As any experienced entrepreneur, investor or business educator will assure you, a Founders Agreement is essential to your company’s success. This legally binding contract will outline business structure, ownership percentages, operational control, rights and obligations, among other things. It should be advised and executed by an attorney.
In addition—and perhaps even more importantly—cofounders must outline their relationship beyond the legal parameters. According to best-selling author and Harvard Business professor Noam Wasserman, conflict among cofounders causes 65% of the failures among high potential startups. Avoid this pitfall by discussing and documenting how you will navigate challenges that fall outside the Founder’s Agreement.
What are the long-term goals and milestones for the business? What are your individual management styles? How will you handle disagreements? What are your metrics for success? You can articulate these abstract, “squishy” topics that are most likely to cause conflict down the road in what’s often called a Cofounder “Prenup”.
Building a startup is a long game and it is difficult to anticipate in the early stages what could lead to disputes as your business grows and evolves. Each individual brings unique work styles, personal values, varied stress responses, and strengths to the relationship. Executive and startup advisor Ranjan Misra recommends identifying gaps in your skillsets early on and agreeing how you will “learn or hire outside your wheelhouse.” It’s all part of “capturing what seems like common sense in black and white.” It is like “brainstorming through the possibilities, opportunities, roadbumps, and pitfalls and putting it on paper.”
“Conflict among cofounders causes 65% of the failures among high potential startups.”
One way to generate concrete conclusions from abstract subjects is to explore them hypothetically. Some of those possible questions to explore could be:
- Is there a shared mission and vision? What is it? What could cause it to change, and if so what happens?
- How should we respond to bad PR?
- What if an employee has personal problems that affect their work?
- What is the succession plan if someone dies or wants to leave the company?
- What are the contingencies required to maintain momentum if a co-founder or key player is temporarily sidelined by an illness or accident or life event of a family member?
- What are the exit timing and expectations of each founder, and what drives that thinking?
- What if we get an acquisition offer?
“Each individual brings unique work styles, personal values, varied stress responses, and strengths to the relationship.”
Having an abstract plan and being willing to have uncomfortable conversations can equip you for smoother discussions when difficult or awkward situations arise. It can also lay the groundwork to avoid a falling out. “The best agreements are ones you never have to pull out of the drawer,” Misra says.
Need another justification for documenting your understanding? Founder, speaker and author Bryce Conlan adds this: Get to market faster. Teams in agreement have a clearer runway to the marketplace because “there’s no question about what their priorities are or how to work together.” Clarify your team dynamics up front so your time and energy can be focused on the business.
If you are seeking or considering a cofounder for your business, check out our companion post highlighting 5 key things to look for and keep an eye on our Cofounder Resource Page. Coming soon: curated events dedicated to cofounder needs. See you there!
“The best agreements are ones you never have to pull out of the drawer.”