A remarkable statistic to throw your way…
“65% of high-potential startups fail due to co-founders fall out”
This statement was made by Noam Wessman, Harvard Business School Professor and author of The Founder’s Dilemma who states that co-founders fall out for many reasons, such as money, business strategy, and leadership.
A simple solution to this problem is to create a founders or shareholders agreement from the very beginning of the partnership. This agreement should aim to set out some of the roles, duties and expectations for each co-founder, though you have to be realistic that founders roles and duties are often a fluid thing within startups.
The key clauses within a founders agreement will ultimately be about giving co-founders the security they need if/when conflict arises.
Whether you’ve started or thinking about starting a business with at least one co-founder, we identify some of the main issues you might face, alongside some potential solutions.
Potential Causes of Co-founders Fall Out
Not having the same business goals
Selecting the wrong partner and/or getting the wrong fit, is often the key problem behind co-founders fall out.
No startup has an easy ride and the bumpy ride that is almost guaranteed, will put that co-founding team under enormous pressure.
It’s therefore critical that the core of that team are well matched, not in skills (you want the different parts of the team to be complementary) but in mindset, ethos, attitude. This makes setting business goals and having an aligned ambition for your startup, so much easier.
Having the same business goals is an indicator that you and your co-founders are in agreement. You’re likely to have the same vision which will make it easier to monitor and manage growth within the company.
When co-founders don’t have the same expectations, this will often result in conflict as the different and often strong personalities (you have to have a certain innate stubbornness to launch a startup) clash over different visions.
Getting the wrong fit, and having no goal = surefire recipe for disaster.
Not investing resources equally
In order to prevent resentment and tension build up, it is important that co-founders try to invest equally in their time, resources and wider assets.
If not investing resources equally, there will clearly need to be a conversation about how the equity is divided, to be confirmed within the agreement. The agreement will map out whether equity in the company is going to be shared equally among the co-founders or if there needs to be an agreement based on the percentage of resources that co-founders contributed.
Never underestimate how a loose agreement and muddy understanding of the original terms, can come back to bite if/when conflict or exit emerges.
Generally it’s important that co-founders are investing their time, money and resources equally as this will reduce the potential for later conflict but in the event they’re not, then it’s critical everything is set out in detail at the start and no co-founder feels there is an imbalance or overburden.
Not having a great fit
As mentioned above, a crucial element in achieving a well-functioning relationship is that co-founders complement and support each of your mutual strengths and weaknesses. This perspective can take many different forms.
Understanding what those strengths and weaknesses are is an initial and crucial step to forming a strong team, and where you need to be most supportive or conversely, know when to step away.
Supporting your co-founders in their area of weakness is about an honesty between the team in acknowledging those gaps and a willingness to address them. No-one is superhuman and startup founders can suffer from delusions and chutzpah about their own talents.
Aim to get a well rounded team of co-founders (very important factor when looking to raise funds) and for any areas of collective weakness, delegate that area to a third party.
Finding a great fit is crucial but then, honesty and support is critical. With that in the background, your startup will have a much better chance to survive and thrive, no matter what external or internal conflicts that may arise because you and your co-founders know that you will get through it together. Teamwork makes the dream work.
Lack of communication
Honesty (or lack of) is also a key problem when it comes to communication and, failure to communicate within a hard pressed startup can be fatal.
Honest communication channels are such an important factor in a successful co-founder relationship.
According to Garry Tan, managing partner at Initialized Capital, “sometimes having some type of relationship outside of work can actually help solve this problem”.
Ultimately it is important to set up robust channels of communication and regular meetings or updates (some people think regular meetings are anathema to agile start ups but meetings can be dressed up in many different ways) via all channels – basecamp, skype, face-to-face etc. – will help you quickly address issues arising within the company. It’s also important for co-founders to be kept abreast of what each other is doing. Even small, agile startups run the risk of operating in silos and that’s rarely a recipe for success.
Equally important to how often you communicate is how you communicate. When you communicate with your co-founders it is important to listen, be respectful and to come from a place of understanding. One of the easiest ways to ruin a co-founder relationship is to be rude, brash and unsympathetic. If you want your company to succeed it is important that you ensure the well being of your co-founders because the happier people are the more meaningful work they will do.
It is understandable that once your startup is starting to gain traction, that you and your co-founders want to avoid conflict at all costs, often in fear that this will then cause more conflict.
This is counter-productive, as problems brushed under the carpet will often lead to even bigger emerging later down the track.
It is important to deal with any arising conflict head-on and immediately, leaving it for longer is likely to make the issue larger, more complex and potentially unsolvable.
There are many reasons why co-founders fall out.
The best way to avoid conflict is find the right type of co-founder fit and then establish your startup around principles of honesty, transparency and communication.
For helping with these considerations, at Linkilaw we’ve created Spliquity, our Startup Equity Calculator, an unbiased tech tool to calculate equity split between co-founders.
At the end, it provides a transparent breakdown of your suggested equity split, allowing co-founders to compare results and start an honest dialogue. Once you’ve discussed this, you can bring a bullet-point arrangement to your lawyer that will be a great base for drafting your shareholder’s agreement.
The result will be a stronger foundation of trust with your co-founders, leading to a more successful working relationship.
If you need legal advice for your business, book a call with our legal team and we’ll guide you through every stage of your legal needs.