Fed up with your startup because of difficulties with a co-founder? You’re not alone. According to a Fortune.com analysis of 101 failed startups, the top 20 reasons include “wrong team” and “disharmony on team.”
If your startup hasn’t yet failed, but you’re not sure if the problem can be fixed or if you should walk away, don’t make any drastic moves until after you take a few deep breaths and read this article.
A Few Miles down the Road
Have you ever gone on a trip with a friend or a group of friends? It probably started out with good intentions and the anticipation of fun and adventure, but after a couple days on the road, you began to see more clearly who your travel partners were: who snored the loudest, who farted the worst, and who drove the least.
It’s a little more complicated with your company in that, unlike co-travelers on a road trip (from whom you could escape and catch a Greyhound back home if things got really unbearable), you and your co-founder(s) may be bound by equity agreements or committed in other ways that make it difficult or risky to simply walk away.
When you decide to go into business with someone—whether it be a family member, a friend, a co-worker, or someone you met at a networking event—your initial impression of them may change when effort, accountability, and potential wealth enters the picture.
If your co-founder isn’t living up to your expectation or your agreement, there is always a solution … and sometimes it’s to call it quits. Here are some approaches you can take.
Stay Calm and Talk It Out
The other person may have no idea that you feel they are not contributing enough. They may have no clue you’ve been upset. If you approach them with accusations, you may find you’re in an argument rather than a discussion.
Wait until you’re calm, then present your concerns—what your vision for the business is, how you thought the efforts were going to be divided (or how it’s specified in your agreement, if there is one) and how the equity is not representative of the actual efforts.
Find out from your co-founder how they see the business, what their goals are, what they think it will take to reach them, and what their idea of success is.
You may discover that rather than being guilty of anything, they are operating by what their concept of the company is.
If you find that your co-founder is misinformed or lazy (as opposed to be actively destructive of your company), you may decide that the relationship and company are worth saving. However, you may need to have something more than your routine nagging to keep your co-founder on track.
In such a case, it might be wise to create a board of advisors for your company and hold monthly meetings to review the company’s status and achievements. In such a case, the board will want to know that you and your co-founder(s) have met the milestones you set for yourself since the last meeting (which should have been put in writing and signed by the board).
A co-founder who doesn’t make their milestones has to answer to the board, as opposed to one guy (you) saying “Dude, seriously … ?” The group pressure may cause them to get serious and productive.
Set a definite number of times that you will allow for missed milestones. If they fail to deliver, don’t listen to excuses or justifications. Take stronger action.
Make it very real to the co-founder that their equity in the company is dependent on what they personally produce. If they are not delivering something of value that moves the company towards its goals, they are not entitled to their equity, and a percentage of it should be deducted for every failure to deliver.
If the person will agree to this, you may see things turn around. At the very worst, you will gain evidence that you need to let them go.
If they refuse to enter into such an agreement, then it’s pretty sure they (or you) will have to go.
Restructure the Agreement
If you can work it out with the person, put them in a position, equity-wise, that’s more equitable to the company.
For instance, if you have a 50-50 split, but you do 85% of the actual work and execution, they should only be entitled to 15%.
If you work it out this way, just know that the person’s conduct and production level probably won’t change; they will just be paid commensurate with their lower level of contribution for the life of the company.
If the co-founder is the “idea” type (who are often not strong on execution), perhaps you could retain them in a consulting capacity, with less of a stake in the company.
You could also make them an employee and mete out equity to them based on their actual contributions.
Worst case scenario is that you can’t reach an agreement and one of you will have to buy the other out of any equity.
It’s always best to get the terms worked out in the beginning under the guidance of a good corporate lawyer. Especially for people with no past experience with startups, a good corporate lawyer will make you and your partner(s) aware of things you may never have considered, such as:
- Basis for splitting equity
- Expectations of performance
- Allocation of specific duties
- How decisions will be made in a dispute
- Rules for gauging performance
- Exit procedures
Such agreements are not guarantees of no future troubles, but it’s a giant step towards defining what’s expected of each founder. Getting it laid out in writing and signed by all helps prevent future misunderstandings.