CBS ranks ‘disharmony between team/investors’ as one of the top ten reasons startups fail, while Harvard Business School professor Noam Wasserman reports that co-founder conflict is the root cause of the failure of 65% of high-potential startups. These figures aren’t entirely surprising, considering how many topics founders have to argue about: equity allocation, IP, company direction, staffing, and investment, just to name a few.
With this in mind, it makes sense to consider how you’re going to resolve founder deadlocks and conflict between co-founders as early as possible – while things are going well. Then, you should get your agreement written up into a formal legal document by an attorney (with experience advising startups!).
To make the process of drafting of this agreement run more smoothly, there are certain things you and your cofounder(s) can agree to in advance. They include:
The Decision Making Power of Each Founder.
The decision making power each founder has (or should have) is something that should be agreed to very early in your startup’s journey, since you’ll be making decisions from day one – and those decisions will only become more important and more impactful over time. Whether you and your co-founders should have equal decision making power depends on the unique characteristics of your startup. Factors like the experience, expertise, investment, and involvement of the parties, amongst other things, should all be considered and then the decision making power should be agreed to and (formally) documented.
Determine What Happens in The Event of a Founder Deadlock.
You and your founders should know what will happen in the event of a deadlock. These provisions serve two functions:
- It can help prevent conflicts escalating. Since everyone knows the consequences of a deadlock, founders will make efforts to resolve it without triggering the deadlock provisions.
- It acts as a roadmap if the conflict does end in a deadlock, providing certainty and direction in turbulent circumstances.
Common deadlock and conflict provisions include mediation, founder buyout, or having a third-party make the decision.
Outline Founder Exit and Founder Removal Options – Before Anyone Wants to Leave.
Founders should also discuss and agree on how and when co-founders can exit or be removed from the startup – and what happens once they leave. You should agree on a method of valuing the founder’s equity in case a founder needs to be bought out, what happens if the purchasing founder(s) can’t afford to buyout the departing/removed founder(s), and the process and timelines for both founder exit and founder removal provisions.
Non-Legal Options for Resolving Founder Deadlocks.
Finally, it’s important to remember that there are non-legal options for disagreeing founders too, including:
- Executive coaching.
- Flipping a coin.
- Having a friend or other non-professional third party decide.
While founders should be open to exploring non-legal options for resolving founder deadlocks and conflicts, it is equally important that the legal agreements are in place – just in case.
If you need assistance transforming your informal agreements into legal documents, reach out. We’re here to help!
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