Avoiding co-founder conflict

By February 23, 2011 5 Comments

Back in January I wrote a post inspired by Ev Williams comments on focus that I read in the TechStars inspired Do More Faster collection of pieces of advice for startups pulled together by David Cohen and Brad Feld. At the time I commented that I was enjoying the book a lot, and I wish I hadn’t left it on my shelf for so long before picking it up, somehow forgetting that I got distracted by another book (Surface Detail by Iain M Banks, rare for me to read non-fiction these days, but I love his Culture novels) –I’ve picked it up again now though and this time I’m going to paraphrase Dharmesh Shah’s thoughts on avoiding co-flounder conflict.

Dharmesh Shah is the founder of Hubspot – a provider of inbound marketing software that some of the smartest sales and marketing execs I know rave about.  He also writes the popular OnStartuUps blog.

Dharmash’s advice in a nutshell is to avoid founder conflict down the line by ensuring early on that you have a common understanding on a number of key, and often difficult, topics.  He provides the topics as a list of questions:

  • How should the equity be split?
  • How will decisions get made? (including if consensus is hard to find)
  • What happens to the equity split if a founder leaves the company?
  • Can a founder be fired? (operational matters should be separated from shareholder matters)
  • What are the personal goals of the founders? (lifestyle, make enough money to be comfortable, build a $billion company)
  • What role will each founder play in the company?
  • What is the commitment of each founder? (are there any side interests, how long will they give it to work, how long can they forego salary)
  • What salary will the founders take?
  • Will any of the founders invest cash, and if so, on what terms?
  • What are the financing plans for the company? (bootstrap, angel, VC)

As I’m sure many of you have experienced firsthand, founder conflict is often value destroying and personally painful.  It is also common – startup life is full of rough and tumble, change, great highs and great lows, all of which effect different people in different ways and challenge relationships.  Every year so far at TechStars one of the ten founder teams has split up by the end of the three month programme.

Asking these questions up front avoids conflict down the line and is also a good test of the strength of the co-founder relationship – if any of these topics are too difficult to address it may be a sign that getting to know each other better should be a priority. Asking these questions up front also makes it easier if there is conflict down the line. A three time serial entrepreneur friend of mine (who I won’t name for reasons that will become obvious in a second) had a difficult split with his co-founder the second time round and one of his main pieces of advice to aspiring entrepreneurs is to agree what happens if the founders decide to separate and document it legally. He had a simple 50-50 split and ended up in a protracted legal wrangle when they decided to go their separate ways. It got sorted in the end and the company went on to a multi hundred million dollar exit but the experience left such a scar that he often says ‘you simply must have a legally documented mechanism for decided what happens if you split with your co-founder, even if it is just tossing a coin’ [sic].

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