Most startups begin as a team effort, but not all partnerships are set on a stable foundation.
Co-founders with different areas of expertise and strengths or advantages collaborate to build products they hope will succeed in the market. Sometimes, the collaboration between the co-founders is smooth, and a good relationship makes it easy for the product to be developed and deployed and scaled up when necessary. Other times, the relationship goes south, and the product and business fall like a pack of cards.
As a startup attorney and author, I have seen too many brilliant startups close shop because of co-founder conflict. While it is painful to see, there's much need to talk about the problem of co-founder conflicts, because its persistence has dire effects on our Nigerian tech ecosystem.
In this article, I will explain two fundamental reasons why conflicts among co-founders often arise in startups. After that, I will highlight four critical mistakes that aspiring co-founders should steer clear of to foster a harmonious working relationship.
The roots of co-founder conflict
1. Absence of a foundational structure or agreement
Co-founders don't just wake up and start working together. There is usually that emotional connection that has brought people together, that desire they both want to see happen.
Most times, co-founders are friends or family or even people they have worked closely with previously and developed a close relationship with. This closeness sometimes brings a blind spot because it clouds the co-founders' view of doing the right thing to structure that relationship.
They have no projection plan. They have no structure in any sense. All they have is a passion to build, the zeal, the excitement, the commitment, and that's good but that's not all that is needed. Suppose co-founders don't agree on the basic leadership and revenue structure; problems will arise when the money starts rolling in.
In that case, some co-founders' priorities begin to change and where one co-founder is frugal. The other is a spendthrift, they begin to have issues relating to how the funds ought to be deployed, most times, for the personal conveniences of the spendthrift. Then, you see co-founders pulling out of the business, and it crumbles.
2. A mentorship void in the Ecosystem
Another big challenge in the ecosystem that I think is largely responsible for co-founder conflict is the very low level of mentorship available for co-founders.
Join over 3,000 founders and investors
Give it a try, you can unsubscribe anytime. Privacy Policy.
Everybody is still busy aspiring to the next big thing, and there is so much restlessness because there's always one aspiration or the other and very little time to mentor young and upcoming founders. Therefore, when the co-founders have challenges, there's no one to counsel or guide them to find a way to preserve the partnership and their business.
No matter how old one is, as an inexperienced startup co-founder, having a mentor and speaking with people who have failed, built again, had co-founder conflicts, and understand how to navigate them is very important so they can advise you.
The problem is that there's so much noise in the ecosystem. There are a lot of tech programmes and events, so many speaking engagements where people talk about the ideals but when it comes to implementing those ideals or helping people implement them, no one is doing that.
Co-founding a startup is like getting married; not every friend should become a spouse — or a co-founder. We should actually have co-founder classes just like we have marriage classes today. That way, an experienced person can guide and foretell if the co-founders are a good match to work together.
"We should introduce co-founder classes, similar to the marriage classes that exist today.
In these sessions, an experienced mentor could provide guidance and help determine if potential co-founders are compatible for working together."
4 mistakes to avoid
Having advised over 300 startups over the years, here are 4 mistakes I tell early-stage startups to avoid, if they want to prevent co-founder conflict from prematurely killing their idea.
Mistake #1: Avoiding difficult conversations from the get-go
90 per cent of the time, co-founders have conflicts because they do not have basic agreements like co-founders, shareholder contracts or profit-sharing agreements. Co-founders won't always agree and that is fine. However, they must have that difficult conversation about every delicate and intricate part of the business they are setting out to build.
How are we going to share profit? What's our expansion plan? What's our decision-making procedure? What is our growth plan? What is my stake in this business? What is your stake in this business?
How much are we keeping exclusively to ourselves? How much are we going to give to the outside world to attract a standard investment? Whose word will override the other? Who would be the one who will have the financing of the two of us? These are some of the fundamentals co-founders must agree on.
In my book, The Business of Running Your Business, I note that a co-founder partnership is like marriage. You've got to think it through before choosing a partner.
Often, many of us make people co-founders who should just be consultants or even employees. Just because a person is diligent and passionate is not enough to make him or her your co-founder.
The partnership is beyond talent. Having a co-founder is beyond the value they bring to the business at the onset. It is the ability to hold the business, intentionally throwing the stone together.
And the only way you can achieve that is to understand yourself at your highest and your lowest. A lot more needs to be taken into consideration. This can easily be solved if difficult conversations are had at the beginning of the collaboration and basic agreements are ensured to govern the co-founders' relationships and actions as it concerns the business.
The co-founders themselves shouldn't have these conversations. They should have a third party mediate in that conversation. Preferably an expert, a lawyer or someone who understands the ecosystem.
Mistake #2: Focusing too much on equity split
There should not be many issues surrounding equity sharing between co-founders. That ought to be taken care of during the difficult conversation phase. I think it is more important that when co-founders commit and invest to run a business, they should see themselves as one and work towards the development of the business.
Co-founders should not be bothering themselves with determining equity and who owns or controls what, and at the same time also be discussing with the outside world, with investors, external shareholders. Something has got to give and that is the co-founders’ equity discussion. As you go out to seek investment, co-founders have to think in unison, which means that whatever level of equity the both, or all, of you have is immaterial to you because you have an agreement that is structured.
However, on the issue of determining what is the equitable way to determine a fair shareholding between co-founders, it's important to note that no two co-founders' investment in a business is ever the same. They all have their differing areas of strength, and what they bring to the table is not always equal, although they are very important.
Therefore, it may not be equitable to say equity should be shared equally so that the co-founders have equal shares of equity. However, the shareholding formula should be balanced enough so that no co-founder feels they have been taken advantage of. It should also be balanced enough to ensure that all co-founders are financially motivated to be actively involved.
Nevertheless, I still maintain that what should be the determining factor for a co-founder’s commitment to a startup should not be the level of equity investment. Rather, it should be the shared vision and goal they have agreed to achieve. If your level of commitment is based on the equity you own, then you're not a co-founder. A co-founder is supposed to be a visionary.
" If your level of commitment is based on the equity you own, then you're not a co-founder. A co-founder is supposed to be a visionary."
Tweet ThisMistake #3: Not drafting an air-tight co-founder's agreement
Some co-founders' agreements are very cosmetic, and I find them so funny.
A well-prepared agreement should detail the roles and responsibilities of each co-founder, defining how commitments are to be met and profits shared. It should also establish clear protocols for decision-making processes, particularly important during critical phases such as investment and expansion.
The agreement should not only serve as a foundational charter at the startup's inception but must also be a living document that evolves as the business grows.
Regular updates are essential to accommodate changes in the business environment, shifts in co-founder roles, or expansion into new markets. These updates help prevent conflicts and ensure that the agreement remains relevant, reflecting the current state and needs of the business.
I strongly recommend engaging a legal expert in drafting and revising this document so that all legal bases are covered, which protects all parties involved and aids in the smooth operation of the company.
Please, do not use online templates or ask ChatGPT to generate your co-founder's agreement.
Mistake #4: Losing control and vision with investor equity
The fundamental rule of thumb is that if you want to build a business, you (co-founders) must own or have a system where you own at least a combined 55% of the shareholding.
This is to prevent a situation where you can be voted out, or you no longer have a say concerning your business. If you do not own a larger percentage of shares in your startup, other shareholders and investors will determine how the startup should go, and your vision will be watered down. That's the law, and unfortunately, the law is not emotional. It deals with facts and the fact that the shareholder with majority shareholding dictates the company's operations.
The only way to prevent this is to have the right shareholder agreement with the right clauses that protect you and your interest in the startup, or else you'll be stuck.
Although your equity is based on how much you are looking for from outside, you must be careful that no matter what you are giving out, you do not give out so much that you have nothing to protect yourselves. If not, you end up building multiple businesses and investors will keep taking it away from you.
Final thoughts
I’ll leave you with this.
Early on, those hard conversations and decisions about sharing equity, and getting investor money can make or break your startup. It's crucial to get this right to avoid clashes later on. Also, it’s really really important to be open about where things went wrong. Sharing stories about disputes that sank or nearly sank your startup can teach valuable lessons.
When there’s clear communication and financial discipline, and when you have a solid and united front, you are strengthening your team. This way, almost nothing can shake the foundation you’ve built, letting your company grow strong for the long haul.
See you in the next one.
