Think of how much time you spend with your life partner. And now compare that with the time you spend with your colleagues at work. Now imagine, how painful, awkward, and unpredictable splitting up with your spouse can be. You always thought you knew this person inside out, but it turns out that’s not the case. He or she can reveal their ugliest side to your greatest surprise at the moment when you are most vulnerable or weak.
About 50% of all marriages in the US end up in a divorce and about 50% of founders are no longer the CEO after 3 years into a venture either. As much as a divorce can be painful and costly, the same goes for co-founders splitting up when they feel that they are no longer aligned towards the same goals.
Here are a few tips and insights on how to look for, choose, and forecast an upcoming co-founder relationship:
Good Working Relationship
You don’t need to be friends, but it would be good if you at least like each other or have some similarities or common interests. There is the concept of the “look-alike” rule, which I personally use a lot when hiring or considering someone to become a co-founder for my next company. Would I be up for going for a drink with that person after work, to go through everything with them at the end of a day, to confide and discuss my thoughts and get straight and honest feedback? If the answer is yes, then it’s already a great deal.
Mutual Respect Is Key
Mutual respect is the second most important thing. You need to respect your co-founder and trust them blindly in all professional matters. If it’s a CTO, you need to be sure that he or she is always acting in the best interest of the company, can lead a team of developers and machine learning engineers, and is always capable of building a product at its estimated complexity.
I am simple in this way – I always give my full trust first and then see if that person can maintain and respect that trust. If it turns out that the person has failed the given trust, it’s better to cut off the relationship straight away. There may never be the right moment to do it, but it’s better to cut it off sooner rather than later. In fact, the sooner the better.
Red Flags to Watch out For
To execute the “divorce” as smoothly as possible, you will first need to set up the foundation way before the co-founder joins and starts working with you. In initial conversations it’s important to understand his or her intentions:
- What exactly drives that person – money, recognition, or boredom and too much time in their hands?
- Are they prepared to dip into their own pockets in return for stock?
- Will they invest all their time or is it just a part-time commitment?
- What kind of expertise will he or she be bringing to the table?
- Do they have connections to investors or first clients?
- Can they be a team player and a team leader at the same time?
I’ll be mentioning some extreme cases here. For example, a red flag for me would be if a co-founder wants stock but is not willing to invest into the company. You also want your co-founder to be with you all-in and not running any other businesses on the side. Those who can be helpful but can only commit part-time would work better as consultants, with a very minimal stock portion vested as slow as possible.
Some other key questions to consider: will this co-founder open doors to investors who will actually invest in your company? Will they introduce and expose you to your first clients who will pave the road for the upcoming success of your venture? Is this person patient and attentive enough to the details? Can they keep the team energized when the mood is low or pressure is high, or are they a loner and prefer to do things on their own?
When to Cut Ties
Now imagine a situation when you are in the middle of a process of building a product and your partner has started acting weird. Maybe they are going behind your back and have created a pact with other colleagues to go against you. Maybe their mind is elsewhere and they’ve lost their confidence and now it’s affecting all the others around. Maybe they are going through some personal issues which are not related to the business, but it impacts their overall performance, thus, affecting you, your team, and your company as well.
The best way to address any issues is to speak to them openly and see their response. Don’t directly accuse them of not being motivated or call them a “douchebag”. Instead, ask them if this is how they want you to perceive them and how they will appear in front of others. Ideally, the answer should be a no and your partner would start to improve or change their attitude. If this does not occur, give it a maximum of two more such conversations. In the meantime, start looking for a replacement. If you haven’t observed any changes, confront them again, inform them of your decision, preferably in person and 1:1, and let them go.
If you are leaning towards the decision to fire – just do it. If you are already in the process of things getting really messed up – again, it’s best to cut it even quicker and let the co-founder go as fast as possible, even if you don’t have a replacement ready in place. Unfortunately, things are not going to improve, and will only get more expensive from your side. Speak to your staff about it immediately or shortly afterwards, and keep them in the loop with your decisions. Get the most loyal ones on board with your decision and also ask them for support when talking to others who you can’t talk or convince. Seek for a replacement at the same time.
Other Potential Threats to Watch out For
There are possible threats from co-founder leaving – accusations and revelations through PR and social media, other valuable employees joining them or leaving your company in unison and out of solidarity. Your former co-founder could also become a competitor – it’s best to avoid this by either writing an agreement upon their departure (you’ll probably have to settle on a lump sum amount to get this signature) or have it baked in the Shareholders Agreement from the first day on, valid for all co-founders, both in good and bad leaver cases.
Now about SHA, here’s what you need to include in it:
- Thorough descriptions of what is a bad and good leaver. Have it as inclusive as possible, but not too descriptive to leave room for interpretation
- A significant cliff period, locking down the shares so that in the event your co-founder leaves, they go with nothing. It will help you to avoid the unwanted “dead bodies” in your cap table
- A slow-paced vesting period, releasing your shares to your co-founders as unhurried as possible, around 2% monthly seems about the right amount
- A strict non-disclosure clause to protect non-public information about your company leaking outside, during their employment and beyond, with some serious fine if disrespected
Doing business with friends requires a special mention. I’d personally would rather not do business with my friends but if you really have to, here are my top thoughts:
- Do not do 50/50 or 49/51 or anything like that. You cannot know for sure what will happen in the future, as there is always someone who is more motivated (you), whereas the other one is OK with everything as long as it’s between 9 am and 5 pm. I know, it’s an extreme case but I have seen these scenarios develop too often to ignore.
- It’s OK to do business with a friend if you’ve worked with them in the past and it was a positive experience.
- They invest their own money into this company. Don’t give them shares as a gift. Instead, ask them to pay for it. If you pay for a poppy or a kitten, you’ll love it more versus if you got it for free, too.
- They agree to the full-time commitment at a salary below their market value for at least 2 years. If it’s for only 6 months or even a year – it’s best not to invite this person to join your deal at all.
- If they have another business running on the side, this is usually not a good sign. It’s better to then keep this person as an active consultant, which may become passive at any time. Then you won’t feel frustrated if they block a significant amount of shares, which you may need for future fundraising events with new investors, so that you don’t dilute yours too much.
Here is another scenario – you consider inviting a co-founder who you don’t know at all. Perhaps, it was from a recommendation, or maybe you posted this role online and found someone who might be perfect for the part:
- If it’s a technical person, give him a task to do. Have someone from your technical friends speak to them and ask them very specific technical questions, and get feedback from all their responses.
- Call up this person’s former or current subordinates and bosses. Don’t email them, as there are many things that can’t be asked or put in an email.
- Funnily enough, do not forget to google your candidate. Check their social media profiles and also profiles of their former colleagues or family.
- Get together for a drink and not only once. Invite your friends or a family member and ask him to do the same. Listen and watch carefully, how this person behaves in front of others, whether they are friends, colleagues, staff, and family.
You don’t need to be best friends with them, but mutual respect is crucial. After all of these steps, if your intuition tells you it’s not the right person, it’s most likely so!
Think of it like choosing a husband or a wife. Imagine – you will be spending days and sometimes nights with this person for the next few years, isn’t it something to take very seriously? Trust your gut.