Strong Opinions @marksbirch

Random thoughts from a NYC entrepreneur and investor about start-ups, technology and the people that make it all happen. Also find time for good tunes and good food.
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Sooner or later you are going to face the truth; the team you start with is not the team you end up with for the long haul.  Sometimes it is the direction of the business, sometimes it is personal issues, and sometimes it is just not a combination that is working out.  Most founders tend to accept this fact when it comes to employees, but what if it happens to be the very person(s) you launched your startup with and were once proud to call a co-founder?

I have seen this scenario play out so often in so many situations at this point, I could very well have enough fodder for a book.  In other words, it happens so often that it does not makes sense to think of this as the exception.  The real exceptions are those founding teams that actually remain intact from the very beginning, developing the product and growing the business through various stages of VC investments onto some eventual exit.  It is in many ways like a rock band; how many bands have actually remained intact for an extended amount of time with the original members?  Even with massive success (or maybe because of the success), very few bands keep the same lineup.

So why do startup founders end up splitting?  Often people will point to events in establishing the startup, either difficult situations or differences in vision.  I contend however that neither are adequate explanations.  Rather, the problems start from the very beginning.  As I explained last week, many issues in startups (or any business or group situation) stem from a breakdown in communication.  Most founders want to dive into building the product, but they never carve out time to consider whether they can actually work together long term.  This means aligning to a common vision, understanding how each person works, confirming commitment, discussing what matters culturally in building a company, etc.  Otherwise, those small differences in opinion early on can lead to serious fights later on at the most inopportune time.  At that point, you may be left with no choice but to boot your co-founder.

I call this post divorcing your co-founder, but it is really more expansive than one perspective captured by the word “your”.  The reality is that, just like in a marriage between two people, each founder brings relationships to the table.  During the course of working together, new relationships are formed.  There are customers, partners, employees, industry contacts, vendors, suppliers, friends, and investors.  Therefore, when things begin to sour in the founder’s circle, the entire ecosystem of relationships surrounding that startup are affected and are drawn into a rather messy and energy consuming separation.  You are not merely booting a co-founder; you are rearranging the deck chairs in mid-flight and hoping you do not lose too much in the process.

Can startups survive this process and prosper?  It really depends on the stage of the startup.  Most pre-funded startups will not last.  There is little skin in the game to hold together a team, so without the accountability of investors to instill a sense of commitment and responsibility, walking away seems like the easy option.  For post-funded startups, there is more riding personally on each founder.  There is the credibility factor to take into the account and the baggage of collective (and public) failure should the startup fail.  The startup is also most likely a real company at that point with employees, advisors, investors and such.  There is too much personally invested for anyone to walk away.

Here are a few thoughts to keep in mind if it does come time to part ways with a co-founder:

  • It is business, it is also personal – There may be very valid reasons to let go a co-founder, but it is also fraught with intense emotions.  You were all in the trenches from the very beginning.  There is a sense of ownership and pride.  It is important to recognize those contributions and respect the work accomplished.  This is not the time for accusations and acrimony, but for respectful discourse and understanding.
  • Reach out to your investors – Funding documents generally have something to the effect that founders are obligated to inform investors of materially impactful events.  Dumping a co-founder would count as something material.  However, you really should reach out well before you get to this point and keep your investors informed of the situation.  Your investors might be able to help you either figure out a resolution to the core issues or at least help with the transition.
  • Address resource gaps immediately – Losing a co-founder is a massive hit to productivity.  Those are skills and work that needs to be filled in by someone else in a situation where everyone else is maxed out to the core.  If there is someone available that can join, that is fine, but also consider outsourcing work where it makes sense.
  • Make it a clean break – Divorce is always messy.  Make sure that all company related information, accounts, contacts, security items, and equipment in the name of the co-founder are returned and that email and other communications transitioned to someone else.  Make sure legal documentation such as incorporation papers, stock certificates, contracts, etc. reflect the changes where necessary.  Clean up contact references on your website, social media accounts, and other places across the Internet.  Lastly, document the fact that the separation occurred and that both sides agree on the terms.  As these things can get messy, getting the advice of a competent startup lawyer would be highly recommended.
  • Be fair in compensation – Recognize that the person was a co-founder and at some point probably made a positive contribution to the startup (if not, that is a whole other discussion).  While you should have something stating in various documents you signed when forming the startup to handle separation, be mindful that making a clean break also means ensuring that you do not get sued later (see The Social Network).  Therefore, when the separation is agreed to, it makes little sense to squeeze the person.  Whatever is vested is vested and let it remain as such.  If you want to buy back the shares, do so at a reasonable valuation. 
  • For investors – Realize that the team you invest in will very likely not be the same team a year from now.  Therefore, consider if you still believe strongly enough in the venture if only part of the team were to remain together.  I have literally seen an entire team dissolve with one person left standing, but the strength of that one person was able to keep the startup running and back on track because of his tenacity and determination.  While this is an extreme case, you need to keep that in mind and make sure that should a co-founder leave or get removed, to ensure the startup stays on a positive growth course.
  • For the ex co-founder – This is a particularly emotional period.  You are leaving your child.  However, it is probably futile to fight the decision if the others want you gone.  Therefore, it is time to move onto something else.  This does not mean however you should capitulate.  If your contribution to the startup was significant, then you deserve to have some stake in the company.  This is not a moment to exact revenge however, which does nothing to help advance your stake.  Understand your rights from whatever founder agreements you signed and negotiate a fair settlement that recognizes your contribution but also allows the startup to move forward.

While it is tough to be in a situation where a co-founder is asked to leave, there are ways to make it less painful and to lessen the chances that it causes issues down the road.  In the end, you can spare yourself much hardship if you do two critical things; understanding each other well before agreeing to be co-founders and creating a founder’s agreement that clearly states the terms and conditions around items such as vesting and separation.  If you lay that groundwork down, you might be able to at least make things easier when it is time for a co-founder to leave.