Handling disagreement between founders

One of the common reasons for issues in startups is disagreement on the way forward.

 

These issues and disagreements come up typically at two inflection points –

(a)  Either when the startup is doing very badly and tough decisions are to be taken e.g. to further reduce the already low salary or (

(b)  When the startup is doing really well and tough decisions are to be taken e.g. to sell out and take the cash or to stay on and grow even more.

 

How does one address this? Well, one way is to anticipate it and have a philosophical discussion and agreements with the co-founders on how different situations will be handled. This discussion should happen at the beginning of the journey and NOT when the situation arises.

 

What will be the decision in case of difficulties? What will be the decision in case there is an option to sell out? It is possible to build some of these agreements into the shareholder agreements or articles.

 

Some questions I ask our portfolio companies to discuss among themselves are:

1)    Who among the founders will be the CEO, and why (If you do not decide at the beginning of the journey, this can be a tricky one to settle. If you do not fight over it, your spouses may.). If required, would you be open to a professional CEO.

2)    If someone offers to buy you out for Rs10cr in a year, what would you do…

3)    What will be your measure to say that the venture as ‘failed’ and give up

4)    What is your plan B?

5)    How long can you go without a salary (or survival salary)?

 

One way to protect the venture in case of conflict is to vest the shares of the founders. I.e. If there are 4 founders in a company with 25% shares each, they may decide that this 25% will ‘vest’ over a 5 year period. This means that if one of them leaves at the end of the 3rd year, he/she will get only 15% equity and the rest will be shared between the remaining founders. This can be documented and formalized.

 

 

Author: Prajakt Raut

Prajakt has over 25 years of experience as an entrepreneur, marketing professional and entrepreneurship evangelist. Prajakt helps startups understand the dynamics of business, and assists them in developing meaningful business plans. He mentors startups on strategy, business model & monetization, fundraising and on preparing the company for growth. Prajakt was previously a part of the founding team of The Hatch for Startups, where he established the brand as a leading player in the early-stage entrepreneurial eco-system in India. Prajakt was the face of The Hatch, and as its executive director, created the out reach programs, deal flow management processes, productized the offering for portfolio companies and built meaningful partnerships with relevant stakeholders. Prajakt is well connected, and respected in the entrepreneurial eco-system in India. He writes extensively on his blog The Hub for Startups (https://thehubforstartups.wordpress.com/) and Quora (http://www.quora.com/Prajakt-Raut). Prior to The Hatch, Prajakt had co-founded Orange Cross, a healthcare services management company. Between 2004 – 2007, Prajakt had taken a 3-year sabbatical to be the Asia Director for TiE (The Indus Entrepreneurs), a global non-profit organization focused on promoting entrepreneurship. At TiE, he was primarily focused on helping entrepreneurs in India connect with the emerging early-stage investor community. In that role, Prajakt helped create interconnectivity between overseas investors and Indian entrepreneurs, and also interconnect the TiE chapters across India. Prajakt has spent over a decade in advertising and marketing companies including Grey, Madison DMB&B and Capital. He was also part of the founding team of a printing business and a CRM solutions company. Prajakt's personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs and for this he also volunteers time with organizations like the National Entrepreneurship Network [NEN] and TiE.

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