While much has been written about finding a cofounder, few people ever talk about the delicate trust issues between business partners once you've paired up. That is despite the fact that your team can literally make it…or break it. Between 7% and 14% of startups fail due to disharmony in the team.
I learnt this the hard way — not once, not twice, but three times.
My mistake? Not having a cofounder agreement, clearly setting out ownership stakes and responsibilities in writing. But first, my tale of woe.
How I learned the hard way — the first time
I founded my first startup with my best friend when I was 22. When the 2008 financial crisis hit, demand for our edocument management service cratered, and we switched to web development to save the business. Profits were finally looking up when my cofounder suddenly announced he was leaving the company for a new project! I was shocked.
I reflected on why my cofounder’s departure had been such a shock to me and realised my mistake. I communicated with him as a friend, not a business partner. I didn’t think of discussing his values in business in advance — which might have raised some red flags and saved me the headache.
My second heartbreak
My second “cofounder” was the CEO of a web studio. We moved into the same office space and started doing joint projects, bringing together my team of four and his team of ten. It seemed like a match made in heaven.
When a major client started to take all of my time and I had to give up the web development part of my business, I assumed that my “cofounder” would take over. In my head, we were partners with a joint business and we’d split the revenue we made together. When I talked to him, however, I learned he saw us as two independent companies.
Burned again for not having a frank discussion at the start of a cofounder relationship.
Third time’s the charm?
My third cofounder was an old friend with plenty of experience in management. At the time, I needed help for my rapidly scaling company, and he generously offered his expertise without asking for anything in return. A year later we were 30-people strong with €3m in revenue. It all seemed to be going well — was there truth to the saying, “third time’s the charm”?
Then, we started having cash shortages because of how fast we were growing. I let my cofounder take over the CEO position because with his expertise, he’d fix the problem, right?
Wrong. Instead, he established an entirely new company, taking 15 team members and the entire IT and management units. I was left with a company on life support.
They wanted profits here and now, in a new company, while I saw a future for the old company despite short-term issues. The problem: we had never discussed our differing goals.
Making it work with number four
By now you probably think I’m like one of those “serial monogamist” celebrities. But I’m happy to say that with cofounder number four, I did much better.
We set up a company to create an information system that united my technology and his energy, time and sales experience (sales were not my forte). While we delivered a big project together, I discovered we weren’t really compatible as cofounders — both of us strong-willed leaders but while he was tough and demanding, I was more flexible. I ended up finding a job elsewhere.
Even though it hadn’t worked out to work together long-term, we signed a partner agreement at the beginning of our collaboration. I gave up a share of the company when I left but took home a hefty cheque. Even more important: we parted ways as friends.
The answer to my woes: a cofounder agreement
As you can see, I would’ve had waaay fewer problems and disappointments had I written up partner agreements in advance. You don't have to repeat my mistakes, so here's how you can write one.
While there’s no formal structure for a founders' agreement, it is usually anywhere from five to seven pages long. It has to be updated or rewritten every time a new partner or investor joins the startup.
This legally binding document lays out the rights, responsibilities, liabilities and obligations of each founder. The agreement should be signed by all cofounders and each of them keeps a copy.
- Firstly, set expectations for the agreement. Why are you drawing up an agreement in the first place? How exactly do you expect it to improve your lives, workflow and relationships?
- Secondly, discuss values and goals for yourselves as individuals and for the business. What’s acceptable and unacceptable for you in business? If these are misaligned, the relationship likely won’t work.
- Next, consider how you are going to split responsibilities, authority and revenue in practice. Who will make decisions and how? How will your contribution to the company translate into shares, stock options or decision-making rights?
- Lay out how these things will work on an everyday level. How many hours a week will you work? How will you be paid? What business matters will you have to approve with your cofounders? It’s likely that your business won’t be profitable at first, so is it acceptable for you to work elsewhere at the same time? If anyone wants to join your partnership, how will you admit new cofounders?
- Consider crisis or worst-case scenarios. Sudden fundraise or aggressive acquisition offer? Losses or cash shortages? Work-related or even personal conflicts between each other? How will you act in such cases? Cofounders are all humans with their own life circumstances. One or several of you might get sick, have a family emergency, decide to resign or even pass away. How can you minimise the impact of those events on your business and support each other?
You’ll be happy to know that my story has a happy ending. Today, I am the CEO and founder of a startup with two other cofounders and several investors.
I had to go through tough experiences to know what I know now — but that doesn’t have to be the case for other founders. You don’t necessarily have to prepare a 10-page document, but a founders' agreement will put you in a much better place when the going inevitably gets tough.