What do you do when a startup relationship gets rocky?
I don’t mean third-date awkwardness, or figuring out how to let him know you’re not ready to introduce him to your friends. No, we’re talking about how to handle going from start-up to break-up.
Co-founders have complicated relationships: you have usually known the other founder as a co-worker or friend for months or even many years. You have already negotiated some formality in structuring the business — or you should have, which you’ll soon find out — in terms of equity sharing, titles, responsibilities, and taking the lead with investors and customers. But there’s a lot that’s unstated: at least one of you believes you’ll never disagree on anything important, that you’ll always be able to talk it out, and that taking a hard line on control shows no respect for the relationship and will even hurt it.
Lord Palmerston said there is no such thing as permanent allies, only permanent interests. Things happen, and it’s always worse than you imagined when you haven’t prepared in some way — structurally, mentally, financially, emotionally — for this. It’s like divorce but the business is your baby.
I got an email from “firstname.lastname@example.org” asking about a startup experiencing some turmoil between co-founders. I gave my viewpoint on the relationship analogy: there are three paths: the good, the bad, and the ugly.
The good path is to do what you might in a committed personal relationship: get counseling or a mediator. What does that look like in a business? It means going to the board, if you have one that was well-structured, both in terms of people involved and governance planning. This situation is one where an independent director can add special value because a mixed board, with founder and investor representatives, is almost always going to be too close to the issues and what the options mean for them personally to have enough perspective in the heat of the moment.
The bad path is avoiding things and muddling along, pretending things will turn out okay if everyone can manage not to talk about it long enough. What happens here is that first, everyone figures it out; and second, you have the opportunity cost from lost opportunities that you might have gained from close alignment between founders.
The ugly path is turning on each other and being willing to burn the company down for your principles and your feelings. That’s one way to come out of this scenario with a worse-than-zero outcome.
In the past, this was the sort of work I’d done under several different hats. The preliminary issue for anyone helping in a legal role is who the client is: cofounder 1, cofounder 2, or the company. Conflicts of interest and zealous representation create some non-negotiable lines. And when one cofounder sees the other one as the enemy, the lines are hardened. To paraphrase Dale Carnegie, no one ever thinks it’s their fault. I’ve done forensic accounting work for a cofounder who realized that the CEO cofounder running the books (my client was head of production) was digging a deeper and deeper hole for them. The other cofounder? Nope, everything was great if only my client would show up and work hard; the CEO was the only one keeping things together.
What’s the best attitude? Find someone to think about what’s best for the business and trust them to give you good advice. Separate that from your personal feelings. In other words, do what’s best for the kids and leave your personal anger out of it. People seldom benefit emotionally from long fights over kids and money that are really about being angry and hurt.
Those lessons don’t go away just because you’re getting a business divorce with a metaphorical kid called “The Company.”
From the board perspective, remember that directors have independent obligations to the company. Behavior that jeopardizes the company’s future ultimately can’t be tolerated. If the cofounders aren’t heading in the right direction, the board will have to force them into a dispute resolution process. And, depending on how well the cofounders comport themselves along the way, the board (particularly investor representatives) may find themselves naturally more inclined to pull the ejection handle. Selling the company sidesteps the problem, recovers their investment, and frees up their time to work on projects that are going well.
The good, the bad, and the ugly. You might not be able to choose your way out of getting into a dispute, but you can choose your way out.
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