When talented, creative and driven people start working towards a common goal, magic can happen. Jobs and Wozniak, Brin and Paige, Gates and Allen, and many other iconic leaders began building companies as a team.
In many cases, founders work 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 the current economic environment, it is more out of necessity. Going it alone has become more challenging as there are fewer resources to go around and founders are forced to consolidate.
We’ve seen this happen before in previous downturns. For example, in 2000, during the implosion 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 online payments and had to join forces or else both companies would likely run out of money. They went on to build something great together.
While that story had a happy ending (i.e. a 10-figure exit), the reality is that many co-founder-led companies fail — not just because the company couldn’t make it, but perhaps solely because co-founders weren’t the right fit and /or have not done enough work on the front end of their relationship to ensure long-term success.
Co-founders don’t have to be best friends. They can and probably should endure conflict as it helps to 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 easily left unaddressed in the whirlwind of excitement about starting a business.
And any co-founder relationship should be guided by an agreement that sets out in a legally enforceable manner the respective rights and responsibilities of the founders.
As I often tell my clients, most people overestimate relationships in business and life. Here are some ideas to help co-founders avoid common mistakes.
Have honest conversations; ask tough questions
Just as you shouldn’t (or at least shouldn’t) enter into marriage with a romantic partner you’ve just met, founders shouldn’t blindly enter into a business relationship as complex as a marriage relationship.
When considering the pool of potential partners, a founder should consider whether there is someone they have a pre-existing relationship with who could be a good fit. This could be a former co-worker, classmate, or industry colleague they have worked with in the past. While there are exceptions to every rule, in many cases a founder can get an idea of what it would be like to work with someone as a co-founder based on past experience.
Regardless of how co-founders form an alliance, before making a final decision to move forward together, they should have open, honest conversations with each other. An effective way to do this is to have conversations led by someone who has dealt with issues that often lead to founder conflict, such as an experienced business coach or attorney.
It is critical for co-founders to address issues upfront that lead to problems later on. These include things like:
- Vision and goals for the company
- Means to finance the business (bootstrap vs. raising outside capital)
- The amount of work each party is willing to do
- Each founder will take on different roles in the company
- How decisions are made
- Hiring and firing
- Compensation, equity allocation and other “money” issues
As you would expect, it is helpful to have frank discussions about these issues before formalizing a business partnership (I would say essential) exercise for detecting potential conflict conflict areas, but it is no guarantee that disputes will not arise once a company is up and running.
In fact, just the opposite is true as conflict is inevitable when it comes to the stress and high stakes of running a business. That is why it is important that co-founders also discuss and agree on how they will handle conflict resolution later on.
In short, agree how you disagree.
The value of shareholder agreements for avoiding and resolving co-founder conflicts
One of the best ways to enforce the various agreements co-founders have reached about how they will run their startup is to memorialize them in a founder agreement.
A Founder’s Agreement is a binding contract. It is not a substitute for an operating agreement; it is an additional agreement that sets out the business relationships that the founders enter into and agree to. It clarifies the responsibilities, rights, duties and any liabilities of each founder to ensure everyone is clear about their specific role in the company. Having a founder agreement also indicates to investors that they are working with a serious company.
Because a founder agreement is a critical part of a company’s governance and how the founders will work together, it’s not something that should be created with a do-it-yourself approach based on a template found on the internet. Consult an experienced corporate lawyer to guide you through the process and prepare a document that is relevant and will stand the test of time.
Some of the issues to be addressed in a founder agreement include:
- Identify who the founders are to avoid confusion such as whether an early employee was a founder
- Founder roles and responsibilities to avoid resentment and redundancy
- The core goals and mission of the company
- How equity is divided between founders and how much is set aside for allocation to employees
- How equity becomes vested so that founders and employees are incentivized to stay with the company and contribute to the company’s success
- Intellectual property to avoid future disputes over whether IP belongs to the company or an individual
- What salary, non-salary and benefits are paid to founders
- How decisions are made, including a process for resolving disagreements
- The way(s) in which a founder can leave the company and what happens to his assets if he does
- An agreement not to compete
It’s hard enough building a startup. Don’t let founder conflicts derail what would otherwise be a successful company. Spend the time it takes to find the right co-founder. Engage in lots of open and honest communication. Work with an experienced attorney to define respective roles and responsibilities in a founder agreement. Taking these steps alone does not guarantee success. But they help mitigate the risks that arise from some of the most common founder disputes.
Kristen A. Corpion is founder and chief legal officer of CORP law.
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