themselves to the unavoidable sacrifices of working in a start-up environment). In my world, those violations create strong co-dependencies between founder and company that transcend legal niceties (sort of like a marriage is more than the certificate). I have a feeling that my description is a bit esoteric for anyone not living it. Maybe I should have just said, “you’ll know it when you see it.”