One of the first steps is creating a company is creating authority. The more “out there” the idea, the more important it is to pay attention to this step. The following are six foundational types of authority necessary for an early stage company:
1. Personal Authority: This isn’t so much a type of authority to be created, though it can be cultivated, as it is a critical characteristic of successful entrepreneurs. The ability to take up, define, and exercise authority that doesn’t yet exist, and therefor can’t be given, is perhaps the most overlooked essential personality trait of a founding team. People with a strong sense of personal authority don’t necessarily deliberately break the rules, but they aren’t constrained by them either. They’re also the people that have a lot of personal integrity and credibility. Founders with a strong sense of personal authority are able to create a company with a strong and functional sense of its own authority.
2. Formal Legal Authority: Get your ducks in a row early. Get an Employer Identification Number (EIN) for taxes and payroll, open a corporate bank account, create a Board of Directors with clearly defined areas of control, write Articles of Incorporation. Have a few key contracts in regular use, such as a confidentiality, confirmatory assignment, and consulting agreements, that remind the team that this is “legit”; you’ll also thank yourself later when the first major investor due diligence process kicks off. These things can seem like a waste of time early on, but they set the stage for growth and functional interactions of the company as its own entity with the outside world.
3. External Relational Authority: Having the transactional foundation of legal authority in place doesn’t guarantee that anyone outside the company will want to interact with you. For this, we need relational authority. Build a brand: get a good logo, have business cards printed, get a custom domain for your website and email, have a purposeful social media presence. Associate with the relational authority of well-respected third parties: attract well-known Directors and well-respected vendors and first customers, associate yourself with institutions and competitions that have good positive brand awareness. By the same token, avoid associating with anyone that doesn’t have a sterling reputation.
4. Internal Relational Authority: In an established organization, employees are often given authority when they start their job (of course, they can lose it or gain more based on their own actions). In a start-up, there is no established organizational chart. Especially if the founding team are already friends or colleagues, early internal authority is pretty ad hoc. This can be fun at first, but if left to evolve organically, problems are likely: “stepping on each other’s toes”, the wrong people making decisions, and paralysis because no one knows who can make decisions or because unanimous agreement is deemed necessary, can make a company dysfunctional. Figure out who has what sorts of authority and be strict about mutual respect. Hint: the answer isn’t just to draw straws for CEO and give everyone else a different C-level title. Another common mistake is to give someone responsibility or something without ensuring they have the authority to actually make it happen.
5. Functional, Managerial, and Procedural Authority: These are all components of internal relational authority, but it’s important to keep them in mind as separate things when figuring out roles and assigning formal authority to team members. Functional authority is authority over another’s work product: a technical fellow may have authority over a junior engineer or a VP may have to approve a memo written by HR. Managerial authority is that found in a traditional reporting relationship and encompasses the relationship between a “boss” and her direct reports. Procedural authority operates within the transactional day-to-day of the company: purchasing decisions, design approvals, and hiring often happen within processes.
6. Informal Authority: Being conscious of the informal authority and power dynamics is necessary to ensure that the formal authority you’ve put in place isn’t being undermined, either intentionally or not. Informal authority is exercised outside formal roles: peer-to-peer, or outside the job description and role of a manager or co-founder. The employee who takes it upon themselves to clean out the fridge once a month is exercising informal authority. The founder that continues to be involved in decision-making outside their current role with the company is exercising a particularly powerful (and potentially corrosive) form of informal authority. Ideally, informal authority would be recognized and cultivated so that it is in the service of formal roles and responsibilities; it should at least be used with full awareness of what’s going on.
As the company grows over time, complexity is often the enemy of clarity. New roles, with their accompanying need for new authority, will emerge and be organically taken up by someone, with mixed levels of success, if they are not deliberately integrated into the internal authority. Similarly, as the company grows, it should continue to consciously build its outward facing authority. The degree to which a company creates its own authority beyond the personal authority of its founders can determine whether the company succeeds in the long run.