Entrepreneurs

Questions need to be answered before entering into a startup business with co-founders

Founders dreams for many things while entering into a startup business. Initially, every co-founder will have the same thoughts, but as time progresses things start to change whether the startup is a success or a failure. Therefore, to avoid problems later, one needs to be practical and it may sound harsh in the beginning but do have a conversation regarding their startup and future plans.

With my experience with startup business, I have come across many questions that need to be settled by co-founders. In this article, we are listing those questions.

  1. How should one divide the shares?

There are actually multiple parts to this. Here, I’m primarily interested in the economic impact. Basically, the question is really simple: Who gets what percentage of the company? This question is often the most difficult to answer and the right answer is rarely “divide them equally amongst the co-founders”.

  1. How will decisions get made?

This is often tied to the number of shares, but not necessarily. You can have voting and non-voting shares. You can setup a board. You’ll need to decide what kinds of decisions get made by the board, and which ones don’t. Common areas to address are decisions around capitalization, executive hiring/firing, share issuance (dilution) and M&A.

  1. What happens if one of us leaves the company?

Though it may seem like a bad idea to be talking about this when you’re starting the company, but it’s not. In the evolution of any startup, there will be good times and bad times and there will always be times when one or more co-founders are simply not happy and not committed. You should decide how to treat this situation early. The last thing the company needs is a co-founder that is no longer engaged but is hanging around out of guilt or ambiguity.

  1. Can any of us be fired? By whom? For what reasons?

Yes, that’s right. Even co-founders can be terminated. Too many people mix the notion of being a shareholder in a startup and having an operating role. These two things should be thought of as somewhat separate and distinct. The company should have a mechanism for gracefully terminating the operating role of a co-founder if that’s the right thing to do. This is often not fun, but should be discussed up front.

  1. What are our personal goals for the startup?

Though this can change over time, it’s helpful to at least get a sense of what each of the co-founders wants to get from the company. If you have one co-founder that wants to build a sustainable business that is spinning off cash and run it forever and another one wants to shoot for high growth and some type of liquidity, it’s better to get that out in the open early and talk it through.

  1. Will this be the primary activity for each of us?

Lots of co-founder conflict can stem from misunderstandings around how committed everyone is. Will one of the co-founders be keeping his/her day job until the company gets off the ground? Will one be working on another sideline business?

  1. What part of our plan are we each unwilling to change?

Not all startups need to change their plans during the course of their evolution. Just the ones that want to survive and succeed. Having said that, there may be elements of the plan that you don’t want to change. This could be around the product being built, the market being addressed or some other aspect of the company. For example, if one startup is fanatically obsessed with wanting to create an enterprise software company, then friction may be created if the model needs to shift to a consumer product.

  1. What contractual terms will each of us sign with the company?

One of the best examples of this is a non-compete agreement. Will each of the co-founders be signing some sort of contract with the company (outside of the shareholder agreement)? If so, what will the terms of this be?

  1. Will any of us be investing cash in the company? If so, how is this treated?

It is very likely that one or more co-founders will be putting in some cash in the early stages of the company. It is critical to decide up front how this cash will be treated. Is it debt? Is it convertible debt? Does it buy a different class of shares?

By solving these questions, one can be assured of having a good time in their startup business without any issues. Considering these issues will help co-founders concentrate more on the business rather than on the issues other than the business.

Questions need to be answered before entering into a startup business with co-founders
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