Date Your Co-Founder
Tonight at a startup meeting the discussion turned to co-founder woes- i.e. where to find them, how to choose them, and how to frame up a fledgling relationship. The first two don’t have easy answers so more time was spent on the last. Let’s say you do find someone, and let’s say they have the right skillset to complement you and the business.. how do you setup the arrangement for success while still protecting against laziness, distractions, or simply life happening?
One suggestion was made that if co-founding is so much like a marriage then perhaps think of the initial agreement like a pre-nup: an ironclad contract divvying up the assets should the marriage meet an unfortunate end. But I don’t think the analogy carries us far enough. A pre-nup is typically (I’m out on a limb here since I didn’t have/need one) for those bringing high net-worth’s to the marriage. But in an early stage startup you haven’t created anything of value yet. You haven’t even proven you can work together. You’re doing the dating dance.
I think a dating analogy fits better. You really are trying to figure out if a) the business has potential, but more importantly if b) the partnership has potential. Can you even work together? Under pressure? Determining if the partnership works is invaluable since it’s easier to change the business model than change/find good partners.
Basic elements of a sane dating relationship are mutual interest, exclusivity, and finally, the ability to break-up. I would question whether you are really dating if you lack any one of the three. Similarly with a co-founder there are some simple measures you can take to help safely navigate the riskier early days into a beneficial long-term relationship.
Put up cash (Mutual interest). You’re about to embark on the seriously difficult task of starting a company. How committed is the other person to idea or the team? Would they put up $5,000? I would be worried if a potential partner either didn’t want to put any money in, or didn’t have enough margin in life to be able to put any money in. The specific amount is less important. I wouldn’t expect a guy right out of college to put up $20 grand. You wouldn’t date someone ‘meh’ about you, why co-found with any less. Plus, you’ll need some starting capital just to incorporate and get going.
Obligations of management (Exclusivity). I hear its safer to only date one person and a time. Discuss and include a section about the level of commitment expected of the partnership. This may say something to the effect of “devoting substantially all of his or her time to the conduct of the business, not planning to work less than full-time” or whatever fits. Beyond hours per week, the spirit should be that this is the only current business. Neither of you want to be the 2nd or 3rd or 4th item down on your co-founder’s list of things-I’m-building/selling/launching. Dating another person (or business) forfeits the right to the current one. If your co-founder doesn’t feel like they can commit, better to know that upfront.
Vest founder stock with a cliff (Ability to break-up). If you read nothing else, read this. All stock, including founder’s stock, should vest. 4 years is typical. And the first year should be a cliff. This means 25% of it vests on the 1 year anniversary, and the other 75% vests equally over the remaining 36 months. If someone walks 8 months in they get: zip. You dated, it didn’t work, time to part ways. And while losing a founder sucks, at least you aren’t losing a permanent piece of the company. The stock can be recovered and used to attract the next partner or reward existing contributors.
Any attorney should be able to assist you with including protective provisions like these three and others in your initial documents. Happy dating.