The Ultimate Guide To
Launching a startup is really hard; keeping it alive is even harder. When a venture succeeds we soak up headlines. But for many, the reality of entrepreneurship involves running out of money, solving the wrong problem or poor execution.
The ‘post-mortems’ of failure tell the story well. But they don’t (perhaps understandably) confront the number one reason for failure: co-founder conflict.
A lot has been written about co-founder relationships and disputes, but not so much by the founders themselves. Going public about a team falling-out is not cool. If the startup is well known, it’s easy to figure out who that person is. So for the most part, founders tend to tread lightly on this topic.
Advisors however don’t face the same constraints. In fact, they have the experience of dealing with dozens or even hundreds of founding teams. Investors, mentors and lawyers are a good proxy. They see it all: the good, the bad and the ugly.
For example, the folks at Y Combinator tell a sobering story. Paul Graham in 2006, said “Fights between founders are surprisingly common. About 20% of the startups we've funded have had a founder leave.” Fast forward to summer 2012, when one in four YC companies had lost a founder.
“With 13 years of experience as a business angel (200+ investments) and almost 4 years as a full time angel, I have finally discovered one of the main reasons that startups fail: conflicts between founders.”- Jeremie Berrebi, 2013
At Lexoo, we help startups deal with founder disputes every week. The types of conflict we see vary, but some come up more commonly than others.
Possibly the most common type of conflict. Who gets what share? Why? Does 50/50 cut it or is there a smarter way to divvy up the pie? What happens if someone leaves?
Some founders are relaxed about titles early on, others not. But one day, the decision will come. If more than one founder aspires to be leader, sparks can fly.
It won’t arise until you raise capital (or earn lots of revenue), but much like the equity split, the allocation of money between founders is a hot spot for conflict. Do all founders have mouths to feed? Or mortgages to pay?
It’s easy to say ideas are worthless and execution is everything. But a founder’s bond with “their baby” is a reality co-founders must manage, and on rare occasions compensate for.
“You’re out the door at five, while I’m here till midnight!”, he complained. Working styles differ, outside commitments vary and sometimes co-founders just don’t share the same level of passion.
Launching a startup takes a certain amount of ego. Success breeds it; failures can decimate it. Put two or more big egos in the same room 24/7 and tensions will rise.
Startups live on the edge of failure and near death experiences. It takes grit and almost blind determination to see through the hard times. Sometimes one founder has it and the other doesn’t.
Most decisions are taken by the founder with resident expertise. But when neither has expertise on a particular issue, opinion comes into play. Fundraising is a common example, where first-time founders often don’t have any experience and conflicting opinions arise putting a strain on the relationship.
Ideally the skill set of a founding team won’t overlap too much. Decisions can then fall naturally to the more qualified member. But where two or more founders share equal prowess for too many tasks, each decision can be a battle.
Working styles differ, as do attitudes. One founder’s strategizing is another’s procrastination. Your product will never be perfect, but some founders won’t ship until it is.
Are awesome – that is, with the blessing of your co-founder. But if your creative outlet goes stealth, it can turn into a distraction that your team members might rightly start to resent.
If it comes to this, you’re in trouble. One founder gets to the point where they simply cannot work with another founder that they threaten to leave. Awful for morale, a friendship might be lost. Your venture might die, but if you survive, it might be for the best.
Hackathons and startup weekends are fun. Coding, post-it-note-ing and pizza-ing all night with a few (or several) strangers can generate great MVPs. But rarely does the party last beyond the weekend.
The Snapchat fiasco, as explained in a lawsuit by co-founder Reggie Brown, started when the English literature major shared an idea with product design student Evan Spiegel (who is now Snapchat's chief executive). His idea was that people could share a photo that, upon being viewed, shortly self-destructs.
They brought on Bobby Murphy as a third partner (he remains Snapchat's key technologist) and had an oral agreement. According to Spiegel’s disposition, Spiegel then claimed that Brown's abilities fell short; Spiegel and Murphy excluded Brown from Snapchat’s systems and generally left him out of the partnership.
Brown took on an unpaid position elsewhere while Snapchat then got $1-billion-plus takeover offers from Facebook Inc. Brown sued his former colleagues and investors who bankrolled Snapchat's early development, claiming breach of contract, and a settlement was reached. (Read more here: http://www.latimes.com/business/la-fi-cofounder-disputes-20150322-story.html)
A senior at the University of Southern California, Ari Rashti joined up with three acquaintances to make software for call centres using voice data to determine when to connect an agent. Although he was keen to bring on more customers before developing new features, two of his co-founders wanted to use their cash on computer programmers.
A couple of years in, Rashti quit. "It took us a while to get to a final agreement, and still no one is ... past resentment," he said, admitting that he regrets penning the company's founding documents himself as opposed to seeking outside help. However, Safesoft survived and now has about 15 workers and millions of dollars of annual revenue.
Tim Sae Koo started Tint, with legal advice helping him to avoid headaches during a co-founder divorce. Sae Koo graduated from the University of Southern California a semester early to work full time on a class project that grew into an app for companies to display social media content.
The five founders included Willy Wang, Sae Koo's friend since primary school. When they clashed over strategy and skills, Wang quit, and another co-founder left soon after. Both still retain shares in the company.
The early legal assistance, which Tint paid for after raising venture capital, helped to mitigate what could have otherwise been a disastrous situation.
So what insights can be gained?
Co-founders come together most commonly through social circles – friends and family. It ticks a couple important boxes: you like your friends; you trust your family. But it brings a tonne of emotional pressure into play, especially when the odds of success are against you. Being family can also cloud better judgement about the skills and competence required for the role. And robust discussion, raising concerns or challenging ideas can be suppressed for fear of offending a good mate or causing tension with a loved one.
Professional acquaintances, such as former work colleagues work best. You know what they’re good at and you’ve seen how they operate, ideally over a number of years. You’ve seen them under pressure; you’ve celebrated success together and consoled each other when beaten. If it all comes crumbling down the fallout will be tough, but at least you’ll have all your friends and family to support you.
And that code ninja you met at startup weekend? There is a chance they might be the right one, but without incubating a working relationship first, those chances are little more than a glimmering hope.
So a former colleague has approached you about a startup idea. You‘ve been through hell and back on projects together in the past and she knows the sector inside out. Your technical skills and developer network complement her grip on strategy and the financials. She’s great to work with. You’ve always wanted to do your own thing, but money and fame isn’t your thing – having independence and a successful business would suit you fine. But is that enough for her?
Too many co-founders dive into business together without defining and sharing what success would look like on a personal level. Set out your best-case scenarios: if you both want an eight-figure exit within five years, then great. But if one wants to build and nurture a business through to retirement, that’s an entirely different proposition. Talk through your priorities and family commitments, be open about your ambitions and share your insecurities. If it all comes together, then embark on your mission.
This goes beyond job titles or merely splitting up roles according to your trade. Take a deep dive into all the jobs that need doing from PR to prototyping, investor relations and sales, to bookkeeping and QA testing. Or as a panel of founders at SXSW put it: “Clearly define your roles in MECE (“mutually exclusive and collectively exhaustive”) as possible.”
Look for gaps that either no one wants to fill, or where the required skills are lacking. Decide who’ll take on (or learn) what, then set a future date to assess how it’s working out. Or if it’s feasible, outsource it. But remember to make sure someone is responsible for the outsourced work.
Perhaps more importantly, look for overlap. Don’t worry if both you and your co-founder love public speaking. Just recognise that it’s something you’re both good at and leverage your combined talents into different arenas. For example, you might talk about your journey at startup conferences while your co-founder might own the stage for more niche events on say design or DevOps.
Or 2.09 to be exact, even if it’s statistic drawn from a small, rather dated (but regularly cited) sample. Most pundits do indeed vouch for either two or three founders as being ideal, so two and bit makes sense.
Politics starts with your co-founder, but increases with every additional body. While three can be handy for breaking deadlocks, it also allows two to gang up on one. There’s also less chance for skills and responsibilities to overlap when there are two or even three co-founders.
Beyond three is doable and of course there are examples where it has worked, but it’s harder to pull off. Splitting say 25%-35% between several founders at the outset doesn’t sound too bad. But the dilution that comes with investment rounds (not to mention carving out an options pool for staff) can quickly result single-digit holdings for large co-founder teams.
When splitting shares, 50/50 or 33/33/33 between two or three co-founders makes intuitive sense. It seems fair right? You’re all in it together, equally invested in the success of your venture.
But 100 divided by x rarely equals fair. Fairness should be decided upon the contributions (or sacrifice) that each founder makes. Are you leveraging someone’s existing code-base, domain expertise or contact book? Is someone bringing cash to the table or giving up a lucrative opportunity elsewhere to join? Who will take the helm as CEO? If the answers don’t add up to equal, reflect it in the numbers.
“I meet far more second or third time entrepreneurs who wouldn’t do a 50/50 (or 33/33/33) partnership ever again than you would imagine.”- Mark Suster
Here’s a handy tool to help you get to a number, drawing from a solid list of variables.
So you’ve found a co-founder who loves your mission. She’s the perfect fit to take your MVP to market and for that, you’ve agreed to offer her a 35% stake and form a company together.
Now you have two choices: issue her 35% of the shares and take the remainder for yourself upfront; or agree that you’ll each ‘earn’ your shares over time according to a ‘vesting’ schedule. For example, after one year (the ‘cliff’) you’ll each earn 25% of your shares, then earn a further 2% each month for the next four years to get you both to your full stake. Should either of you leave earlier than year four, you’ll only keep the shares you’ve earnt (or need to sell them back to the company or co-founder for fair value). If someone leaves in the first year, they get zero.
Without this typical vesting structure (there a few variations), she could’ve walked away at anytime with a 35% stake in the company. You would then need to buy those shares back, which you might not be able to afford, particularly if your startup is earning money or has developed significant IP. This situation could effectively kill the company. She’ll have a 35% stake ‘trapped’ in the company and any investor will baulk at a business where a chunk of its shares are held by a person who is not contributing anything!
One the greatest football players of all time, Lionel Messi, launched his career with a contract scribbled on a restaurant napkin. It’s a romantic story, but it highlights the importance of getting things in writing, whether it’s basic one-pager or a forty page shareholders agreement (with vesting of course!).
“When it involves real or perceived large sums of money, friends sue.”- Mark Suster
The act of writing down and signing up to your commitments has a way of flushing out issues that otherwise might be left unsaid. It will cause tension and at times will make you uncomfortable - thinking about ‘what ifs’ and worst case scenarios might run against every fibre of your entrepreneurial being. It is the domain of lawyers, so use them as a sounding board to raise issues and let them act as a buffer to find the middle ground. You’ll come out the other end knowing where you stand and your founding team will be stronger for it.
While nobody can predict the future, we’ve seen that following the above steps can save you a lot of headache further down the line. At the outset of starting a business, it’s easy to get caught up in the excitement and forget how a lot of other co-founder stories pan out. Getting legal advice early on in the venture can help you to steer your partnership through any unexpected storms.
Looking for help with hiring your first employee? Read more here.