Co-Founding a business is a lot like entering a marriage with children
You don’t have to do all this alone. You can share this exciting road with a smart and committed partner with complementary skills.
A successful partnership can increase your chance of success, make you go faster, and make the whole journey more enjoyable.
But if you turn a blind eye to one of these deadly mistakes, your business can run into a sputtering stop. And leave you with a bitter taste in your mouth and a bunch of hurt feelings.
So here are the most common mistakes entrepreneurs make when co-founding their business (and how to avoid them).
Mistake #1: Letting your Insecurities Drive You
Insecurity and self-doubt are human. But letting them drive your critical business decisions will lead to a missed opportunity at best.
Ask yourself: would I be able to go at this alone for a while? The answer should be “yes” before you are really ready to partner up. Lack of confidence is the wrong reason to seek a partner.
Letting our insecurities drive us will make us blind to other partnership mistakes.
Mistake #2: Lack of Complementarity
Each business can be broken down into a number of critical activities and skills. Market knowledge, sales and marketing, product development, finance, strategic planning…
No one can excel at everything.
A biggest value of a fruitful partnership is bringing together complementary skills. Don’t partner up just because you like someone. You may be better off simply becoming their friend.
Ask yourself: what is each partner bringing to the table?
Mistake #3: Not a Good Match
Co-founding a business is a lot like entering a marriage with children. You need to ensure you can communicate and work together with your partner in good times and in bad.
That does not mean that you want to partner up with someone who always agrees with you.
You want an independent partner with a strong opinion, and a different perspective. The best decisions are made when two perspectives can be combined, and a new insight is born.
This only happens if both of you are open to a different opinion.
The less you know your partner, the bigger the risk you take. At the very minimum, have a series of conversations around all the issues discussed in this lesson.
Dharmesh Shah also suggests to discuss your personal goals. While one of you may want to build a sustainable business and make it their life’s work, the other may be looking for a quick exit.
Mistake #4: Not Ensuring a Rock Solid Commitment
One of the top reasons why most businesses never get off the ground is lack of commitment from the business founders. Most business ideas remain ideas. Unfulfilled dreams.
You are here because you are committed. How about your partner?
Lack of commitment from one of the partners will erode the partnership and seriously threaten your business.
Discuss this with your prospective partner. Is this business their top priority? How much time will they put in it? Are they ready to invest their money?
Mistake #5: Not Discussing how to Make Decisions and Resolve Conflicts
Indecisiveness is a serious threat to business success. At the very essence, business is a series of decisions.
You should be able to discuss key decisions with your partner. But what if you cannot reach a consensus? When discussions clearly become a drain on your mental energy, and start slowing down the progress?
Will one of you have the final say? Will you create a board? Reach out to a strategic advisor?
Not all decisions are made equal. You could each have an area of operational and tactical decisions that you are able to take on your own.
Mistake #6: Not Discussing the Breakup Scenarios Up-front
Remember: business partnership is like a marriage. Breakup is a painful but a realistic outcome.
You need to sit together now, and discuss the different breakup scenarios.
What happens if one of you decides to leave the company? Can one of you be fired, by whom and under which conditions? What happens if one of you gets sick, or God forbid, dies?
A tip from Silicon Valley is “4 year vesting with one year cliff”. In essence, this means that each partner “earns” their share in the company over the period of four years. Because of the one year cliff, if a founder leaves during the first year, they are entitled to nothing. Upon the one-year anniversary, the founders will each vest 25% of their total shares. Thereafter, the founders vest monthly an amount equal to 1/48th of the their total common stock.
You can also decide to accelerate vesting on certain events (e.g. sales of the company, certain level of revenue, external investment of certain size…).
Mistake #7: Not Considering Other Collaboration Forms
Your business will need founders, employees, suppliers, business partnership agreements with other companies…
Each form of collaboration has its place. Not everyone is partner material. Which brings me to:
Mistake #8: Settling to Fast
For a true business partner, you need a special type of person that is very difficult to find. You need to find someone who will be all of these things:
- An independent complementary partner you can openly communicate with
- Someone able to tolerate high levels of uncertainty. Not everyone is able to live with the amount of uncertainty that is inherent to a new business
- A strategic thinker. Only a handful of people you know will have the ability—and even more importantly, the experience—to stare at uncertainty and know what is the most important thing to do next
- A true executor. A startup does not need a VP of this or “CE…that”. It needs the doers of the thing that needs to get done. This often means getting outside your comfort zone, and doing things you never done before. And doing them really well
Haven’t found such a person? Keep on looking. Or consider other forms of collaboration.
Mistake #9: Only Considering Equity as a Compensation
50/50 or 33/33/33 is not the only way to divide the stake in the company. This can be very difficult, but you need to discuss how compensations follow contributions.
Contributions include time, invested cash, contacts / e-mail list / existing customers, technology developed beforehand… But also risk. As a rule of thumb, the earlier you join the company, the more risk you take.
Compensations include equity, salary, bonuses, percent of revenue or profit, exclusivity contracts or leads for your other business… Equity is only one piece of the puzzle.
Here is where equity plays a role:
- When selling a company. Percent of the sales proceeds that goes to you is determined on the basis of your share in the business
- Similar for paying out dividends. But how much dividends will be paid is still up to you and your board of directors—if you have one—to decide
- Liability. Depending on the local legislation, type of company and the situation, you may be held held liable if your company gets in trouble with debts or the law. Sometimes, differences are made in liability of founding partners, and those that join later
- Decision making. In principle, the majority shareholder(s) get the deciding vote—although you can issue stock without voting rights.
Mistake #10: Not Incorporating and Formally Transferring IP Ownership
Picture this. Your business takes off. You are able to prove a great potential and attract a couple of millions in external investment.
The investor’s legal team inevitably carries out due diligence. One of the things they check is your IP trail: do you actually have the right to carry out the activities of your business. They find out about your ex colleague who developed the first version of your website. It happened long time ago, before you even incorporated.
But the lawyers insist he signs a formal IP transfer agreement.
What do you think happens when you go to your ex-colleague and say: “Hey, I was wondering if you would do me a favour? I need you to sign off any rights to the work you did for me (that I never paid you for). Be a buddy, because if you don’t sign it, I risk losing $X million of investment”.
This conversation is the one you want to have up front, when your business is still worth nothing.
Conclusion
Partnership can mean a difference between success and failure. Done right, with a right person, and you can double your chances. At the same time partnerships that go bad are known to be a top reason for new businesses to fail.
Don’t let this happen to you. Take these actionable steps right away:
- Send your potential partner this post and ask them to read it
- Both of you, each for yourself, write down your prefered way of addressing each point
- Meet a couple of times and openly discuss your views
- If you cannot reach the agreement, walk away
- If you do reach the agreement, write it down as a “memorandum of understanding”
- Get a good corporate lawyer with experience with your type of business
- Don’t forget other agreements, such as IP transfer, non-compete and non-disclosure agreements
Did I forget a point? Please do share it and help others avoid a major mistake.