Co-Founding is a Serious Commitment: Are You Ready to Get Hitched?
Part one: tips, traits and signs for success
Like any good relationship, startup co-founders depend on strong communication and clear boundaries. Instead of a handshake, the best way to work with a partner is to establish expectations in writing through an operating or founder agreement.
Entrepreneurship can be a challenging undertaking, and while sharing the experience with a co-founder can alleviate some of the burden, this too comes with its own set of challenges. However, practicing effective communication is critical for successful business relationships among co-founders, executives and investors.
Below, four startup veterans from food and beverage, fintech, safety analytics and consumer product firms share their personal stories as co-founders. This includes tips for choosing a partner, establishing relationship boundaries and identifying red flags.
Traits to Look For When Choosing a Partner
Typically, in the early stage of a company, investors are looking primarily at the people involved, because the product is less concrete and the obstacles the company will face are unknown.
When asked about the reasons to take on a partner versus work with a service provider, Mike Alfred, co-founder and CEO of cryptocurrency assets firm Digital Assets Data says, “Running a company is really hard – the downtimes are brutal and carrying that stress is intense, so it helps to share the load.” His test for determining if someone should be a co-founder or a service provider is whether they can help answer questions that are fundamentally “unknowable or that you don’t even know to ask.”
There are a number of consistent, desirable co-founder traits and telltale signs of potential success when considering a partner.
CEO Michael Becker co-founded safety analytics firm GeoSure with a chief scientific officer whose background is statistical modeling and predictive analytics. Becker says he seeks two traits that transcend vision and values alignment. “There are all kinds of ways things can go wrong. At the end of the day you really want someone who shares a common set of values and wants to achieve the same outcome,” Becker says.
Alfred, who founded two different companies with two of his brothers, says his top requirement is integrity. “If you work with bad people it doesn’t matter how talented they are – they’ll torpedo your company," Alfred says, adding that the second thing to consider is capabilities that are both new and complementary.
Alfred adds that to know if the partnership is on solid ground, the best proof point is that the business itself is working. “You’re raising money, hiring people, growing revenue. If you can chart those things, the chemistry is working and if you still trust the person, then stick with it," he says.
Jonas Tempel, a serial entrepreneur and co-founder of specialty popcorn manufacturer Opopop, places importance on modeling founder behavior yourself. “Regardless of who your co-founder is, you have to put in the work, show up; it takes grit and determination to deliver. When looking over your shoulder, is your co-founder right there? If not, that’s your answer," Tempel says.
The timing of conversations around salary, equity stakes and vesting for agreements is a key issue for startups, even before other people join the organization. Alfred says that co-founders need to be in step on their determination to make it through the inevitable challenges to come, such as outages of capital.
Becker says that while a founder is bootstrapping a company — devoting 110% of time to the effort — it’s reasonable to expect to reach a point where a salary is possible. “But, in the early stages, it’s money going out the door – covering costs and expenses — so that’s one of the last things to expect and your co-founder should understand that, too," he says.
Blake Nielsen, co-founder of investment bank firm Black Iron Advisers and co-owner of Johnson & Held belt buckles, says that early stage companies may find it difficult to meet a market-level salary and advises that potential partners talk about money early and often, including their equity stakes.
What about Red Flags?
Nielsen has some regret in overlooking warning signs when a partner sold back shares. “He clearly didn’t believe in the direction we were taking the business; we believed it was a liquidity issue and that wasn’t true. Ultimately, if you’re not building toward a shared team goal, the partnership implodes along the way,” he says.
“The thing with startups is there are no rules,” Alfred says. “It’s like taking five people and putting them in a jar, then shaking it to see what happens. Not everyone lasts. One of the best ways to manage that uncertainty is to use a vesting schedule to claw back equity. As the CEO, all you really have is your power to fire people and as the founding CEO you want to use that aggressively if people are damaging your culture.”
This is part one of a two-part series on the commitment of co-founding a startup. For part two, click here.
Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult your legal advisor regarding your specific situation.
Allison Donovan and Russell Hedman are members of Hogan Lovells’ corporate practice team.