10 Tips for Co-Founding a Company
(aka avoiding the potential pitfalls of partnerships)
Starting a company is no small feat. While having a co-founder (or co-founders) to help get things get off the ground can be an INCREDIBLE asset, it does increase the number of moving parts involved and the number of things that can go awry if things aren’t aligned. It’s important to really put thought and energy into making sure things start (and hopefully finish) on the right note. Joining forces with a co-founder can be every bit as big of a commitment of as a marriage (and it may be end up being much harder to divorce your business partner).
- Is each co-founder actually ready to make the leap? Everyone loves talking about starting a company, not working for the man any more, etc. However, it’s really important to make sure that starting a company is something that everyone involved actually wants to do. And not just the exciting and fun stuff like coming up with a name or designing the logo. It’s about being sure that everyone wants to do the hard work and deal with the restless nights that can come with blazing your own path. While it’s one of the more rewarding journeys you can take in life, it is far from easy or risk-free. It’s important to make sure everyone involved understands what they are getting into and that their interest in starting something from scratch is real and not just hypothetical.
- You need to think about vesting schedules. Tom and Jane form a company on Day 1. They decide, because they get along so well and everything has been incredibly smooth so far, that they should be 50/50 partners. On Day 2, Tom decides that starting a new company isn’t for him. It doesn’t matter why. Maybe he gets a promotion at his day job. Maybe he finds out he is going to be a father. The bottom line is that life happens and things can change quickly. The question now becomes: Does Tom own 50% of the company? Does he own 0%? 10%? By putting appropriate vesting schedules in place for each founder’s equity, you can avoid tricky situations down the line and potential “dead equity” in your company.
- Who owns how much of the company and why? Figuring out who owns how much of the company can be more black art than science. Sally is contributing $20k in seed money. Bob is contributing his really cool software that is the keystone of the business. Mary is the one actually doing all the hard work (for free, no less) while Sally and Bob still have their day jobs (and salaries). So who gets what? The answer, as always, is “it depends”. Each situation is different. In some cases, the money may be more important than the IP. In some cases, it’s the exact opposite. Sometimes, nothing really matters aside from the sweat equity. It’s really about finding the right balance and capturing the relative importance of each person’s contributions while keeping everyone motivated and aligned. By having a sensible vesting schedule (see #2 above), you can dramatically mitigate some of the issues associated with these kinds of issues.
- What are roles and responsibilities going forward? It’s incredibly important that everyone is on the same page and have the same expectations for all involved. Is this expected to be a full time venture for everyone? When will Don quit his day job? Does Jill know that we need her to handle finance and HR for now? Does everyone know what their day to day duties are? It may sound simple, but it’s the everyday blocking and tackling that can make a major difference.
- What are the economics for each co-founder? Will there be salaries? Will we work for free until we are profitable? Each co-founder’s situation is different. For some, having stable compensation isn’t important while others will need to worry about paying mortgages and college tuition bills within a few months. Make sure that each co-founder has realistic expectations of what they will make (if anything) during the early days. When projecting when co-founders will be able to take money out of the company, be very A good rule of thumb is that it will likely take twice as long and cost twice as much to make half of what you expect to make.
- Who votes on what? In every company, there are little decisions and big decisions. Obviously, you don’t want to have a board meeting every time you take the trash out. However, there are some decisions that are so important that that each co-founder should have a voice in the process. What if we want to change the core business? Or invest $30,000 in a new website? Or sell the company? These are situations where it needs to be clear that one co-founder (unless he/she owns the vast majority of the company) cannot act unilaterally. When it comes to “big picture” items, the team needs to think about what sort of approval is necessary to take action. Does it need to be unanimous? Is 2 out of 3 good enough?
- Do you have the same vision for the company? This is simply common sense. If one co-founder has a drastically different vision for the company than the others, things will not be sustainable. Have a clear and explicit discussion about where everyone thinks things should be going before starting to work together. While it may lead to some difficult conversations (especially at a time when everything is flowers and sunshine), it will save everyone time, energy and headaches in the long run.
- What are your ideal outcomes for the company? This is a corollary to Number 7. If one co-founder wants to build a lifestyle business that she can hand off to her kids someday and the other wants to build a company that can be sold to Cisco in 2 years, things will fall apart before they can begin. While it’s not a bad thing to want different things out of life and business (different strokes and all that), it probably means you shouldn’t be starting a company together.
- Are you compatible and complementary? You don’t have to like each other, but you have to work well together. While you don’t necessarily want someone who is a carbon copy of yourself (in fact, it’s probably a bad idea), you have to be capable of a great working relationship where each co-founder is respected, valued and put in a position to do his or her job well. You are going to be going through a lot together (emotionally, financially, psychologically) so there needs to be a foundation of communication, trust and respect. That doesn’t necessarily mean you’re best friends, but it means you should be great teammates.
- GET IT IN WRITING. Honestly, this one could be Number 1-10. No matter how perfect or certain things seem on Day 1, it’s incredibly important to have a written agreement between the co-founders covering the relationship among themselves and with the company. What if a co-founder wants to leave? Or sell his shares? What if a co-founder becomes disabled or passes away? What happens if a co-founder steals from the company? What happens if a co-founder wants to start another company? While it’s easy to believe that these sorts of things will just “sort themselves out”, it’s these kinds of issues are extremely hard to deal with after the fact (think about asking your wife to sign a pre-nup after she serves you with divorce papers). In the beginning, you can pre-emptively avoid turbulence by having a roadmap and the right system of checks and balances in place from Day 1. While there’s no guarantee that things will be smooth no matter what you do, some of the major pitfalls can easily be avoided with a little bit of foresight and planning.
Every situation is different and there’s no cookie-cutter to solution to what an “ideal” partnership looks like. There’s no one right answer (and there are plenty of wrong answers), but discussing the nuts and the bolts of the relationship and being transparent/honest with each other about expectations can go a long way. Find great partners and go build great things. Just make sure that you’re working from the same blueprint first.