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 enterprise’s very existence.
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 how potential co-founders’ conflicts and disputes can be resolved to preserve the partnerships by offering practical tips and strategies for 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 utilisation. 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 scrutinise 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 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 high employee turnover, loss of productivity and inability to adapt in 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.
Recognising 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 a coal mine, alerting you to issues before they escalate into major disputes. Some of the early warning signs include the following:
- Communication Breakdown: When you and your co-founder are no longer effectively communicating or are frequently misinterpreting each other’s ideas, it’s a clear warning sign. Effective communication is the bedrock of a successful partnership; and when it erodes, conflicts can easily arise.
- Diverging Visions: If you and your co-founder’s vision for the business starts drifting apart, this can be a significant early sign of trouble. Differing visions can lead to conflicting strategies, which if left unchecked can snowball into more significant disagreements.
- Shifting Commitment Levels: A change in one co-founder’s commitment level can be a significant source of conflict. Whether due to personal reasons or shifting priorities, addressing changes in commitment early can prevent future disputes.
- Decision-Making Disagreements: Frequent disagreements about how decisions should be made and who holds the final say can be a source of tension. If you find yourselves locked in such disputes, it’s time to revisit your decision-making process and redefine responsibilities.
- Personal Disputes Impacting Work: Personal conflicts spilling over into your professional relationship can be particularly worrying. When arguments unrelated to the business start affecting your work dynamics, it is essential to address those personal issues promptly to prevent them from further disrupting your partnership.
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 minimising 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 co-founders to resolve dilemmas with one another.
- The need for a Founders’ Agreement: First, as has already been acknowledged above, conflicts are unavoidable and sometimes even essential for the growth of startups. Therefore, it is important to be prepared for these situations when they do occur.
To prevent such scenarios, the need for a Founders’ Agreement cannot be over-emphasised. 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 toward the company and each other, this agreement should provide a clear path to resolution. The responsibility falls on 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.
- Addressing co-founder disputes directly: Human nature often drives us to avoid conflict, believing it might save our relationships. However, the harsh reality is that by postponing the resolution of conflicts, you’re more likely to exacerbate the problem, risk its recurrence, or in the worst-case scenario cause irreparable harm to your company. Confronting and embracing conflict directly not only strengthens the bond between co-founders but also sets a positive example for your team, provided that you and your co-founder can find common ground.
When co-founder conflict emerges, it’s 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.
- Approach the negotiation table with a resolution mindset: After agreeing to have a serious conversation concerning any disagreement or dispute, take some time to ponder, independently, whether you are genuinely open to discussing matters with a positive mindset and a willingness to reach a constructive resolution. This step might appear trivial, but it holds significant importance.
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.
- Establish boundaries: While conflict is a natural part of co-founder relationships, constant disagreements can strain the partnership.
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 buy-outs 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, capitalising 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.
- Have an equitable and fair vesting schedule: Establishing an equitable and fair vesting schedule sends a clear message to investors that co-founders are committed for the long run, and are not looking to make quick gains and exit prematurely as the business scales.
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.
- Seek external input: Occasionally, both you and your co-founder could be too invested in the dispute – making it challenging to gain a clear perspective or find common ground. 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.
- Document the resolution: Finally, after you and your co-founder have come to an agreement, be sure to record and keep track of it. This step is essential in preventing future miscommunications, disputes, or lingering hard feelings. You can document the resolution using a written agreement, a contract, a memorandum of understanding or even a straightforward email. 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.
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. This 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.
>>>Harold is an Associate at SUSTINERI ATTORNEYS PRUC with its Corporate, Governance, and Transactions Practice Group, specialising in legal service provision for Startups/SMEs, Fintechs and Innovations. He welcomes views on this article via [email protected]