As a journalist who has reported on startups and investors…
Before writing this article, I spoke with three lawyers who specialize in consulting startups. All of them had a common observation — the majority of co-founders that they meet do not sign legal agreements between them at the time of starting their venture. Co-founders either feel that they have been friends for long enough to not trust each-other or that their startup is still taking baby steps and is not ready for any kind of legal agreement. Pratik, an independent lawyer who works closely with startups mentions that typically, the trend among startups is that up until the time the founding team envisages raising a round of funding, they either remain unaware of the importance of entering into an agreement, or are aware but actively avoid it. “Investors, before coming on board, inevitably push for a legal agreement amongst founders,” he says.
Research by a Harvard professor in 2012 reveals that 65 percent of the startups fail due to co-founder disputes. In most cases, co-founders fail to understand that arguments usually do not happen during the good times at a startup. Conflicts occur when startups grow, major decisions have to be taken and the potential for a power struggle arises. There are numerous examples of co-founders dispute which turn ugly as the companies matured. For instance, when Facebook founder Mark Zuckerburg diluted the stake of co-founder Eduardo Saverin without his consent, or when 9 out of the 12 co-founders at Indian e-commerce company housing.com quit due to disagreements among themselves. Even if you are close friends with your co-founder(s) and/or have known each other since your college days, here is what you can do to avoid disputes that might arise in the course of your startup journey:
Have a legal agreement
Anisha Patnaik, co-founder of LexStart insists on having a co-founders’ agreement as it helps in setting the right expectations amongst partners. “When starting a new venture, the focus is typically on proving your idea or business model. But it is equally important to have answers to questions like, who will hold how much stake in the entity? What happens if one of the co-founders decides to leave mid-way? What happens if a co-founder stops showing up to work? Who will be the CEO?” These questions are essentially what get addressed in the co-founders’ agreement, thus setting the guidelines for managing the relationship.
Manu Srikumar, founder of Denture Capital agrees, “What I have learnt from my previous experience is, no matter what you do, if there is a difference in the vision or alignment, partnerships will fail.” It is extremely important that you communicate clearly with your co-founder and also document everything. “A Founder’s agreement is a must, or else things will turn sour,” he says.
Clarity on equity divided amongst founders
Anirudh Rastogi, lawyer and founding partner at Tanikella Rastogi Associates (TRA) says that, “it is essential for co-founders to have a mechanism providing for what will happen to the equity when a co-founder exits or is ousted from the Company.” (Click on the video at the end of the article to know more about Anirudh’s views on co-founder terms.) In such cases, he says, “a vesting structure provided for in the co-founders’ agreement will help – a typical vesting structure will provide that the shares owned by each of the co-founders are up for taking only in certain proportion to the time spent by the co-founder in the company, and the remaining shares of such co-founder shall be returned to the company should the co-founder decide to quit from the company prematurely. The vesting of shares usually begins after a certain time period such as 6 months or 1 year (also known as the Cliff Period). The Cliff Period gives time to all the co-founders to understand each other and their seriousness with the venture before shares are allotted.”
Have dedicated time for founder meetings
The five co-founders of 91 Springboard spend 24 hours together each month, away from their work place to discuss their concerns.
“Once a month, we get together from a Friday evening to Saturday evening and discuss everything from broad business strategy to emotional challenges. We are open to receiving ideas and listening patiently. This is an extremely constructive and productive exercise which we started after one year of starting our company,”
Pranay Gupta, co-founder at 91 Springboard recommends this even if startups work very closely on a day-to-day basis. They call this monthly ritual a Partner Hurdle.
Sandeep Singh, one of the co-founders at InfiSecure too recalls that he along with his co-founder spent a lot of time together when they bootstrapped InfiSecure last year. “We spoke about the business in general, our private lives, whatever came to our minds. We would talk like friends, telling each other about what is going on in our lives. This helped us build the initial connection. Having a diverse founding team is a good thing, but it could also be a potential source of friction unless you learn to accept each other the way you are.”
Trust each other with dedicated roles
Akshay Verma, CEO and co-founder, FitPass says that the most important thing that co-founders need is trust. It is highly advisable to clearly divide responsibilities between the founders and create a transparent system of information sharing. “This helps the co-founders from both a governance perspective (to track progress, for instance) and also from a personal relationship perspective. Implicit trust in each other’s abilities and clear demarcation of roles has helped us establish excellence with our company in India within twelve months,” he adds. It is advisable to recognize the right role for the right co-founder and let her take the lead in decision making in that context. Arunprasad Durairaj, co-founder and CEO of Flintobox rightly says, “Put company’s interest first. Not personal interest or ego.”
Be open to professional help
This will come handy when your startup has matured. There is professional help available which helps startup founders work in an amiable way. Executive coaches or CEO coaches who specialize in advising co-founders on how to create healthier work equations can often see aspects that you might miss. Even close friends who know all the founders closely can be of great help in times of dispute. Recognize the people whom you trust and the ones you can reach out to in times of disagreement. Whether you have started-up with a close friend or someone you just met, it is always good to be prepared for difficult times to guard your venture.