Co-Founding is a Serious Commitment: Saying goodbye
Part two: Tips on everything from spicing things up to breaking up
Structuring control between co-founders is critical for success, especially later in the company’s lifecycle where effective governance can become crucial. In the second part of this series on co-founding, four startup veterans share what they’ve learned as entrepreneurs including how to maintain control among co-founders, vetting potential investors and takeaways for breaking up a partnership.
Control and partner dynamics
Mike Alfred, co-founder and CEO of Digital Assets Data, recounts that a dual CEO structure in his first founding team created confusion internally and externally to investors. He says that separating those roles was the key to balancing control.
Establishing distinct responsibilities helped Blake Nielsen, co-founder of Black Iron Advisers and co-owner of Johnson & Held, navigate issues. “We each had a domain for making decisions yet still listened to and respected the other person,” Nielsen says.
Jonas Tempel, co-founder of Opopop, says that his father, an attorney, advised him about becoming an entrepreneur when he said, “Put everything in writing while you’re still friends.”
Often, co-founders technically join the company after it is founded, so there is a process to determine whether a prospective team member is a candidate for “co-founder” or just an employee.
Michael Becker, CEO and co-founder of Geosure, says it is important to identify the skillsets and talents that enhance the overall enterprise value when bringing someone to the capital table. His firm added a co-founder three years after its inception and this new partner offered a completely different perspective that helped the company leapfrog in the marketplace.
“It’s advantageous in ensuring commitment, a shared vision and reaching the next growth level,” Becker says. “A service provider has an entirely different mindset. Plus, it’s a cost-benefit that helped bootstrap the company through an equity package that enabled us to execute faster.”
Alfred once had a team member who was retroactively given the co-founder designation due to his contributions within the first few months. This employee’s vision for the product resonated with customers and helped attract new hires as well.
What makes a good investor?
After co-founding, the most important relationship for a startup is often with its investors. These entrepreneurs had different criteria for vetting investors.
“Most importantly, it’s someone that buys into your valuation and vision. Second, they really understand your business, as the best investors are well-networked. Another consideration is whether an investor will be on the board, because that structure includes power over compensation, future equity grants and strategy,” Alfred says. “I’ve had experiences where investors and board members held us back; now I have two investors on my board who are renewing clients alongside our internal team. Those are true believers who can help grow the business.”
Becker also holds that these relationships are sacred. “We consider our investors family members and view them as an extension of our brand promise.”
According to Tempel, an investor once told him to think of his company as a boat floating near a lakeshore and said that if it tips, the investor team might walk out a few feet into the water. “But if you sink, we’ve got lots of other boats out there,” the investor told him. “The reality is when you step up into institutional money, they’re not betting the house on you.”
Breaking up is hard to do
When expectations fall short and the relationship isn’t working, how do you recognize when it’s time to have that conversation and say goodbye?
Tempel says that, like any bad breakup, “the hangover of that experience lasts much longer than the moment itself.” He once had a mentor who told him that the most expensive time in any company is “the gap between realizing you have a problem and the moment you do something about it.”
Nielsen says that the moment an entrepreneur questions the partnership, whether with a co-founder or a key employee, that’s when action is needed because any delay will result in regret.
“Avoid the contentious separation. The longer you wait, the more expensive it becomes,” Becker says.
“Be decisive and firm – don’t let it drag out. And when someone leaves, treat them like royalty, because it’s a signal for future and current employees, as well as customers,” Alfred says. “How you do it matters. Do not text or email the news. Celebrate their contribution and try to separate in a business context without losing your humanity.”
Donovan says that starting with written agreements help set expectations that may change over time. For Hedman, having trusted guidance through a professional service relationship enhances effective communication between co-founders, executives and investors for successful business relationships.
“Good counsel is worth its weight in gold,” Alfred says.
This is part two of a two-part series on the commitment of co-founding a startup. For part one, 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.