When you launch your startup with your co-founders, it’s often difficult to conceive how your relationship with them could deteriorate and negatively affect the company. Unfortunately, this does happen, and quite often.
Relationship breakdowns aren’t unique to startups. People fall out with spouses, partners, family members and friends all the time. The stresses of building a startup, including working for long hours and minimal pay, can push problems that may otherwise have bubbled away, undiscussed, to the surface.
At LegalVision, we regularly deal with disputes between startup founders. This article sets out four common disputes which can arise between start-up founders, and how they can be solved.
When a startup starts either generating considerable revenues or raises a significant amount of venture capital, there is an increased possibility of the co-founders arguing over issues like salary. Often each of the parties has very reasonable reasons for wanting, for instance, a bigger salary.
The best way to solve this type of dispute is to try and understand each other’s needs. Many start-up founders have young families and need more cash to manage their daily expenses than a young single founder. Often a good way of ensuring each co-founder is happy is to offer a different equity/ salary component.
When a dispute over money does come up, make sure you talk it through in a civilised manner. Disputes over salary can kill a startup. If the issue continues, bring in a third-party mediator.
Questions about who gets to run what are often another source of tension between co-founders.
Power issues usually emerge because the partners did not have an agreement at the start of relationship clarifying the responsibilities of each party before they launched the business. Often one founder will manage to “scale” effectively, whilst another will not. In other cases problems arise because the business starts covering new areas which weren’t anticipated at the beginning of the relationship.
Clearly setting out the roles of the founders at the time of inception is a good idea, but perhaps more importantly, make sure each founder understands that startups rarely move along a fixed path. You will need to be flexible about roles. It’s the results that count.
Control issues are often about who actually owns what in the business, but also relate to issues like who injected funds and under what terms, whether or not a founder is putting enough time into the business and founders who get involved in other businesses. Founders who enter into shareholder agreements from the very start often avoid these problems because shareholder agreements usually spell out how these issues should be dealt with.
You know that friend you really, really liked until you moved in with them? Well think about that situation and multiply it by five. Personality problems become magnified when you’re working 18 hours a day with your co-founder.
How to avoid these disputes
It’s impossible to avoid disputes entirely. However, you can mitigate many of the risks associated with disputes by:
Maintaining respect – respect is crucial to maintaining a relationship between founders. Try to keep a base of level of goodwill between you and your co-founders even when things go wrong. A key to respect is not personalising disputes and seeing ways around problems which don’t involve trying to bring the other person down.
Invite a third party to mediate – a great way to get an objective viewpoint and preserve the relationship in the long term.
Problem-solve – look for solutions, rather than people to blame when issues come up.
Understand your own weaknesses and strengths; understand and appreciate how your business partners experience your strengths and weaknesses. Also, be open about discussing these.
Enter into a good shareholders’ agreement – a comprehensive shareholders’ agreement drafted by a lawyer with start-up expertise can spell out your business’s management structure, what to do if there are deadlock issues, clear dispute resolution procedures as well as financing, payments, exit options and winding up. It is remarkable how many businesses start without such an agreement and how many problems could be mitigated if the founders had one in place from the very beginning.
Lachlan McKnight is CEO of LegalVision, an online legal services provider assisting startups and small businesses.