The Co-Founder Trap – Don’t Get Caught

/ 16 Hours ago
Rusty Holcombe Holcombe Financial

Rusty Holcombe
Holcombe Financial

Many startups begin during a brainstorming session among two friends. The emotions are intense; you cannot wait to get started. 80 hour work weeks, shared failures and being broke create solidarity in purpose. But something happens when the company becomes profitable.

Some partners want double the effort and some want to double their paycheck. Benevolence is not a universal value. The company must survive or nobody gets a paycheck. It is time for one partner to leave. A quick review of the partnership agreement leaves a queasy feeling after the lawyer explains the facts. You are stuck.

Like marriages, they begin well and end badly. Sadly, many businesses don’t survive the breakup. Feelings like fairness and revenge take precedence over the reality that the business is paying for the kids schools, family vacations and the mortgage. Some people would rather torpedo everyone’s success than deal with the reality that they are not a fit for the business anymore. There are a couple of techniques to help limit the risk that a departing owner will bankrupt the business:

1. Remember that nothing last forever: When two friends get together to start a business, it is almost scientific. One partner will depart (or more likely be removed) within five years. Why?

Because the likelihood of two people’s level of commitment and talent remaining equal over time is really small. Add 3 people to the mix and the odds are 100% that someone will depart. There is a tendency to pay each partner equally, which means that one person will be overpaid, and the other underpaid. Anger and resentment ensue and the result is a business divorce a dagger in the heart of a small business. If you must enter these treacherous waters with a friend, be sure to clearly define your roles in advance. Only one of you can be CEO. Set the wages to match effort and talent, and review at least annually.

2. Define the divorce in advance: I just sat with an entrepreneur with 3 partners 2 of which are well paid ticks sucking energy, time and money from the company. They would be fired in a heartbeat if they did not own stock or the title of cofounder.

But the original agreement did not contemplate the process or the price of redeeming an estranged partners shares. She can’t get rid of them absent tanking the entire company in the process. She is stuck working twice as hard for half the money. Take the time to contemplate the exit in advance, clearly define the redemption of a partner and how the price will be determined. When the divorce is contemplated in advance, it makes a very uncomfortable situation easier.

Just like marriage, we ignore the failure rate when walking down the aisle. It is scary to enter the world of entrepreneurship alone, the unknown is always easier to face with a friend. If you must have a partner, have the tough conversation up front about the roles and the business divorce.

You owe it to yourself, your employees and your customers to keep the great idea going and that means making tough decisions up front to protect the business.

Russell Holcombe is CEO of Atlanta-based investment firm Holcombe Financial and author of the award-winning book You Should Only Have to Get Rich Once: How to Avoid Toxic Financial Advice and Focus on What Really Matters“.

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