When talented, creative and driven people start working toward a common goal, magic can happen. Jobs and Wozniak, Brin and Paige, Gates and Allen and many other iconic leaders began building businesses as a team.
In many cases, founders team up to complement each other’s strengths and weaknesses. This is the classic technical and non-technical founder mashup. In other instances, such as in today’s economic environment, it’s more out of necessity. Going it alone has become more challenging because there are fewer resources to go around and founders are being forced to consolidate.
We’ve seen this happen before in past 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 had been engaged in fierce competition with each other in the fledgling online payments space and had to join forces, or else both companies would have likely run out of money. They went on to build something great together.
While that story had a happy (that is, 10-figure exit) ending, the reality is that many cofounder-led companies fail — not just because the business couldn’t make it, but also, maybe exclusively because cofounders weren’t the right match and/or didn’t do enough work at the front-end of their relationship to help ensure long-term success.
Cofounders don’t need to be best friends. They can, and probably should, endure conflicts because that helps avoid the pitfalls of “groupthink.” But there are important steps cofounders should take before joining forces to determine if there’s a good fit. This includes having open, honest discussions on topics that are easy to leave unaddressed in the whirlwind of excitement about starting a business.
And, every cofounder relationship needs to be guided by an agreement that sets forth in a legally enforceable way the founders’ respective rights and responsibilities.
As I often tell my clients: Most people overestimate relationships in business and in life. Here are some ideas to help cofounders avoid common mistakes.
Have honest conversations; ask tough questions
Just as you wouldn’t (or at least shouldn’t) jump into a marriage with a romantic partner you just met, founders shouldn’t blindly enter into a business relationship that’s just as complex as a marital one.
When considering the pool of potential partners, a founder should consider whether there is someone with whom they have a preexisting relationship who could be a good fit. This might include a former coworker, classmate, or industry colleague they’ve worked with in the past. While there are exceptions to every rule, in many cases, a founder can get a sense of what it would be like to work with someone as a cofounder based on past experience.
Regardless of how cofounders go about forming an alliance, before making a final decision to move forward together, they should have open, honest conversations with each other. One effective way to do this is to have conversations facilitated by someone who has dealt with issues that commonly lead to founder conflicts, such as an experienced business coach or lawyer.
It’s critical for cofounders to address upfront issues that tend to lead to problems down the road. These include things such as:
- Vision and goals for the company
- Means of funding the business (bootstrap vs. raising outside capital)
- The amount of work each party is willing to put in
- Different roles in the company will each founder take on
- How decisions are made
- Hiring and firing
- Compensation, equity allocation and other “money” issues
As you might expect, having frank discussions about these issues before formalizing a business partnership is a helpful (I would argue essential) exercise for spotting potential irreconcilable areas of conflict, but it’s no guarantee that disputes won’t arise once a business is operational.
In fact, just the opposite is true, as conflict is inevitable when it comes to the stress and high stakes of running a business. Therefore, it’s important that cofounders also discuss and come to an understanding about how they will deal with conflict resolution down the road.
In short, agree how to disagree.
The value of shareholder agreement for avoiding and resolving cofounder conflict
One of the best ways to enforce the various agreements cofounders reach about how they will run their startup is to memorialize them in a founder’s agreement.
A founder’s agreement is a binding contract. It’s not a replacement for an operating agreement; it’s a complementary agreement that lays out the business relationships that the founders enter into and agree upon. It clarifies the responsibilities, rights, obligations and any liabilities of each founder to ensure each is clear on their specific role in the company. Having a founder’s agreement also signals to investors that they’re working with a serious business.
Because a founder’s agreement is a critical part of a business’ governance 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 an experienced business lawyer to guide you through the process and draft a document that is relevant and stands the test of time.
Some of the issues to address in a founder’s agreement include:
- Identify who the founders are to head off confusion about, for example, whether an early employee was, in fact, a founder
- Founder roles and responsibilities to avoid resentment and redundancy
- The core goals and mission of the company
- How equity is being split between founders and how much is being reserved for allocating to employees
- How equity vests so that founders and employees are incentivized to stick with and contribute to the company’s success
- Intellectual property ownership to avoid future disputes about whether IP is owned by 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
- The way(s) in which a founder can exit the business and what happens to their equity if they do
- An agreement not to compete
It’s difficult enough to build a startup. Don’t let conflicts between founders derail what would otherwise be a successful business. Spend the time necessary to identify the right cofounder. Engage in lots of open and honest communication. Work with an experienced lawyer to document the respective roles and responsibilities in a founder’s agreement. Taking these steps, in and of themselves, won’t guarantee success. But they’ll help mitigate the risks stemming from some of the most common areas of dispute between founders.
Kristen A. Corpion is founder and chief legal officer of CORPlaw.