4 Questions to Ask Before Divorcing Your Co-Founders

Dear Professor Investor, How can I deal with co-founders that aren't pulling their weight?

Pam from San Mateo

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Great question, Pam. Unfortunately, this is one that I've had (and most investors have had) to deal with too many times. Of the last 23 startups my fund invested in, 20% lost a founder within the first 12 months, even more had issues with "under-contributing founders." So why does that happen (so often), and what can be done about it?

On first blush, everyone seems great. Before the down days, before the doors slamming in your face, before the failed prototypes, before the failed sales -- everyone wants to be a founder. Unfortunately, by day 300, everyone's true character often shines through. In some cases, more than you would think -- great founders on day one turn into liabilities by day 300.

This happens to be a common problem. Founder fatigue, differing visions, externalities -- these can all put stress on partnerships. That is why you should always pick your co-founders wisely, and not just because you know them and they are available at the time.

Even selecting your partners wisely isn't enough, which is why I insist that all of my startups do two things on founding: Create a unanimous shareholder's agreement, and deploy reverse vesting. The former is a legal document that acts like a prenup agreement in a marriage. A unanimous shareholder's agreement (or USA) outlines how the founders (shareholders) will act, treat one another, split profits, manage the company, set budgets, etc. It also outlines how founders can be removed. Discuss this while everyone is still feeling optimistic. Leaving dissolution until the day the shit hits the fan is way too late. Furthermore, if you and your co-founders can't agree on the terms of the USA, you already know there is an issue.

In addition to a USA, I insist my startups deploy reverse vesting. Reverse vesting means that while your share of the company -- say 20% -- is determined at the time the startup is created; you don't own 20%. Instead, you earn this over a period of time, which is known as a vesting period. I recommend a 24-month vesting period. So if you get 20%, you actually earn one-eighth of these shares every three months. If you leave the startup before the end of the vesting period, you only get the shares earned to date. The remaining shares stay in the equity pool of the company, and can be used to bring on your replacement.

But let's say I wasn't your investor, and I didn't insist on a USA, and you didn't set up reverse vesting -- what can you do with a co-founder who is not contributing? First, examine the underlying issues. There are a few key questions to consider before you make your decision on how to proceed:

1. What is in your co-founder's way?

Is your co-founder being held up by a lack of clarity? Is it a lack of motivation or a lack of autonomy? Why are they not pulling their weight? Just sitting down to talk with them could help clear this up.

2. What job was your co-founder brought on to complete?

Is this job being completed? Maybe you need to define your roles better, or maybe they are in the wrong role.

3. Is your co-founder capable of doing the job?

Do their skills match their position? Sometimes, startup founders bring on close friends because they trust them, but then come to realize they are in the wrong position and the company suffers because of it. If your co-founder is not capable, you either need to lay them off or find a better spot for them within the company.

4. Do you just simply not like the way this co-founder works?

People work differently. Some like micromanaging while others prefer a more laid-back management style. Does your style match theirs? Is this something you can work on together, or is it a deal-breaker? If it's the latter, maybe you should reconsider your position and theirs within the company. Working with other people is tricky in general. Our internal, instinct is to assume that we're the best workers on the planet and everyone else is incompetent, an idiot, a slacker or all of the above.

Usually, it's a combination of a lack of clarity at the organizational level in addition to poor communication, no processes, or just plain, old, we-don't-see-eye-to-eye-on-things-ness.

So before you start firing co-founders, ask these four questions. If these questions don't resolve the matter, then turn to your shareholder's agreement, or employment agreements, or simply ask them to step away, leaving behind unvested equity for the replacement employee you will have to bring in to pick up the hole left behind.

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Questions can be sent to sean.wise@ryerson.ca, Please be sure to include "Dear Professor"