Picking a Co-Founder is Hard

I had a great opportunity at this year’s Interop Las Vegas IT Conference and Expo to talk with some amazing entrepreneurs at Work In Progress. I focussed on the many lessons I have learnt as an Entrepreneur but one of the unexpected talking points that came up was picking a great co-founder and sourcing the right team for your fledgling business.

Let’s just start off by saying this process is really HARD. Picking the right co-founder is arguably one of the most important decisions involved in your startup and it can impact your business hugely. That’s why you may have heard so many horror stories about the Entrepreneur who settled on the wrong set of people to grow their business. Imagine Honey Boo Boo and Duck Dynasty trying to build a nuclear reactor together with nothing but a roll of duct tape and a Death Star Lego set. It isn’t going to end well.

I’ve been really lucky with some great co-founders and initial employees who I still count as friends and work with today. I’ve also had some extreme experiences that could have stopped the company in its tracks. But every experience, whether good or bad, has been a learning experience. It’s taught me what works — and what really does not work.

It’s simple advice but I’d always recommend that you go with who you know. Some of the most successful business relationships are formed where the people have known each other in contexts prior to the business at hand.

There are a few warning signs to be aware of with regards to your initial team and co-founder. Classic red flags are individuals that ask for too much money in the early days of a startup as everyone should be channeling funds to investing in the company, not fattening their own wallets. In fact, almost two-thirds of founders only make $50,000 or less per year in the startup phase (info).

That’s not to say the hard times will only crop up in the early days. You need to check in with your co-founder to ensure they are just as committed many years down the line as they were from day one. You and your co-founder could end up going without a salary for a while as your business gathers pace — this can be incredibly tough for everyone. Make sure your co-founder is completely committed for as long as they are a co-founder and throughout the highs and lows of a new business endeavour.

Having a co-founder splitting after just one year, taking half of the company out of the door with them. To stop this happening, make sure you create vesting restrictions http://thestartuptoolkit.com/blog/2013/02/equity-basics-vesting-cliffs-acceleration-and-exits/. If your co-founder dithers over vesting terms, you may want to question their commitment to the company.

Trust, but Verify

‘Trust, but Verify’ is a great piece of advice that fits well with the co-founder selection process. It means that, no matter how reliable a source of information appears, you should always conduct your own research to double check your information is trustworthy.

The business world is a dog eat dog world. Sometimes you learn that lesson the hard way and find that some people are not aligned with your startup. As an Entrepreneur, I have fallen foul of this lesson and allowed people into my company who were not all that they seemed. It’s a sad fact, but such individuals can manipulate your team and poison your company up to the board level. In the end, once the rot sets in, they could destroy the company if you don’t identify them and pull the ripcord before the company hits rock bottom.

How can you identify these people? There’s no easy answer. They tend to talk a good talk, make claims that sound a little too good to be true and sometimes pull in other unscrupulous individuals to vouch for their efforts. But the facade always comes down in the end — they never were a company leader, or ran half the P&L, and the people that vouched for them were most likely on the take in some way as well.

There are a few simple measures you can take to protect yourself and verify individuals:

  • Meet their nearest and dearest. If I’m planning to work with someone at a critical level, I always ask to meet the other important people in their lives. The individuals who surround you, also influence you. This is a critical tactic that has worked for me many, many times.
  • Do extensive background checks. If anything comes up then you can make an informed decision. Would you bring in a child minder to look after your kids and not check their references? Probably not. Remember that your company is your baby and not doing extensive background checks could put it at risk. If you have known an individual for most of your career, then this could be the exception. But most of the time it is better to carry out a quick background check..
  • Talk. Talk to their references and then talk to other people in their network. Old work colleagues are a great source to validate the facts. “Did this person really run half the P&L of the company? No! He ran only 30M of it, and only 30 people reported to him when he claimed a bunch more? Holy sh*t!”

If you have made a mistake with your co-founder then it’s time to quit while you’re ahead. A bad business relationship will poison your company and ultimately lead to its failure.

So what if you do decide to break up with your co-founder? If you have a board then you need to go to them first and discuss what is going on. They have experience in this and can help you understand what is possible and how to handle the situation. Some splits can be amicable so always try to talk things through and reach a solution that suits all parties. If you cannot reach a consensus, it’s time to turn to a third-party arbitrator that you both trust such as an accountant or attorney.

Consulting an attorney before a breakup could also be a savvy decision. Removing a co-founder from a legal standpoint may depend on whether your business is a partnership, corporation or limited liability company, as well as the state that the business is set up in. Some states have laws preventing a co-founder from kicking a partner out of the company without buying that individual out, regardless of whether the co-founder initiating the breakup believes the partner deserves compensation.

And that’s the key message from this post. It’s better safe than sorry. Don’t get to that stage where you’re calling in the lawyers. Make sure you chose a co-founder and a fantastic team of people to set up your business and the sky’s the limit.

Trust your gut, trust the people you know. And never, never, never trust a professional duck hunter and a child beauty pageant contestant to build a nuclear reactor with rudimentary equipment.

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