I really enjoyed this article from Dharmesh Shah. It’s unbelievable how many startups get into trouble not because their product isn’t having success or their company can’t scale but rather because the co-founders have some “funk” between them that grows to the point that the train goes off the tracks. 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“). Let’s explore further.
You can read Dharmesh’s full article here. His list goes into details on the following topics:
- 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?
Just like other forms of relationship, co-founders can “grow apart” over time. What motivated each of them initially can easily change as time goes on. Getting married, having children, experiencing the company at different phases of growth, watching the company culture change as more employees are hired and simply getting wiser over time can all cause personal motivations to change. Discussing the topics in Dharmesh’s list at the outset and then again periodically as the company grows is an ideal way to avoid surprises. If you and your co-founder(s) can recognize the changes in motivation as they occur, it’s much easier to deal with than waiting until someone explodes.
Sometimes two founders will create a 2-person board, 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 that other board member knows where the co-founders stand on the list of questions above.
In addition, having one or more formal advisors that are motivated for the company to 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 a year and if you stretch that to two 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 vesting schedule.
Side note: A vesting period of 3-4 years is typical. 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 3-6 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“.