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 from 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.