Keep Your Startup Co-Founder Closer
Sun Tzu is generally credited for coming up with the phrase, “Keep your friends close, and your enemies closer.” He obviously never launched a startup and got shafted by a co-founder.
Entrepreneurs often believe their startup company faces legal threats from only external sources. And that’s a big mistake. Instead of worrying solely about some 3rd-party stealing your business idea or a “slip and fall,” your startup company’s top legal priority should be the reduction of its internal legal threats: co-founder disputes.
You can start by examining every aspect of the co-founder relationship. Your startup company could be ultimately doomed by a co-founder dispute, as even small disagreements can systematically erode the core of your company. Therefore, at the earliest time possible, sit down with your co-founder(s) and talk about issues like:
(1) the goals each of you have for the startup;
(2) the goals each of you have for yourself;
(3) duties, job descriptions, and hour commitments;
(4) who pays for what;
(5) who gets paid first and why;
(6) what happens if one of you wants out;
(7) what happens if one of you wants to sell the company, raise capital, or end it;
(8) what happens if one of you gets disabled or dies;
(9) what happens if things take longer than expected; and
(10) whether launching other startups, i.e. “moonlighting,” is ok.
This is not an exhaustive list of topics and by no means whatsoever will such discussions be easy. If it is easy and everything sails through without a hitch, someone’s holding back and you’ve all wasted your time. And for the love of high-speed internet and all things Web 2.0, do not think being friends or relatives reduces the need for these difficult and/or awkward conversations. In fact, if your co-founder is a friend or relative, that should trigger even more issues and discussions. Because now you have more to lose than just a company and your (or someone else’s) money.
After you have discussed everything that needs to be discussed, DOCUMENT-DOCUMENT-DOCUMENT. Make sure your startup company documents reflect all of your discussions. Don’t leave anything out just because you and your co-founders already talked about it. Take nothing for granted because memories will inevitably differ.
Once you have discussed and properly documented your co-founder relationships and thereby protected your startup company’s core, then you can focus on external legal threats.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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Please consider subscribing to The Startup Lawyer, following @startuplawyer on Twitter, or contact Ryan directly.9 Responses
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I’m sorry to hear about that. I wish I could say that my experience was limited to listening to my clients’ stories.
Even so, I believe the negative experience can end up producing a better entrepreneur if he or she applies lessons learned to current and future startups. Because inevitably, there will be more projects and ideas down the road.
We entrepreneurs constantly try to refine our product or model, so it is only natural to think that we should refine ourselves.
BTW, I tried visiting your blog but it crashes my Safari browser (Mac version) each time.
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These are all great points, when I formed my business, my co-founder and myself (relatives) ended up in many heated arguments over what direction to take our company.
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[...] (1) Number of Founders: If your startup is going to have more than one founder, this would indicate you’ll need to add to your legal fees total. Establishing and documenting the co-founder relationship is one of the most important aspects of a having a successful startup company. I wrote a previous blog article regarding startup co-founders. [...]
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[...] Your Business Partner Closer,” was a reformatted version of a blog post titled “Keep Your Startup Co-Founder Closer” which appeared in Ryan Roberts PC’s blog for startups and entrepreneurs, The Startup [...]
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[...] for practices that will protect and enhance both them and the startup company. I wrote an article about issues co-founders should discuss titled “Keep Your Startup Co-Founder Closer.” Check it out if you haven’t [...]
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North says:
Thanks for this whole blog its the best I have found.
Who must be a co founder and who can remain a hired principal? I am the idea guy, but I am the only guy right now. Before I bring in any principals I will have the company all set up, some engineering done and patents pending. When I find, and hire on options, the three perfect CEs/directors must I consider them co founders and treat them accordingly? Will (should) they insist on it? I guess what I mean is, can all the nasty issues everyone writes about between co founders be avoided this way? Can I remain the sole founder even though I must get people ‘in” far, far more skilled and qualified than myself.
I am totally “unqualified” as CEO, but so what.
Thanks
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You can be the sole owner of the startup, but it sounds like you need skilled people to implement your idea. I think you’ll have trouble developing your idea without bringing on people, probably as co-founders. Even if you are able to do so w/o bringing these skill people on, potential investors will likely ding you since you can’t implement the idea (even if already ‘developed’).
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[...] ‘Keep Your Startup Co-Founder Closer‘ by Ryan Roberts [...]
the co-founders of textworks just experienced getting shafted by a co-founder! so glad we found this blog [too bad it was a little too late]. would you like to link to one another?