Co-Founders: What Happens When It Goes Wrong

Every co-founder situation is different, but one common problem, especially in start-ups, is how to handle co-founder disputes which can damage progress or even lead to company failure. The problem isn’t unique, even though it may feel that way to the individuals involved in conflict.

Harvard Business School professor Noam Wasserman writes in his book “The Founder’s Dilemma” that 65% of high-potential firms fail due to disputes among co-founders. At Motion Paradox, that has been our experience too. Many of our clients come to us because of this issue. They stay because they recognise we help with other problems.

A co-founder is more than just a business partner. They’re someone with whom you plan to cultivate a long-term relationship, but, as with any relationship, that partnership may not work out. There could be a straightforward personality clash, or business goals might no longer be in sync or questions might arise about commitment to the business. It’s another aspect of the ‘motion paradox’ that many businesses, especially start-ups, face.

Real World Consequences

When a dispute becomes serious, there could be longer term implications for any business. For example, Zipcar is an American car-sharing company offering vehicles billable by the minute, hour, or day for a fixed membership fee. Now a subsidiary of Avis Budget Group, long before Zipcar became a hugely successful business, without seeking professional help, founder Robin Chase entered a 50/50 equity split with her co-founder Antje Danielson.

When their relationship soured shortly after they went into business, Chase and her co-founder parted company, but Danielsen still retained half of the company she was no longer helping to build. Apparent success will also temporarily mask co-founder problems. Things might be going wrong underneath and you won’t be aware of it. When a co-founder dispute becomes so serious that it’s damaging the business, it can be extremely difficult to see any good options.

Plan to Prevent Problems

The first approach to avoid these problems is to focus on preventing conflict, rather than trying to fix it when a lot of the mental, emotional and financial damage has already been done. It can be useful for both parties to document what each expects from the setup, but the most positive step you can take is to be open to early professional advice, recognising that disputes and disagreements are inevitable, in the early days of the business and throughout its lifetime. Getting professional advice early on can identify actionable, practical solutions to put, and keep, the business on track.

Motion Paradox experts can advise about implementing strategies to avoid destructive conflict, because we believe differences of opinion can be constructive. As soon as the company is regularly engaging in commercial activities, we can suggest the processes and create the documentation, such as a shareholders’ agreement, that will provide the mechanisms for dealing with and resolving any disputes.

Typically, a shareholders’ agreement specifies how equity will be shared, IP ownership, pre-emption on issues of new shares/transfers of existing shares, restrictive covenant obligations, what happens to the equity if a co-founder quits, a structure for how decisions will be made (including board appointments) and deadlock provisions.

Dealing With Problems

Even if all these steps to prevent damaging disputes are taken (and certainly if they are not) problems that are seemingly irreconcilable may arise. One useful strategy in these circumstances is to use an independent third-party to mediate your dispute and suggest a resolution. This works of course if both parties are prepared to abide by whatever conclusion the neutral mediator may suggest.

Smoothing Co-Founder Exit

If none of these preventative measures and approaches work and mediation proves impossible, the business will have to face up to the fact that one person needs to exit. There are a number of reasons why a co-founder might leave your business and it is certainly not an uncommon event in the start-up world. Despite your best efforts, if things have reached this stage, then it is usually more beneficial in the long term to simply end the relationship than to try and convince your co-founder to stay on.

Motion Paradox can help smooth the exit of a co-founder, by negotiating on behalf of the company to ensure the relationship is terminated fairly, with full transparency, and as little damage to the business as possible. Getting professionals involved in this final act will also avoid mistakes and potential legal problems in the future.

Professional Advice for Every Eventuality

A co-founder leaving your start-up can feel like a big loss, but it certainly does not have to mean the end of your journey. Every team experiences disagreement at some point. If it doesn’t, chances are destructive conflict is brewing beneath the surface and may erupt at the worst time possible.

Motion Paradox can advise on how to prevent these disagreements becoming toxic and implement processes to manage disputes when they arise. We can help mediate disputes to achieve a positive resolution, but if that proves impossible, we can help mitigate the impact of a co-founder exit.

But things don’t have to be this dire before you consider getting our professional help on board. Athletes have coaches and trainers who help them get to peak performance. Motion Paradox can do the same to help tune up your business.

Digitalisation: The Right (to Work and Rent) Solution?

UK employers have a legal obligation to comply with the prevention of illegal working legislation as set out set out in the Immigration, Asylum and Nationality Act 2006, section 24B of the Immigration Act 1971 and Schedule 6 of the Immigration Act 2016. This legislation requires checks to verify that anyone you employ in the UK has the legal right to perform that work. Landlords have to jump through similar hoops when it comes to establishing the Right to Rent – but more on them later.

Stiff Penalties for Non-Compliance

Employers may be liable for a civil penalty if they employ someone who does not have the right to undertake the offered work on or after 29 February 2008. That was a lesson embarrassingly learned by former chief law officer Baroness Scotland in 2010 when it turned out she had hired an illegal immigrant as her cleaner. The cleaner, Loloahi Tapui, was jailed for a total of eight months and Baroness Scotland was fined £5,000 for failing to take copies of the documents Tapui claimed to show she was entitled to work in the UK.

That’s why conducting Right to Work checks correctly is important, not least because it offers you a defence in the event of problems with the immigration or working status of any of your employees. Equally vital though is carrying out these checks on all prospective employees, regardless of nationality, race, or ethnicity. Singling out certain classes of individual could lead to charges of unlawful discrimination by an employee.

Employers have had two ways to conduct checks on a job candidate’s Right to Work: inspecting their physical ID documents in a manual check or looking the candidate up on the Home Office UK Visas & Immigration department (UKVI) UKVI immigration database online.

Digitalisation of Right to Work Checks

Complete digitalisation has been a long-term goal for the UKVI and its ambition is to do away with physical immigration documents entirely by the end of 2024. Checking an individual’s Right to Work using the temporary COVID-19 adjusted measures has proved popular, especially given the practical difficulties in checking new employee’s status when so many people were working from home. So popular in fact that the UKVI announced in June 2021 that, due to positive feedback, they intended to introduce a new digital solution to allow more types of status to be checked online. This includes UK and Irish citizens whose status cannot be confirmed using the current UKVI online checking service.

Changes to the System in April

From 06 April 2022 onwards employers will no longer be permitted to accept some physical documents as evidence of right to work. This includes Biometric Residence Permits (BRP), Biometric Residence Cards issued to family members of EEA migrants under the EU Settlement Scheme and Frontier Worker Permits for EEA migrants. Employers will instead be expected to use the free UKVI online checking tool. Employers will not need to do retrospective checks on anyone employed on or before 05 April 2022 if those checks were made using a physical document, although follow-up checks will still be required where someone has limited permission to stay in the UK.

Government guidance announced on 17 January 2022 stated that, from 06 April 2022, the government intended to work with Identification Document Validation Technology (IDVT) service providers to carry out checks on people outside the scope of UKVI’s own online checking service.

From that same April date employers can only use certified Identity Service Providers (IDSPs) to carry out digital Right to Work checks on British and Irish citizens – as long as they hold a valid passport. It’s thought that the cost could be as much as £70 per check, unlikely to be welcomed by businesses already dealing with National Insurance hikes and rising inflation.

The Employer Remains Liable

While the digital Right to Work checks are to be completed by IDSPs on behalf of employers, no IDSPs have been identified yet (it is expected that a list of certified IDSPs will be published by the Department for Digital, Culture, Media & Sport ‘shortly’). However, even though it’s someone else doing the check, the legal obligations around prevention of illegal working still falls on the employer.

Employers will still have a responsibility to carry out a risk assessment on every transaction and remain liable for undertaking their own due diligence, so examination of how your current Right to Work processes fit with this proposed digitalisation is crucial.

Limitations of the System

This digitalised service is expected to save time and bring efficiency, although the actual cost of using the system is unclear. And while digitalisation of the system appears to be a positive step, especially in a post-pandemic world, many suspect that in fact it represents the beginning of the privatisation of the UK’s immigration system. Those without broadband access or passports will be at a disadvantage, as will many candidates who may lack any physical documents (like those in the Windrush scandal).

Discussions are taking place to allow IDSPs to provide Right to Work checking services through alternative routes for those without passports or reliable on-line access. A problem here is that the people in most need of assistance (say those moving from welfare to work) are least likely to have any of the suggested documents, tax, NI records, or credit histories proposed.

The Right to Rent

Since 2015, landlords have been required to check that all prospective tenants have lawful immigration status in the UK before entering a residential tenancy in England, otherwise they may be liable for a severe civil penalty. Landlords can delegate this responsibility, along with maintaining records and conducting follow up checks to a letting agent.

The government claims that changing to digital identity checking in April means landlords can assure prospective tenants’ identities and eligibility. Biometric Residence Card (BRC), Biometric Residence Permit (BRP) and Frontier Worker Permit (FWP) holders will only be able to prove their right to rent using the Home Office online service. As with the Right to Work, from that April date physical documents will no longer be accepted as valid proof of Right to Rent. Landlords will not need to retrospectively check the status of BRC, BRP, or FWP holders who entered into a tenancy agreement up to and including 05 April 2022 and will not face any civil penalty if the initial checks were undertaken in line with the guidance that applied at the time the check was made.

Want to Know More?

Employers and landlords can get more information and guidance on the changes to Right to Work and Right to Rent checks by emailing RighttoRentandRighttoWork@homeoffice.gov.uk or by talking with the experts here at Motion Paradox.