What All Co-Founders Need to Know
We've all heard it before. The number one reason early stage companies fail is co-founder meltdowns. So what can we do to prevent that from happening? If you don't already have a solid co-founder agreement in place, here is the agenda for your next meeting.
Relationships are hard. Founder relationships, romantic relationships, family relationships, friendships. They are all hard. We continue to enter into them because the potential upside is so astronomical, but still, hard. In each relationship, there is a spoken or unspoken set of terms. How are we going to treat each other? What am I not going to do? What are you not going to do? How many times can a person watch Highlander? For most personal relationships, the terms are not memorialized in writing and (often, let’s be honest) not even stated clearly out loud. And we all know how that goes.
Approaching a professional partnership is not much different, but with one major upside: it is entirely socially acceptable and expected to write it down. What is wonderful about this is that it forces you and your partners to come to terms about your expectations for the relationships. But, and I’m repeating myself here, it’s hard. These are challenging conversations and because of that, they are often pushed off as long as possible. By the time you sit down to discuss the major terms, team members have each devoted a significant amount of time to your venture and chances are good everyone is going to feel undervalued.
So whether you are contemplating starting a company, or well into running one, let’s discuss the key terms of any good co-founder agreement. While this is a legal issue in that it has legal ramifications because it’s a contract, these are not just the most important “legal” terms to agree upon, they are also the most important terms for purposes of running a great business that isn’t going to implode six months in.
Equity Split Is Queen. The most important thing to agree on (because it’s almost always the most important thing to each of the founders) is the division of equity. In most situations, the best split is an even split. That is the only way everyone will feel equally invested in the success of the business and that they are being treated fairly. There are some exceptions to this (usually when not all founders are working for the company full-time), but that imbalance is challenging in and of itself. If you start with an unbalanced team, you need to pay extra special attention to making sure everyone feels equally invested and fairly treated. This may include more complex arrangements regarding how equity allocations are adjusted once everyone comes on board full-time.
Control (Never Gonna Stop). Control (to Get What I Want). Equity does not just involve profit rights, it also involves control rights. If equity is evenly split between two founders then all major decisions will require unanimity. This is as it should be. If you have more than two founders, you may want to agree that all major decisions (and you’ll have to list out what those are) still require unanimity. Otherwise you risk creating an unhealthy two against one environment that is heavy on scheming and low on productivity. As an aside, when I listen to music from the 80s and 90s, I am often struck by how clearly these women had a handle on all the same issues women are facing now, in 2021. Janet Jackson, Dolly Parton, Whitney Houston, Madonna. They all knew what was up back when I was just singing along, blissfully unaware that anyone would ever use my mind and never give me credit.
Who Is Responsible Here (Financially and Otherwise)? Starting a company requires money, yours and often other people’s. It is crucial to understand from the very beginning who is going to pay for this thing. That means going beyond an agreement on “startup capital” to how decisions are going to be made about future fundraising. Starting a company also requires people to do the work and by “people” I mean you. In most cases, you as founders will be doing most of the work for the indefinite future. So get clear on what everyone’s job is. While all jobs are really everyone’s job in the early stages, it’s still helpful to task each person with being the person responsible for X. If you trust your co-founders (which you should, or they shouldn’t be your co-founders), then you can enjoy the rare entrepreneurial mental relief that comes with knowing someone else is handling it.
Think About Timing. Vesting schedules aren’t just cute little Silicon Valley terms that startup founders throw around because they’re cool. This is one area where there is good reason for the norm. By making equity vest over time (rather than all at once when you start), you are ensuring all your partners really are in this for the long haul. It also avoids the uncomfortable situation where a founder leaves and you have a huge chunk of stock on your cap table tied to someone who has zero involvement in the company or its success. Plus, many investors will not invest in companies without founder vesting.
Even if you do everything right from the start, problems are going to arise. What’s my advice when you find yourself in that situation? Talk to each other. As in any relationship, communication is paramount. If you love your company but are unhappy about something going on in your company, talk to your partners and try to work it out. As with all great essays on founder relationships, I’ll end with a quote from Patrick Swayze in Roadhouse:
Be nice. If somebody gets in your face and calls you a *#?!*&!#* I want you to be nice. Ask him to walk, but be nice. If he won’t walk, walk him, but be nice. If you can’t walk him, one of the others will help you, and you will both be nice. I want you to remember that it’s a job, it’s nothing personal.--Jessie Gabriel