Choose Your Cofounders Carefully To Prevent Disaster

The time must be right and the agreement must be airtight

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The best way to fire a cofounder is to never take on cofounders in the first place.

I’ll begin with a quick cautionary tale about my friend, “Terence,” and his super promising startup that failed before it even got started, because he got screwed over by one of his cofounders.

Terence is a good dude, like a really good dude, one of those people with whom you instantly feel a kinship . When people talk about Terence, they usually lead off with: “He is such a good guy.”

But don’t mistake his niceness for weakness. Terence is also a really smart guy, with an independent streak, a good deal of risk tolerance, and solid connections. So when Terence wanted to talk to me about his startup, I was excited to hear about it.

His startup was already generating revenue, and was growing from a local play to regional. But the idea was meh. It was something a lot of people were already doing or trying to do. The space was a sudden hot commodity, and at this point, Terence had more of a nice side business than a high-growth startup.

However, Terence had an idea that would dramatically alter the original concept and immediately right all the wrongs that were keeping his startup from its growth phase. The new idea was unique and sound, he had already field tested it, and he had answers for every hole I tried to poke in it.

This made me very, very happy for Terence.

One problem.

Terence had brought two of his friends into the company as cofounders. Let’s call them Janet and Steve. And Steve, as it turns out, was a total train wreck. Steve had become toxic toward Janet, and when Terence had tried to intervene, he bore the brunt of everything that was wrong inside of Steve.

Steve grew more concerned with his personal grievances (which eventually turned into personal vendettas against both Janet and Terence ) than he was with the startup and his time and cash investment in it.

Yeah. Steve owned 33.3 percent of the company. No vesting, no out clause, no wiggle room.

Steve was now content to let the startup burn. He could not be swayed; he could not be reasoned with; he could not be bought out. Steve was pretty shrewd, and he walked a fine enough line that Terence would not be able to force him out without a costly legal fight.

Terence actually had a couple of financing deals on the table, but it had become impossible to explain Steve’s ownership and why he was actively defying his cofounders’ appeals to reason.

In the end, it took Terence a year and some legal costs to try to save and then ultimately unwind the company. By that time, the original business had dried up completely, and Terence was back to square zero. He tried valiantly to start over, but he never regained enough momentum for the new idea to take off.

All the ways it went wrong

  • Cofounders come together.
  • Original idea falters.
  • Company stagnates.
  • New idea emerges.
  • Cofounders are no longer on the same page.

Shit can get acrimonious real quick. Then shit can get litigious.

You might look at Terence’s story and think his first mistake was sharing the company equally between three cofounders with no vesting and no out clause. You’d be right in the sense that that is indeed what did the company in. All founding equity should vest, and there should be a rule that the majority of cofounders should be able to trigger a predetermined buyout of any one cofounder under certain circumstances.

But that wasn’t his first mistake. His first mistake was taking on cofounders in the first place.

When cofounders are a bad idea

The original idea for the company was Terence’s, and he’s the one who got it off the ground and began generating revenue. Then he brought in his friends Janet and Steve when he needed money and muscle to scale. After each investing a small amount, Janet would handle operations and Steve would essentially be sales and expansion. Paperwork was drawn up, an attorney was not consulted, and the agreement was signed.

Technically, yes, Janet and Steve made an investment and came on board early enough to be considered cofounders. Furthermore, there are about 100 scenarios where this arrangement could, would and should have worked beautifully for everyone involved.

But in startups, it’s always the outliers that kill you.

In every case where I’ve seen a founding team fall apart, the team was put together way too soon and the agreement was way too loose.

In Terence’s case, there was no original business idea. In the beginning, there was hustle and moxie and the sense to jump on a trend while it was hot. This is a pretty standard way to start a company. Terence, being entrepreneurially minded, saw a way to try to evolve his company by bringing on investment and labor and working with friends he trusted.

I’ve done this. But with a whole bunch of qualifiers.

When I have an idea that I believe in strongly enough to start a business around it, I know enough to know that my idea won’t stand on its own. Even when I start generating revenue, I know that I’ll still need to prove viability and prove that I can scale, which means I’ll need additional “great ideas” that I will discover as the business progresses.

I put quotes around “great ideas” because these aren’t actually ideas, they’re decisions to make major and minor pivots to the business. And I need to make those decisions as a leader, not by committee.

So even if I were to take on cofounders or investors or employees or a combination of any of those, I need to make sure that everyone understands that there is one leader making the decisions, including the decisions of who stays and who goes and how they leave.

In return, all of the ownership vests over time. So the clock is ticking for me to shape the idea, the product, and even the company to a point where it can be self-sustaining, and the people who have grown with it can take authority over their own respective domains. That’s only fair to the people I bring on.

The legal language on this can get pretty complex, so you must have an attorney’s help. Or you can learn Terence’s lesson and be forced to pay for an attorney later.

And while this whole situation could have blown up on Terence whether his friends were cofounders or investors or employees , the first mistake was that Terence painted himself into a corner, trying to be a good guy.

That’s like the only thing a founder can’t do early in the life of the company. You can bend over backwards for your friends and employees and investors and customers. You just can’t paint yourself into a corner.

Choosing the wrong cofounder, with no legal protections in place, is usually the first opportunity for that kind of corner-painting to happen.

This post was originally published in BuiltIn.

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I’m a multi-exit, multi-failure entrepreneur. Building Precision Fermentation & Teaching Startup. Sold Automated Insights & ExitEvent. More at joeprocopio.com

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