When talented, creative and driven people start working towards a common goal, magic can happen. Jobs and Wozniak, Brin and Page, Gates and Allen, and many other iconic leaders started building businesses as a team.
In many cases, founders come together to complement each other’s strengths and weaknesses. This is the classic technical and non-technical founder mashup. In other cases, such as in today’s economic climate, it’s more out of necessity. Going it alone has become more difficult as there are fewer resources and founders are forced to band together.
We’ve seen this happen before in past recessions. For example, in 2000, during the bursting of the dot-com bubble, Elon Musk’s X.com and Peter Thiel’s PayPal merged. The companies were in fierce competition with each other in the nascent online payments space and had to join forces or both companies would likely run out of money. They went on to build something great together.
While that story had a happy (ie 10-figure exit), the reality is that many co-founder-led companies fail not only because the business didn’t make it, but also, perhaps solely, because the co-founders didn’t. the right match and/or didn’t do enough work in the early part of their relationship to ensure long-term success.
Co-founders don’t have to be best friends. They can and probably should tolerate conflict because it helps avoid the pitfalls of “groupthink.” But there are important steps co-founders should take before joining forces to determine if there’s a good fit. This includes having open, honest discussions about topics that are easy to get lost in the whirlwind of starting a business.
And every co-founding relationship should be guided by an agreement that sets out the respective rights and responsibilities of the founders in a legally enforceable manner.
As I often tell my clients. Most people overvalue relationships in business and in life. Here are some ideas to help co-founders avoid common mistakes.
Have honest conversations; ask tough questions
Just as you wouldn’t (or at least shouldn’t) marry a romantic partner you just met, founders shouldn’t blindly enter a business relationship that’s as complicated as a marriage.
When considering a pool of potential partners, a founder should consider whether there is someone they have a pre-existing relationship with who might be a good fit. This could include a former employee, classmate, or industry colleague they worked with in the past. While there are exceptions to every rule, in most cases a founder can get an idea of what it would be like to work with someone as a co-founder based on past experiences.
Regardless of how the co-founders plan to form an alliance, they need to have open, honest conversations with each other before making the final decision to move forward together. One effective way to do this is to have conversations with someone who has dealt with founder conflicts, such as an experienced business coach or lawyer.
It’s important for co-founders to address initial issues that tend to cause problems down the road. These include things like:
- Company vision and goals
- Means of business financing (bootstrap vs. raising external capital)
- The amount of work each party is willing to put in
- Each founder will take on different roles in the company
- How are decisions made?
- Hiring and firing
- Compensation, equity allocation and other “money” issues
As you might expect, frank discussions about these issues before formalizing a business partnership are helpful (I would argue essential) exercise to identify potentially irreconcilable areas of conflict, but it is no guarantee that disputes will not arise after the business is launched.
In fact, the opposite is true, as conflict is inevitable when it comes to the stress and high stakes of running a business. Therefore, it is important that co-founders also discuss and understand how they will handle conflict resolution.
In short, agree to disagree.
The value of a shareholder agreement in avoiding and resolving co-founder conflict
One of the best ways to enforce the various agreements the co-founders have reached about how they will run their startup is to remember them in the founder’s agreement.
The founder’s contract is a binding contract. It does not replace the operating agreement. it is a supplemental agreement that defines the business relationship that the founders enter into and agree upon. It spells out the duties, rights, responsibilities and any liabilities of each founder to ensure everyone is clear about their role in the company. Having a founder’s agreement also signals to investors that they are working with a serious business.
Because a founder’s agreement is an important part of running a business and how the founders will work together, it’s not something that should be created with a DIY approach based on a template found on the Internet. Consult with an experienced business attorney to guide you through the process and draft an appropriate document that will stand the test of time.
Some of the issues addressed in the founder’s contract include:
- Identify who the founders are to avoid confusion, such as whether an early employee was actually a founder.
- Roles and Responsibilities of Founders to Avoid Frustration and Redundancy
- The main goals and mission of the company
- How the equity is distributed among the founders and how much is kept to distribute to employees
- How equity capital is provided in a way that encourages founders and employees to stay and contribute to the company’s success
- Intellectual Property Rights to avoid future disputes over whether the IP belongs to the company or an individual
- What salary, non-salary compensation and benefits will be paid to founders?
- How decisions are made, including a process for resolving areas of disagreement
- Way(s) the founder can exit the business and what happens to their equity if they do
- Agreement not to compete
It’s hard enough to build a startup. Don’t let conflicts between founders derail what would otherwise be a successful business. Take the time to identify the right co-founder. Engage in very open and honest communication. Work with an experienced attorney to document the appropriate roles and responsibilities in the founder’s agreement. These steps, by themselves, will not guarantee success. But they will help mitigate the risks arising from the most common areas of contention among founders.
Kristen A. Corpion is the founder and principal attorney at CORPlaw.
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