It is rare to come across a relationship that is without problems. Disagreements are common in both personal and professional relationships. Because, at the end of the day, relationships are relationships and people are people, the same sorts of anxieties, unconscious beliefs, and poor communication strategies can derail people regardless of the context of the conflict. Most of the time, though, the goal is (presumably) mutual development, so disagreements and assessments of them are called for. Conflicts are usually solved in the same way: through mutual respect, figuring out what each side wants, showing empathy, and solving problems. A conflict does not always spell the end of a startup. Rather, it can use the disagreement as an opportunity to collaborate and resolve issues that will benefit everyone involved in the long run (which includes employees, customers, vendors, and investors). Of course, resolving disputes is far more difficult than posting about them on LinkedIn. However, I hope that this article will assist the reader in identifying problems before they occur and preparing solutions to avoid disastrous outcomes that may harm the startup and relationships.
If a start-up is doing well, money and investments are coming in, and traction is growing, it's not hard to see why disagreements between the founders are hard to notice and often get overlooked in the "high" of growth and movement. But it's when things aren't going well, when there's uncertainty, fear, and doubt, that things that weren't important before become clear. From what I've seen, most growth-oriented start-ups with more than one founder will have some kind of conflict or problem within the company. How the good differs from the best is based on the structures and systems set up ahead of time to deal with problems and different directions. Most of the time, the worst effects of conflict can be avoided if people are ready for them.
This week, we look at common co-founder disputes and how co-founders can prepare for and resolve them.
- Operational direction: Co-founders are heavily invested in their businesses (naturally). Each founder may want to take the startup in a different direction at times. One instance that comes to mind is when a client asked me to assist him in resolving a disagreement with his co-founder over a crucial business decision. One path led to more traction and a better chance of getting VC funding, but it came at the expense of a higher burn rate, which is a problem for a bootstrapped startup. The other option was a unit-economics-focused path, which would allow the firm to remain viable but severely limit its growth rate. Because each path was viable in different contexts, it was a difficult problem to solve. The problem was magnified when it became clear that neither founder had a clearly defined role, as neither was designated as CEO, nor was either identified as the final arbiter of the company's path, and both founders had made decisions based on unanimous consent using their collective wisdom. It's not hard to think of a situation in which the co-founders would have worked across functions to get the most work done for the least amount of money. While this philosophy is admirable and has merit, it fails if the impasse results in a stalemate of operations, particularly when it comes to an important decision about the startup's future.
- Change of Heart: A lot of founders set up a startup after a lot of trials and challenges. There is no doubt that a majority of startup founders are extremely passionate and motivated about the problem they are seeking to resolve. The practicalities of the material world (at least for some time) fall away, and the sole agenda is the growth of the business that they worked hard to set up. However, reality hits some founders hard, and the desire to build something new is overshadowed by other obligations; sometimes those are personal tragedies, sometimes those are as innocuous as losing interest in the product, and sometimes a 'Godfather offer' lands up (an offer that is too good to be true). While on its own, a founder leaving is not a challenge, it is elevated to a problem if there are issues around the treatment of the founder's equity and options (if any). The problems compound if the startup is well into its operations and is approaching investors.
- Violation/breach: A founder's conduct may violate specific requirements, or he or she may simply do (or fail to do) something that harms the start-up. These may be slight transgressions like careless handling of specific products or serious transgressions like financial fraud (which seems to be the flavour of the year for founder-related disputes in 2022). In circumstances when the founder is told to depart, the reasons for terminating the engagement and how to deal with the founder's shares (BharatPe, anyone?) become critical, and the less acrimonious such settlements are, the better for all stakeholders.
- Documentation: Systems and processes are effective at increasing productivity. The same principles apply to resolving conflicts. Simply put, if founders can agree on methods for resolving future disputes, most of the subjective biases that emerge afterwards can be avoided, increasing the likelihood of a peaceful resolution. Founder agreements and shareholder agreements are excellent methods for implementing such processes and checks. The terms of these agreements can be used to construct systems such as third-party mediations or veto rights over matters pertaining to respective domains. However, typical boilerplate language will not necessarily result in the best possible outcome. Therefore, always try to make a contract work for you, even if it costs money and time upfront; the investment is (in my experience) worth it.
- Mediation: To help enable discussions aimed at settling disagreements, it is often helpful to involve a neutral, unbiased third party. The disastrous consequences of unsolved problems can be avoided with the help of a trustworthy third party during difficult, often unpleasant, and demanding dialogues. To put it mildly, a mediator functions as a B*** S*** filter and facilitates the smooth flow of negotiations. Our job is to act as a neutral third party who facilitates communication between the parties involved so that they can reach a mutually agreeable solution. Think of us as the Gandalfs and Dumbledore to your Frodo and Harry (albeit we can't 'magic' our way out of problems as much as we'd like to!). When it comes to settling complex corporate disputes, it is best to enlist the help of a professional commercial mediator (one who has been trained in corporate mediation and has the requisite commercial and business understanding). There are certain types of founder disputes that can probably be best resolved through mediation, as this article notes.
- Complete Breakdown: The saga of BharatPe v/s Ashneer Grover is still fresh in the minds of a lot of us. We saw the impacts of a termination for cause. Similarly, if disagreements among the company's founders grow intractable, an amicable solution is required. The most problematic aspect of such scenarios is deciding what to do with the founder's shares (because in most cases, one founder or group of founders decides to part ways). For several of my clients, a fair solution has been to organise a buyback (by other investors, the founder, or the company) at a pre-agreed value or the last funded round valuation, or a formula that takes into consideration the time spent/value provided by the exiting founder. It doesn't take much to see that wasting time, money, and effort on non-revenue generating avenues is an inevitable result of not addressing potential negative repercussions in advance.
If there is one lesson to be learned from this post, it is to plan for emergencies and spend the extra time, energy, and money up front to avoid negative outcomes. Another critical component is to always document the terms of any settlement. It doesn't have to be written by an attorney (although those with the ability to spot potential loopholes are better suited), and it can simply be an agreement between two people on a piece of paper. The settlement will likely signal the end of a dispute as long as the language and intent are clear, unambiguous, and definitive (if the stakes are high, then the requirement for a skilled lawyer becomes imperative). The lack of clarity permits any party to act in bad faith, contrary to the terms of an "oral agreement," and without proof of acceptance, parties are forced to start from scratch. Relying on an oral agreement between parties is not ideal because its terms are opaque and agreements are more likely to be honoured if they are written clearly.
Disagreements are unavoidable. However, not all disagreements must end in an acrimonious tussle with personal barbs and attacks splashed all over the media. After all, even Cap and Tony cleared up their issues, right?
