Startup Advisories

Start right with your business partners – the pre-nuptial way

I have seen the fall of startups caused by many reasons, one of which is the relationship of the founders/ business partners.

Startups are formed by many types of founders. I have the general one where good friends from army, school, previous workplaces or childhood friends coming together. I also met founders where a senior mature experienced founder will have two young passionate energetic co-founders, to an exotic mix of a Hong Kong, Taiwanese and Singapore mix, or a Singaporean, French and American combination, to an Australian and Vietnamese who barely understand each other, or where the founders barely met and understood each other and are ready to jump right into a business together. I get a loud and boisterous dominant who expounds his capabilities, while his two fellow timid mouses are cowering and looking down at their toes. It is an interesting list of bedfellows here in the Singapore startup scene.

Starting a business is relatively easy, especially in Singapore and Hong Kong. Finding the right business partner(s) is like a pre-nuptial marriage, and here are some advice that I give in my advisory clinics.

  1.  Friends are friends, but work is work. I see a good lot of teams coming together where they have a great deep friendship through their schooldays. They will claim to me that their friendship will help them ride through the best and worst of times and it will be a bonus to their company. I do believe in some truth to that, but then again, best pals can also cause rifts and get a nice free ride along, citing the Facebook founders saga where Eduardo Saverin started with one-third stake and nows enjoys the benefits of his friend’s hard work. (no offence to Mr Saverin sir, as he has gladly supported the Singapore ecosystem and I am totally grateful)
  2.  Founders are not in an equal relationship. In Asia, I noticed the difficulty in having hard truths. Asians prefer not to speak out sensitive issues that might hurt the feelings of others. That in itself becomes a difficult problem brewing. I generally see cases like four founders equally dividing the company into 25% share each, but it is an irony as two are full-time, one is working full-time elsewhere and another claims he will be contributing as and when he has the time. What is wrong with this? In the beginning there is no money made that’s fine, but once the first dollar is made, emotions will arise and cry of unfairness will occur. Disputes start and the company comes to a standstill as founders cannot agree with each other.
  3.  Startups decisions are not democratic. In all startups, the CEO should be making the final decision on strategic decisions and policy. He may seek the advice of the fellow co-founders, but the respect has to be given to the CEO on where to lead. I have been in the same position before in my previous startup, allowing power-sharing on strategic decisions, but it only became a power struggle and opinions going differently which brought down the company. Companies are entities which need strong leadership from one person and the others follow to build that strategy forward. It is not a chummy place to be friendly and accommodate each other at the expense of the company’s direction.
  4.  Founders come and go. It is rare to see all founders of a team stick together until exit. The Facebook story says it all. Each founder have their own lives and destiny, from getting married, having a kid, furthering education, migrating etc, having different views on life and changes their course in working for the startup. Where does that leave the existing team? If you had 4 founders and 1-2 choose to go, holding 50% stake in the company, what can the remaining founders do?
  5.  Are founders a good fit to the company? In a startup, every founder is a crucial asset, given the tight limited resources. It doesn’t make sense if there are 4 founders who are all in the marketing background and there is no one to watch the technology aspect.

Sounds terrible now to start a business? No, on the contrary, it is a reality check that such situations can happen. I liken a new business relationship to be like a pre-nuptial agreement. Founders should come together and talk it out, in many areas like:

  1.  Roles of founders. Who does what? Elect officially a CEO and support the CEO to make the final decision.
  2.  Equity stakes. Based on the roles, equity should be given out in proportion. A general rule of thumb of equity distribution, from the largest to the least, will be the CEO, COO, CMO, CTO, CFO to the supporting staff. The other consideration is whether any founders put in money. If they did, they should get a higher equity stake.
  3.  Exit strategy. What is the end goal in 3 years? 3 years is a general lifespan of whether a company can make or break. It is also a good timeline as investors generally seek returns in a 3-5 year period.
  4.  Event of founder leaving. An agreement should be made that if any founder leaves, the others have a first right of refusal to buy out the leaving founder.

All these should be written down and signed by the founders. Is it that necessary? When such an issue happens, you will be very grateful to have these agreements as a guiding point to resolve the issues.

I hope this has given you some good thoughts. Even though you may now be running a business with co-founders, it is not too late to have a discussion like this.

Feel free to comment if you have any experiences with your co-founders.

This article is the second of the ‘Startup Advisory Clinic’ Series.

This article first appeared on Tech in Asia.