The Small Team, and How to Build One

Many founders treat a small team as a phase to grow out of quickly. You do not have to. With good tools and clear writing, a handful of people with sound judgement can now build and run what took a much larger team a decade ago, and small teams were capable of a lot even then: when Facebook agreed to buy Instagram for $1 billion in April 2012, the company had 13 employees. This chapter covers choosing co-founders, structuring equity, hiring, working with contractors and AI, and keeping the founders healthy enough to last.

This is general information, not legal or financial advice. Use a lawyer for equity, employment and tax decisions.

Choosing Co-founders

A co-founder is the most important hire you will make, and the hardest to undo. Look for complementary skills and shared values. Two people who both love building product and both avoid selling will struggle. So will two people who disagree about how big the company should become.

The research backs this up. Noam Wasserman studied almost ten thousand founders for The Founder's Dilemmas (2013) and identifies people problems as the leading cause of startup failure. Paul Graham wrote in 2006 that about 20% of the startups YC had funded had seen a founder leave, and that these fights usually come down to the people rather than the circumstances.

Before you commit, work together on something real for a few weeks: ship a small feature, run customer interviews, or prepare a pitch. You will learn more from how someone handles pressure, disagreement and dull work than from any conversation about vision.

Have the hard conversations up front, while everyone is still friendly:

• What does each of you want out of this in five years: a large company, a profitable one, a sale?
• How much can each of you afford to go without salary, and for how long?
• Who has the final say on product, on hiring and on money?
• What happens if one of you wants to leave, or stops performing?
• How will you split equity, and why?

Write the answers down in a co-founder agreement, then have a lawyer turn the binding parts into proper documents covering equity, vesting, assignment of intellectual property and decision rights. Planning for a breakup at the start feels awkward. Negotiating one later without a plan is much worse.

Founder Equity and Vesting

Vesting means you earn your shares over time instead of owning all of them on day one. If someone leaves early, it protects the company and the founders who stay.

The most common arrangement is a four-year vesting schedule with a one-year cliff. Nothing vests during the first year; at the one-year mark, 25% vests at once; the rest usually vests monthly over the following three years. This is convention, not law, and you can agree different terms.

Some founders resist vesting their own shares. Investors routinely require it as a condition of funding regardless, and it serves you too. If a co-founder walks away after six months, you do not want them holding a large stake in a company the rest of you are still building.

In the US, founders who receive shares subject to vesting should ask a lawyer about filing an 83(b) election with the IRS. The election must be filed no later than 30 days after the shares are transferred and cannot be revoked without IRS consent. Miss the deadline and you may face a large tax bill later.

Hiring Slowly

Every hire changes how the company communicates, decides and spends money. Hire when the pain of not hiring is clear and specific, not because a funding round says you can afford to.

Hire for judgement before experience. Most of the work in a small company is undefined, so people have to decide what matters without being told. Useful signals:

• They ask questions about the problem before proposing solutions.
• They can explain a past decision, including what they got wrong.
• They write clearly, because much of the job will be written.
• They will do work below their seniority when it needs doing.

Use paid trial projects where you can. A week or two of real work, fairly paid, shows you more than several rounds of interviews. Be honest about the company's stage, the risk and the pay, and let people opt out early.

Letting someone go is part of building a team. If a hire is clearly not working, act quickly and kindly. Delay is harder on them and on everyone around them.

Contractors, studios or employees

Not every role needs a full-time employee. The choice depends on how central the work is to your advantage and how long it will last.

• Employees fit core, continuing work: the people who will own the product, the customer relationships and the culture.
• Contractors and freelancers fit well-defined work with a clear end, such as a brand identity, a security review or a data migration.
• Studios and agencies fit a burst of work that needs several skills at once, such as design, engineering and launch together, before you can hire a full team.

Keep ownership of anything core. Contracts should assign intellectual property to the company, you should hold admin access to every account and repository, and someone on your team should understand what was built well enough to maintain it.

Many jurisdictions have rules on when a contractor must legally be treated as an employee. In the US, the IRS looks at behavioral control, financial control and the type of relationship, and a business that misclassifies an employee without a reasonable basis can be held liable for that worker's employment taxes. State rules can differ. If someone works only for you, on your schedule and under your direction, ask a lawyer how to classify them.

AI Agents as Leverage

AI tools and agents now do work that once required extra hires. In March 2025, Y Combinator's Jared Friedman said a quarter of its Winter 2025 batch had codebases that were 95% AI-generated. Whether to use these tools is settled. What you have to decide is where they produce reliable output and where a person still has to make the call.

Good candidates to automate or heavily assist:

• First drafts of code, tests, documentation and support replies
• Research summaries, meeting notes and data cleanup
• Routine operations such as triaging inboxes, tagging tickets and generating reports
• Repetitive checks, such as reviewing pull requests for common mistakes

Work that should stay with people:

• Decisions about strategy, pricing, hiring and firing
• Relationships with customers, investors and your team
• Anything with legal, financial or safety consequences, unless a person reviews it carefully
• Final sign-off on quality before something reaches a customer

Treat AI output like work from a fast, capable junior colleague: often right, and always worth checking. Write down how you use these tools, including what each agent is allowed to do and who reviews its output, so a time-saver does not turn into a risk nobody is watching.

Async Work and Writing Things Down

Many small teams work across cities and time zones. That works when writing is the default and meetings are the exception.

Keep a few shared documents current: this quarter's goals, how decisions get made, and how the product and systems work. Record each decision with its reasoning, so a new person can understand why without asking. A short written update each week replaces most status meetings. GitLab, an all-remote company, takes this further: it documents new solutions in its public handbook before announcing them, so the handbook stays the single source of truth.

Written documentation also gives AI tools something accurate to work from, and it keeps knowledge in the company when someone leaves.

Meet in person when you can, especially at the start and for difficult conversations. Trust built face to face makes remote work easier afterward.

Founder Health

A startup is a long effort, and the founders are its most fragile part. Treat burnout as a risk to the company, not a sign of commitment. Exhausted founders make worse decisions, communicate poorly and are more likely to quit.

Mental health problems are common among founders. In a 2019 study in Small Business Economics, 49% of the 242 entrepreneurs surveyed reported a personal history of a mental health condition, and 30% reported depression. The sample is small and self-reported, but the finding is strong enough to take seriously.

Protect the basics: sleep, exercise, time with people outside the company, and at least one day a week mostly away from work. Watch for early warning signs such as dreading work you used to enjoy, constant irritability or trouble concentrating. If you are struggling, talk to a co-founder, a mentor or a professional.

Co-founders should check in with each other directly, about more than the business. Agree that either of you can call a pause when things are getting unhealthy.