REPORT ER David Bushby, COO at Lexoo Experts The hidden cause of
failure...CO-FOUNDER CONFLICTS
Launching a start-up is one thing – last year alone saw the birth of nearly 500,000 new businesses. But keeping it alive is even harder, with half of SMEs withering and dying within five years.
Over the years I’ve worked in and founded my own start-ups – and as a former lawyer helped entrepreneurs liquidate their businesses. And after watching the good, the bad and the ugly, I’ve realised the main reason start-ups fail isn’t a lack of access to funds – it’s co-founder conflict.
The view is echoed by Y Cobinator arguably the world’s most famous accelerator. Former Y Combinator partner Harjeet Taggar described fights between founders as “certainly the most common reason for failure we see at YC.”
And serial investor Jeremie Berrebi said that after 13 years invest- ing in over 200 companies, he’d “finally discovered one of the main reasons that start-ups fail – conflict between founders.”
The types of conflict we see vary, from equity splits to clashing egos. There’s an inexhaustible list of ways a working relationship can turn sour. But over years we’ve identified the top seven rules co-founders should follow.
Lesson 1: A working (not social) history works best Co-founders come together most commonly through social circles. While working with people you know and trust has an appeal, it’s likely to cloud your judgement about the skills and competence required. Professional acquaintances, such as former work colleagues, work best. You know what they’re good at and over the years you’ve seen how they operate in good times and bad.
Lesson 2: Find common goals; define your success Too many co-founders dive into business together without defining and sharing what success would look like on a personal level. Talk openly about through your priorities, ambitions, insecurities and family commitments – and agree on an exit strategy.
Lesson 3: “I do this; you do that”
Go beyond job titles or merely splitting up roles. Dive into all the jobs that need doing from and look for gaps that either no one wants to fill, or where the required skills are lacking. Decide who’ll take on (or learn) what, then set a future date to assess how it’s working out.
Lesson 4: Two founders is the magic number Or 2.09 to be exact, even if it’s statistic drawn from a small, rather dat- ed (but regularly cited) sample. While three can be handy for breaking deadlocks, it also allows two to gang up on one. There’s also less chance for skills and responsibilities to overlap when there are two or even three co-founders.
Lesson 5: Beware of the 50/50 split
Splitting shares equally between two or three co-founders makes intui- tive sense, but the distribution should be based on the contributions or sacrifice each makes.
Lesson 6: Vest your shares
Once you’ve agreed the share split, instead of issuing shares upfront, the smarter way is to earn your shares over time using a ‘vesting schedule’. A typical schedule works like this: after one year (the ‘cliff’) you’ll each earn 25% of your shares, followed by a further 2% each month for the next four years. If someone leaves in the first year, they get zero. It’s a great incentive.
And this means... Lesson 7: Get it in writing
Don’t rely on handshake deals. Get things down in writing, whether it’s basic one-pager or a forty-page shareholders agreement (with vesting of course!).
Signing up to commitments has a way of flushing out issues that other- wise might be left unsaid. And if you can’t agree on the rules, perhaps it’s time to rethink who you’re about to do business with.
Final word
Running a start-up alone is, for the most part, simply too hard. Finding that special someone or forming a small team at least gives you a fighting chance of success. It’s a relationship that will be tested many times and will (on occasion) need repair, but should always be nurtured.
David Bushby is the COO at Lexoo - a service that handpicks specialist law- yers to give businesses multiple, fixed-fee quotes based on your legal needs. He tweets at @DavidBushby and connects on LinkedIn.
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