7 Common Mistakes to Avoid as a Co-founder

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Building Digital Product (BDP) by Osita is a monthly newsletter that supports founders, investors and startup enthusiasts with insights and principles to build better products and startups.

This is my 21st edition and fourth edition for the year.

BDP's theme of the year is "Resilience."

Here is a little snapshot of me.

Osita James is a technology entrepreneur and a partner at BlackCrest . The start-up advisory law firm (BlackCrest) has successfully advised start-ups across Africa in investment deals worth over $5 million. He holds an MSc in Innovation Management and Entrepreneurship from the Nottingham Business School, Nottingham Trent University , a bachelor of law from the University of Nigeria, Nsukka and a Diploma in Technology and Innovation from the Nigerian University of Technology and Management . He writes poetry and fiction in his free time.

I support African founders with professional legal and start-up operations advice. You can reach me at [email protected] or schedule a free meeting here .

Today's edition will focus on how founders can avoid some of the most common issues that can derail their productivity, business equity and dreams.

Hard work isn't enough. And more work is never the real answer. The sort of grit you need to scale a business is less reliant on brute force. It's actually one part determination, one part ingenuity, and one part laziness. - Reid Hoffman

Today, many young people in their 20s and 30s are building startups. There is a frenzy to ship something and see how it does. Many look at Netflix, Tik Tok and other successful startups as their aspirations and keep going for years until they hit gold. Some succeed, but most fail.

According to research , more than 90% of startups fail. This is not too surprising since startup success has a tremendous upside, it follows logic that it would carry an equivalent amount of risk as well.

Failure is an inevitable step for growth, however, some failures can be avoided. Failure with respect to market size is not always within one's control. Chegg could not have known for example that AI would go mainstream with the release of Chat GPT3 & 4. But how they handle that disruption is what determines if they succeed long term or shut down after some time. Failure concerning team dynamics however is largely within one's control. As a co-founder, you can determine your startup's culture alongside your co-founder, you can contribute to hiring decisions, contribute to your startup's spending culture and work process.

In this edition, I will be discussing 7 avoidable common mistakes co-founders make when building startups.

Building anything together with someone else requires a commitment to a shared vision. The high-risk nature of startups demands something even more than just commitment. It requires persevering commitment that will not change with the market or funding cycles. Many entrepreneurs who have decided to build startups with their friends or other entrepreneurs often underestimate how much can change after they start. This leads to rookie mistakes. The common mistakes co-founders face that are avoidable are as follows:

1, Equal Equity Split

2, Unclear founder obligations

3, Dating each other

4, Unclear exit plan

5, No Revenue Allocation Strategy

6, No Fundraising Strategy

7, Working with a co-founder of a similar personality

1, Equal Equity Split

I personally have experience with this. When I was building one of my startups some years back, we split the equity between us equally and got to work. Some months down the line, the commitment level of two of my co-founders dropped and I brought it up. I then suggested that they reduce their shareholding to reflect their current commitment, which led to a conflict that lasted until I left the startup.

As a co-founder, never assume that things will stay the same. Changing circumstances like getting married and having children can impact your co-founder's commitment. And because the time to market is such an essential factor to startup success, the founder who does all the critical work while their co-founder sorts out life issues will have resentment if the equity stake stays the same.

But don't take my word for it. According to the Harvard Business School's Rock Centre Startup Guide:

Establishing a static 50/50 equity split during the early stages can spark future conflict if one founder devotes less time and effort to the venture but retains 50% equity.

If you value your peace of mind and hate disputes as a co-founder, never agree to an equal equity split. Always allow the equity split to be determined by contribution over a period of time.

Here is a practical example of how to do this.

Three founders can agree to take 20% vested equity each, leave out 20% for employee stock options and investor pool and then leave 20% in "escrow" to be allocated according to contribution criteria agreed, over the course of the vesting period.

This will allow co-founders to own equity and have the opportunity to own more if they meet the agreed contribution criteria. This is something I do for founders while I structure their founders agreement.

2, Unclear founder obligations

Founders who come together to work on a startup have to do a lot of things to get to product market fit. To read more about how to do this, you can check out a previous edition on the product market fit here. It is always an operations disaster when co-founders debate amongst themselves who should be doing what. I have advised founders in the US, UK, Ghana and Nigeria on how to resolve their conflicts. A recurring theme is unclear founder obligations. A startup whose management is comprised of two engineers and no written obligations sometimes disagrees on who should be writing the codes.

As a co-founder, you want to avoid this by having obligations documented from the start. The founders agreement offers some help here. It includes the responsibilities of the founders in the schedule, the decision-making powers and process for the founders and the financial commitment (if any) of the founders. It is however limited in scope. It prescribes the responsibilities but provides clauses that empower the co-founders to then make the decision.

This is why at BlackCrest , we advise full-time founders to sign individual employment agreements. This solves the problem around founder obligation completely because it prescribes responsibilities for each founder and their remuneration and work vetting process. The additional thing we do is incorporate the employment contracts for the founders by reference in the founders agreement and then prescribe the contribution criteria to apply directly to the role assigned in the employment agreement.

At BlackCrest , I and my team make your co-founder's obligations as clear as crystal.

3, Dating your co-founder

Before you roll your eyes, I know some co-founders who have gotten married. I also know some who have successfully managed to keep their relationship separate from work. It is something that can work but is difficult to do. As a co-founder, your job is to work with your co-founder and the startup team to build a product that solves a problem profitably at scale. Indeed, we can't always control who we like, but acting on your feelings against the interest of the team makes you a bad leader.

Romantic relationships radically change work dynamics. The worst part is when things go south. Two effective co-founders may end up not replying to each other's emails, pitching without coordination or worse, not talking to each other at work.

Co-founders can avoid this common mistake by waiting until they have some traction, marrying the co-founder outright to erase the "halo effect" which impedes logical thinking or just simply not dating them. A co-founder as a leader of the team has the responsibility to act in the interest of the team. Dating a co-founder and disrupting team dynamics is not in the interest of the team.

4, Unclear exit plan

According to Heraclitus, "Nothing endures but change.” Every startup co-founder has to accept the fact that growth comes with changes. They may have to leave the board or take on other non-exciting roles. An exit plan has several advantages:

• It gives the investor clarity on when they will get back their returns.
• It gives the startup direction and provides a long-term financial goal.
• It helps the startup minimize losses in the event of unforeseen circumstances.

A co-founder who wants to be aligned with his co-founder on exit has to agree on the following:

• The runway of the startup
• The KPIs
• The investment size
• The type of investor to work with.

A co-founder who does all this is more likely to avoid needless conflict over startup exit uncertainty.

5, No Revenue Allocation Strategy

It is never a good idea to leave the startup finances in the hands of any of the co-founders, especially the CEO. Once the founders raise, they should set up a finance team and create a spending policy that encourages frugality. This will align the startup to allocate resources on only the things that move the needle.

Co-founders who do not agree on this on time end up fighting over spending priorities and misappropriated funds.

6, No Fundraising Strategy

Not agreeing on how much to raise and when to raise it can also be a recipe for co-founder conflict.

Founders should always agree in the beginning on how much they want to raise throughout the life cycle of their startup, the type of investors they want to work with, the financial targets they aspire to achieve and how long they think it will take. They should also prioritize investors who disburse agreed funds based on agreed milestones to improve fund raising accountability.

7, Working with a co-founder of a similar personality

Co-founders of similar personalities may struggle to get along. Myer-Briggs personality types offer some insight into how personality plays a role in team dynamics. The popular personality type called the ENTJ or "The Commander Type", is seen as the most favoured for entrepreneurial venture creation.

They are extroverted and charismatic. Two ENTJs however may be bad for team leadership. Two people with energy and lots of opinions can be a disaster. As a co-founder, you can take a personality test with your co-founder during your trial period and ensure that their personality is not too similar to yours.

Conclusion

Despite our best efforts, we cannot avoid failure. Failure is of two broad categories - productive failures and unproductive failures. Productive failure instructs but unproductive failures frustrate. Experience might be the best teacher but it always an unpleasant teacher. Learn from the mistakes of others and avoid unproductive conflict as a co-founder. I hope you find this edition helpful.

Remember that you only fail when you stop trying.

I am rooting for you.

If you loved this edition, please share it with another founder.

Keep building,

Osita.

PS: I am going to be offering a free 30-minute business strategy and clarity session to 10 African founders this April.

How to qualify - Repost this newsletter and comment below I am interested and I will send you my calendar link to schedule a time.