Most of the startups guarantee the failure moments of the startups either by committing some mistakes or any other problems.
Most of the times, the co-founders make a mistake of over-optimizing the division of ownership and control. Uncommonly, the cofounders tend trust each other and delay memorializing their agreements. Cofounders who make either mistake are dooming their companies — period.
The most ironic thing in the startup world is to say your partners “trust me”. The main problem is when you start a new business, the ground realities change very quickly those rely on honesty or fairness of the cofounders, partners, investors or vendors.
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The most important thing in the startup world is trust but it is also table stakes — you’re not going to get in the game or invite anyone to the game who you can’t trust in the first place. The most common reason partners, especially when forming new companies, delay documenting their agreements is because they don’t agree.
Much frequently than one can imagine, the founders table the most important negotiations as they are uncomfortable.
Most of the times, parties trust each other but don’t realize is that what seems “fair” in the present can be very different from what was fair in the past or what will be fair in the future. One should never start before you agree.
The benefit of negotiating and documenting various things before o e can start building your company is that the important issues of the ownership and control are being settled before the get complicated.
Pascal, the famous mathematician, observed that “Things are always at their best in the beginning.” During the entire startup period, the contribution of each cofounder would be perceived in different ways over time.
Typically startups are binary. They either fail or else they work. Also, 90 percent of them are fragile whereas the others end up failing no matter what.
Given this fact, spending a lot of time trying to figure out the optimal allocation of ownership and control in an early stage company is a fool’s errand. In my experience finding a way to create circumstances where the parties are equally yolked is the safest way to get started.
If at all the cofounders attempt allocating the ownership and the control depending upon their past, present and future contribution the company would fail certainly.
There are a million ways a startup with unequally yolked cofounders can fail. For example, just try to imagine a scenario wherein the developer or the founder owns 75% of the company because he’s the one building the application.
The founder oens nearly 25 percent of the company just because he is not doing that much while the application is building.
After the MVP is launched the founder is able to raise $5M from a venture capital firm. The partner from the VC knows a great developer from another company he funded and suggests you all bring him on board. The developer brings more and more of his colleagues on board and in short order the developer/founder is moved into an ‘architect’ role and isn’t really writing much code.
The business/founder is now bringing on customers in rapid succession. The VC realizes that the developer/founder’s contribution and value to the company is in the past and that the business/founder’s contribution and value to the company is in the present and future.
The VC courts the business/founder and foments upset regarding the unequal division of the company. The business/founder is clearly the one adding all of the value and yet he only has a third of the equity that his cofounder has.
Suddenly the business/founder has twice as much stock as the developer/founder. The developer/founder is upset and hires a lawyer. The lawyer threatens a lawsuit and the company, on the cusp of success, is distracted from their core mission. This is only one possible scenario.
Whenever you want to give your startup a chance to fight, negotiate control and ownership on Day One AND make sure the division is equal. Realize that there is a reason each cofounder is sitting at the table and that your best chance of success is for all of you to win or fail together.
Most of the times, the outcome of this is failure. Whenever you do not feel like sharing in the possible ways of business along with your cofounders, you don’t get into the business with them at the first place.
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