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How to future-proof your co-founder relationship

How to future-proof your co-founder relationship
 

Posted: Tue 18th May 2021

We've all heard co-founder horror stories, with the high-profile ones making headlines with alarming regularity. Nearly every major brand you can think of has seen its co-founders slug it out in the courtroom - Zuckerberg vs Saverin for example, or Musk vs Eberhard.

If you are just getting set up, these gargantuan battles might seem far removed from your reality, but actually there are lessons we can all learn from these fallouts.


Future-proof yourself from the off by considering the following…

It might seem obvious but make sure you are choosing the right person to join you on your journey. You might have a friend or family member in mind, but do you have a depth of working experience with them?

It helps if you've worked on previous collaborations or projects. That way, you'll know if your chosen co-founder has any tendencies to becoming defensive, egotistical or territorial - all relationship (and business) killers.

And if you don't have somebody in mind…

Shake out your networks, talk to others in your circle. Good people get recommended by word of mouth, so this is an efficient way of finding the new blood you need. Alternatively, many professional networks - like Enterprise Nation - exist, so start making contacts.

It's a good idea to take an honest assessment of your own weaknesses at this stage. What would be a complementary skillset to your own?

You could approach this from a discipline angle (a financial director might look for a technical or digital director for example), but think about your soft skills too. Are you a genius at networking but you haven't got a great track record of managing a team? Find somebody who can help you plug those gaps.

Before you engage anybody…

Develop a crystal-clear idea in your mind of what the balance of the partnership will be. Are you looking for absolute parity or more of an asymmetrical model in which your co-founder will be subordinate to you?

It's important that you understand at this stage what you want because this will help to alleviate power struggles later down the line.

Next steps

Whatever you've decided in relation to the last section, there are mechanisms to support every co-founder arrangement you can think of.

You will need to put something in place that is a lot stronger than a gentleman's handshake and it's crucial that this is sorted out at the earliest so that everybody knows where they stand.

There's no better way to do this than by using your equity as the tool to not only shape your relationship but also to define the reward that you will each take from the business.

A lot of early start-ups use a model called 'agile partnerships' to ensure that equity is awarded fairly and in a way that generates maximum returns.

How does it work?

The key is conditionality.

You don't want to just give away your equity to your new co-founder. What if they fail to deliver?

With agile partnerships, you can set conditions for the release of the equity. For example, you can give a time or delivery horizon to your new co-founder, and they won't be able to claim their share of the equity until they have reached their agreed goals.

For instance, you could agree with them that they will receive their shares after two years with the company, or after they've helped to create a digital platform for your product. The conditions are entirely up to you and can be drawn up to suit the skills of your new co-founder.

To make this fair, you need to agree realistic goals with your new co-founder, and these must be tangible, measurable and specific, such as:

  • Grow the sales team to ten people by June 2023

  • Achieve X regulation or accreditation

  • Bring in 10 new international partners

Avoid unquantifiable conditions, such as:

  • Increase marketing reach

  • Create a great company

  • Once company revenue has doubled, you'll get your share

You might think that the last condition is quantifiable, but the issue with it is that if the company revenue does double in size, your co-founder will be entitled to their equity, but at the same time, they might not have contributed much to that achievement.

If your wider team has worked hard to double the revenue of the company and your co-founder hasn't, it's going to be pretty demoralising for them to see your co-founder take their disproportionate share of equity.

Once you've awarded shares, it's difficult to pull them back. It's therefore vital that you get this stage right.

Important!

Remember that the ambition here is to reward effort, so you are not setting up a condition that your co-founder won't be able to achieve. This isn't a 'stretch' goal but a fair ambition that you both agree is doable.

You want them to be inspired by their ownership, and once they've delivered exactly what they promised, they get their reward. Equally, you've de-risked bringing them on board as the terms are set out clearly right from the start.

Everybody wins.

If you didn't do that and now it's too late…

These things happen but if mediation and business coaching has failed to knit you back together, you need to prepare yourself for a change in business status.

Think ahead and go through all of your options with your wisest legal and business contacts. You might decide to end the business, or you could sell your share to your partner to get your freedom back. If you are in a position to do so, you could also buy your partner out.

Before you make any moves however, ensure that you have sound legal advice so that you don't end up short-changing yourself.

Conclusions

On the one hand, the tenets of establishing a co-founder relationship are common sense. Find the right person, ensure they have the right skillset etc.

But on the other, founding relationships can fail because of a failure to follow good business practice during the 'honeymoon period'. It's essential that you galvanise your relationship from the start, with conditions and a framework to protect your assets.

Good luck with your hunt for your co-founder, and if you need help setting up your equity arrangements, we'd love to help you start off on the right foot.

 
 
Ifty Nasir is the co-founder and CEO of Vestd, the share scheme platform for UK SMEs and startups. Vestd is the UK’s first, most advanced and only regulated digital share scheme platform for SMEs. Our experts help customers to design and set-up share schemes, and provide ongoing support. Companies use Vestd to issue shares and options to people who they want to incentivise, motivate and reward with a slice of the action. Need some insight into EMI or other types of shares and options? Or perhaps you need help digitising your existing scheme? Whatever the query, Ifty can help.
 

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