It’s unbelievable how many startups get into trouble not because they aren’t finding product-market fit or because their customer acquisition model is inefficient but rather because the co-founders have some “funk” between them. Startup ventures are already risky enough as it is. Adding an element of co-founder funk can end up being “the final straw” that causes the venture to fail. Let’s explore further.
Relationships
There are many, many benefits to having a co-founder versus running things solo. In fact, watch the short 3 min video clip below for additional insights on that. But just like other forms of relationship, co-founders can “grow apart” over time. Sometimes, it happens shortly after the venture starts and the initial excitement turns to hard work and difficult decisions. Other times it happens over a long period of time.
What initially motivated each of the founders can easily change as time goes on. Getting married, watching a personal bank account balance go down, dealing with unhappy investors or customers, watching the company culture change as more employees are hired, and simply getting wiser over time can all cause personal perceptions and motivations to change.
Much like spousal relationships, a secret to success is learning how to argue, debate and make critical decisions in a productive manner. It’s unrealistic to assume there won’t be heated debates and disagreements. But there’s a right and wrong way to do it. A good book to consider reading to learn some very valuable and related tools is “Crucial Conversations” by Kerry Patterson and Joseph Grenny.
Guiding Light
Ideally, the founding team makes a commitment to a set of founding principles that will serve as their guiding light. Some guidelines on establishing founding principles is covered later in the book. At the same time, the team should try to put all the cards on the table for important issues that could lead to controversy or misunderstanding.
When is the right time to have this crucial conversation? As early as possible during the new venture and then again periodically as the company grows. The sooner a co-founder can recognize their changes in motivation, the easier it is to deal with versus waiting until someone explodes.
Dharmesh Shah, co-founder and CTO at HubSpot, produced a list of 10 important questions co-founders should ask each other (You can read Dharmesh’s full article here). They serve as a great tool for minimizing the risk of co-founder funk and are listed below:
- How should we divide the shares?
- How will decisions get made?
- What happens if one of us leaves the company?
- Can any of us be fired? By whom? For what reasons?
- What are our personal goals for the startup?
- Will this be the primary activity for each of us?
- What part of our plan are we each unwilling to change?
- What contractual terms will each of us sign with the company?
- Will any of us be investing cash in the company? If so, how is this treated?
- What will we pay ourselves? Who gets to change this in the future?
If your founding team can successfully make it through a list of topics like this, you’re far better off than most startups. Even if there’s some yelling and shouting involved, if the final result is an agreed consensus with personal feelings intact, you’re in good shape.
Other Insights and Advice
Sometimes a two person founding teams will create a 2-person board of directors, which eliminates the possibility of a tie-breaking vote on difficult decisions. If they wait until there’s a significant conflict to realize a third vote would be helpful to the company, adding that third board seat becomes a very political decision. So consider starting with a 3-person board and making sure the other board member knows where the co-founders stand on the list of questions above.
Having one or more formal advisors that are motivated to see the company succeed via their equity compensation but not directly entangled in the co-founder relationship can really help (see related articles: Selecting an Advisor, Compensating an Advisor and Maximizing Value From Your Advisor). Often times, your company’s legal counsel will have conflicts of interest in being able to help work through co-founder conflict. So start with advisors or non-employee board members.
Realize that with three or more co-founders in the very early days, the odds are fairly high that at least one of them will not remain with the company more than two years and if you stretch that to three years the odds are extremely high. They might leave due to their own decision or they might get forced out. Because of this, you should strongly consider putting all co-founder equity on a four year vesting schedule.
Side note: A vesting period of 4 years is typical but I’ve seen founding teams go up to 5 or 6 years. If all co-founders worked on the venture for a few months or more before a company was formed and equity granted, maybe monthly vesting starts immediately. It might even be justified to start out with a certain amount already vested (ie – 10%). If equity is granted just as the venture gets started, consider a short “cliff” of 6 months to make sure all founders are truly committed to the venture and working well together. With a cliff, there is no vesting before the cliff period is reached but once it is reached there is a catch-up in vesting so that nothing is lost. Your attorney can advise you further.
With any addition to the team at the early stage (ie – first 20 employees), pay close attention to personas and personalities. You don’t want too much concentration of the same persona type because diversity of thinking and approaches can be one of your company’s strongest superpowers. For more on this, see my article titled “8 Personas of Successful Entrepreneurs“.
In a related article I discussed some of the implications of matching up with a co-founder that’s already in the bonus round (see article here titled “Is Your Potential Co-Founder Already in the Bonus Round“).