The hidden cause of start-up failure: co-founder conflicts


Date: 29 October 2015

The hidden cause of start-up failure: co-founder conflicts{{}}Last year alone saw the birth of almost 500,000 new businesses in the UK. Starting up is one thing, but staying alive is even harder, with half of new businesses dying within five years.

Over the years I've founded my own start-ups and as a former lawyer helped entrepreneurs wind up their businesses. And after watching the good, the bad and the ugly, I've realised that a key reason why many start-ups fail is co-founder conflict.

The view is echoed by Y Combinator, arguably the world's most famous accelerator. Former Y Combinator partner Harjeet Taggar described fights between founders as "certainly the most common reason for failure we see at YC."

And serial investor Jeremie Berrebi said that after 13 years investing in more 200 companies he'd "finally discovered one of the main reasons that start-ups fail – conflict between founders."

Types of conflict varies from equity splits to clashing egos. There's an inexhaustible list of ways a working relationship can turn sour, but over years we've identified the top seven rules co-founders should follow.

1 A working (not social) history works best

Co-founders come together most commonly through social circles. While working with people you know and trust has appeal, it's likely to cloud your judgement about the skills and competence required. Professional acquaintances, such as former work colleagues, work best. You know what they're good at and over the years you've seen how they operate in good times and bad.

2 Find common goals and define your success

Too many co-founders dive into business together without defining and sharing what success would look like on a personal level. Talk openly about through your priorities, ambitions, insecurities and family commitments – and agree on an exit strategy.

3 "I do this, you do that"

Go beyond job titles or merely splitting up roles. Dive into all the jobs that need doing and look for gaps that either no one wants to fill, or where the required skills are lacking. Decide who'll take on (or learn) what, then set a future date to assess how it's working out.

4 Two is the magic number

Or 2.09 to be exact, even if it's statistic drawn from a small, rather dated (but regularly cited) sample. While three can be handy for breaking deadlocks, it also allows two to gang up on one. There's also less chance for skills and responsibilities to overlap when there are two or even three co-founders.

5 Beware of the 50/50 split

Splitting shares equally between two or three co-founders makes intuitive sense, but the distribution should be based on the contributions or sacrifice each makes. Here's a handy tool to help you get to a number, drawing from a solid list of variables.

6 Vest your shares

Once you've agreed the share split, instead of issuing shares upfront, the smarter way is to earn your shares over time using a 'vesting schedule'. A typical schedule works like this: after one year (the 'cliff') you'll each earn 25% of your shares, followed by a further 2% each month for the next four years. If someone leaves in the first year, they get zero. It's a great incentive.

And this means...

7 Get it in writing

Don't rely on handshake deals. Get things down in writing, whether it's basic one-pager or a 40-page shareholders agreement (with vesting of course!). Signing up to commitments has a way of flushing out issues that otherwise might be left unsaid. And if you can't agree on the rules, perhaps it's time to rethink who you're about to do business with.

Final word

Running a start-up alone can be, for the most part, hard. Finding that special someone or forming a small team at least gives you a fighting chance of success. It's a relationship that will be tested many times and will (on occasion) need repair, but it should always be nurtured.

Copyright © 2015 David Bushby, COO at Lexoo ("a service that handpicks specialist lawyers to give businesses multiple, fixed-fee quotes based on your legal needs"). He tweets at @DavidBushby and connects on LinkedIn.