Managing Founders’ Relationships – Tips for preventing co-founder disputes

Sometimes, launching a startup is a journey marked by innovation, ambition, and shared vision. The convergence of diverse talents, skills, and aspirations often gives birth to remarkable ventures with boundless potential. However, this collaborative spirit that fuels the genesis of startups can sometimes evolve into co-founder disputes, risking the very existence of the enterprise.

Conflict is inevitable in any startup, especially when you have co-founders with different backgrounds, personalities, and visions. The way you handle these conflicts can significantly impact the success or failure of your venture.

Therefore, the purpose of this article is to highlight howpotential co-founders’ conflicts and disputes can be resolved to preserve the partnerships by offering practical tips and strategiesfor doing same.

THE IMPACT OF FOUNDER DISPUTES ON GROWTH AND FUNDING

Founder disputes are one of the red flags that investors are keen on avoiding when evaluating potential startup investments. While some level of disagreement is natural and often leads to innovative solutions, unresolved disputes that escalate can be detrimental.

From an investor’s point of view, founder disputes can have several adverse effects.

First, they can impede a startup’s growth potential. Conflicts among founders may lead to a lack of focus, misalignment of goals, and inefficient resource utilization. This not only affects the startup’s operational efficiency but also hinders its ability to execute its business plan effectively. Investors are well aware that the success of a startup heavily depends on the founders’ ability to work together cohesively.

Second, founder disputes can undermine a startup’s prospects of securing funding. Investors closely scrutinize the startups they consider for investment. They conduct due diligence to assess the startup’s potential and any associated risks. If they discover unresolved disputes among the founders, it may raise concerns about the startup’s stability and its ability to withstand challenges. Investors are less likely to commit their funds to a venture that exhibits signs of internal strife.

Furthermore, the absence of resolution or effective management of founder disputes can hinder the startup’s overall progress and the pursuit of its growth trajectory. Investors seek companies with the potential to scale and thrive in their respective markets. Disagreements among the founders not only impede decision-making but also create an unhealthy work environment. This can lead to employee turnover, loss of productivity, and an inability to adapt to changing market conditions.

Founder disputes act as a warning sign for investors. They indicate the presence of internal instability and can signal a lack of cohesion and effective leadership within the startup.

To attract investment and foster growth, it is essential for startups to manage these disputes constructively, ensuring they do not escalate and impede the company’s path to success.

RECOGNIZING EARLY WARNING SIGNS

Identifying early warning signs of potential conflicts between co-founders is essential to maintaining a healthy and thriving business partnership. These signs act as the proverbial canary in the coal mine, alerting you to issues before they escalate into major disputes. Some of the early warning signs include the following:

EMBRACING CO-FOUNDER DISPUTES

After identifying red flags which may give rise to potential conflicts, the next necessary step is to address the dispute head-on. One might assume that the ideal situation involves minimizing all conflicts, but that is not always the case. Successful startups are led by founders who do not shy away from conflict and have mastered the art of welcoming it. In reality, to foster a robust and operational business partnership, you must become adept at engaging in constructive disagreements and finding resolutions that all parties can accept.

With that in mind, there are a host of options available for founders and cofounders to resolve dilemmas with one another.

To prevent such scenarios, the need for a Founders’ Agreement cannot be over-emphasized. The primary aim of drafting such an agreement is to create a kind of “guidebook” for understanding the relationships between the co-founders themselves, not just between the founders and potential investors. These agreements should leave no room for ambiguity, explicitly defining the roles, responsibilities, rights, obligations, restrictions, provisions for equity and compensation, and consequences of a breach for each founder individually.

If disagreements arise concerning their rights and duties towards the company and each other, this agreement should provide a clear path to resolution. The responsibility falls on the lawyers engaged by the startup to ensure that the agreement covers all possible scenarios.

Furthermore, the agreement should lay out exit strategies for founders, along with a well-defined method for calculating exit prices and the exit process in various scenarios, whether they are forced or voluntary.

While these provisions may initially seem theoretical and easily overlooked, they can become critically important in the event of a dispute.

When co-founder conflict emerges, it is imperative to hold these discussions in a private setting, away from the watchful eyes and ears of your employees. Open conflicts in the workplace can rapidly diminish team morale and erode their respect for leadership. Thus, choosing a private space for these conversations is the preferred approach.

Avoid jumping into the conversation by hurling accusations at each other, even though it can be quite tempting. Given the potential buildup of negative emotions and resentments, it is essential to actively remind yourself that failing to find a solution will have negative consequences for both co-founders.

In fact, conflicts are a common issue, with 43 percent of entrepreneurs facing internal disputes that lead to co-founder breakups. These often result in buyouts or even business closures. Among those who split, 71 percent attribute it to differences in the company’s direction, and 18 percent point to conflicting values as the cause.

Frequent conflicts between co-founders typically signal a lack of clearly defined roles. It is therefore important to establish boundaries and navigate the challenging waters of constant bickering and in-fighting.

First, create a comprehensive list of the business’s areas of focus and designate the person best suited for each role. Co-founders can bring diverse skill sets and strengths to the table, capitalizing on their differences. Also, avoid allowing disagreements to linger. Address difficult conversations promptly to prevent them from snowballing into larger and more complex disputes.

Finally, avoid opting for a co-founder who is your complete opposite. Many believe that successful co-founders should be the polar opposite of themselves for the startup to thrive. However, the reality is that you should share core values with your business partner. Furthermore, your work ethic should be in sync with your partners to ensure a productive and compatible working relationship.

It is not uncommon for co-founders to consider leaving a venture for various reasons. Therefore, a well-designed vesting schedule helps co-founders stay focused on adding value rather than being distracted by resentment if a co-founder departs midway yet continues to reap the rewards.

At times like these, seeking input from an external source can be invaluable. Trusted third parties like mentors, advisors, coaches, or mediators can offer impartial insights, help facilitate communication, and propose potential solutions. It’s important to exercise caution, though, by not involving too many individuals or disclosing sensitive information without proper consent.

Include the details of your discussion and the specific action steps you have both committed to taking. Additionally, consider establishing a timeline and a way to provide feedback to track your progress and assess the outcomes.

CONCLUSION

In conclusion, co-founders often find themselves at odds, which can lead to significant disagreements. These disputes usually stem from differing expectations and a breakdown in communication, often triggered by the pressure to move swiftly in the startup’s early stages.

Interestingly, the solution lies in understanding the problem. It involves taking a patient and considerate approach to evaluate trust issues resulting from unclear roles and responsibilities. By working together to devise a solution and setting a timeline to measure its success, co-founders can navigate and resolve these conflicts effectively.

ABOUT THE AUTHOR

HAROLD KWABENA FEARON is an Associate at SUSTINERI ATTORNEYS PRUC with its Corporate, Governance, and Transactions Practice Group, specializing in legal service provision for Startups/SMEs, Fintechs, and Innovations. He welcomes views on this article via [email protected]