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.