Resolving Major Co-Founder Disputes

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In the first year or two of a company’s formation, it’s not unusual to have co-founders hit a wall in their relationship and have it become a point of division that if dragged out, ultimately leads to the company’s demise. Co-founders hitting a wall isn’t an uncommon occurrence; however, I believe many of these situations are not only preventable if addressed early enough, but also reversible if handled with grace and patience by everyone involved.

Going through the process of resolving a founder dispute isn’t as simple as reading a blog post — however, hopefully the below points will help you in thinking through what you could do, and help steer you in the right direction.

Diagnosis:

In my experience, the root of many co-founder disputes comes from the intersection of the required speed of execution that a startup demands, and its negative effect of displacing the pockets of time necessary to properly align expectations with colleagues. Early days it’s not unusual for people to pitch in and help across various functions, add to this a founder’s natural drive to achieve (you wouldn’t start a company if you didn’t have this), and you have the recipe for a decline in co-founder communication. This decline blurs what everyone is working on, to what tempo, and to what level of desirable quality/outcome.

Lastly, and as a point I want to address separately (because it tends to be most present in teams that were formed as part of an event), sometimes within this mix of issues, resides a mis-alignment of vision and risk tolerance (financially and reputationally) from the start. This kind of co-founder dispute is the hardest to resolve, and many times does lead to separation, because in effect, it isn’t due to a decline of an operating relationship, rather a misalignment of co-founders from the start.

Treatment:

For the sake of simplicity I will use two co-founders as an example, but this scales up to three and possibly four, beyond that, you likely need to rethink who is a co-founder and who isn’t as co-founding teams of four or more are inherently unstable due to the complexity of expectations from all involved.

Agree to Proceed: To resolve a co-founder dispute of any sort, regardless of the eventual outcome, you first have to agree you have a problem. That’s easier said than done. One of you will have to be persistent in raising this red-flag to be able to initiate any sort of serious conversation on the matter. In the words of a founder friend who recently went through this, “People need to be really fearless about driving for clarity, even if this can feel pushy at times, without it, you’re just adding more uncertainty to something that’s already uncertain.

Have a Resolution Mindset from the Start: Following the agreement of ‘we need to talk’’, both of you will need to reflect on (prior to engaging in any sort of conversation with anyone) whether you are willing to engage in the conversations with a positive attitude and willing to find a constructive outcome. This might seem like a trivial thing, but it isn’t. Make sure you don’t polarize the nature of the conversation early-on by throwing accusations at each other; this will be very tempting to do. There can be so many pent-up negative emotions and resentments leading up to this point that you have to actively remind yourself that not finding a solution to this outcome will negatively impact you as much as them and that the whole point of you working with them in the first place, was to solve a problem that was meaningful to you both.

To help yourself with this task, ask yourself the following questions:

  • “Am I sure we are in agreement on the larger context that led to the disagreement, or could it be that we aren’t clear?”
  • “Do I fully understand why they chose to take the actions they’ve taken?”
  • “Do I sense that it is super clear to them why the actions that led to this disagreement were taken?”
  • “What part have I played in getting us to this place in our relationship?”
  • “Is this really a trust violation or more a disappointment in my expectations of them?”
  • “Is it clear to both of us who is expecting to have the final say in the matter we are arguing about?”

If the source of the co-founder dispute is one that can be rectified, usually the above questions will start indicating to you that there is some ambiguity in the source and prioritization of the dispute rather than a categorical failure of trust.

For the removal of doubt however, if the reason why you are reading this is because your co-founder did something unethical, clearly no level of conflict resolution advice will overcome that. Seek professional legal counsel at that point to begin a proper bad-leaver process.

Delay Involving Others: Assuming you’ve made it this far, the next thing to keep in mind is that you should try and resolve co-founder disputes internally as much as possible. As well intended as external advisors and shareholders can be, it’s hard to find one that can truly not ‘take sides’, and baggage from this process can sometimes haunt you later. If you do get stuck in trying to resolve this, however, reach out to some’one’ you trust, because it is 100% better than going around in circles and making things worse. In an ideal world, you have one investor or shareholder you both trust who can help you, but choose carefully, because this person has to be able to balance everyone’s interests from that point onwards, and that’s not easy!

Remove Ambiguity: The source of many conflicts comes from not knowing who should be doing what, to what level of quality/outcome, and who has the final say on a matter. To help you both, have a conversation around this, and as a start, set aside at least two hours to go through your organization in parts (eg. product, fundraising, engineering, sales, etc). The more parts you each can outline, the better, because usually hidden within these identified (or unidentified) parts, is where the ambiguity stems from.

Once you’ve done that, apply the RASCI model to each of the organizational parts (if you are not familiar with RASCI, read about it here). In effect, what you will discuss by using the RASCI framework for each part, is who is the ‘boss’ for that part and who gets a say in that part. I suspect you will have many ‘aha’ moments as you go through this and realize hidden points of friction. Hopefully this will also give you the right clarity and direction to start addressing the issues by agreeing who should take what role for which organizational part and who should merely be consulted or provide support, for example.

Re-Establish Consistent Communications: With your roles and responsibilities clearly outlined, you’ll have to get into a constructive cadence of communication to make sure you are aligned in the way you agreed to align. If you skip this, you’ll simply find yourself back in this same situation, but with a whole new set of issues to deal with. Communication can take any format you want, whether it be a daily stand up, weekly progress report, or impromptu chats. Just make sure they happen, and it can also include communication with relevant external parties who might have been wondering what is going on or have a vested interest in your success.

Set a Time-line: Lastly, set a time-line for when you want to revisit the agreements on division of roles you came up with. Don’t think of it as a report-card moment, just think of it as a hygiene check. When you come up with a mutually-beneficial solution as per the “Remove Ambiguity” section above, the temptation will be to check-in everyday to see if the person is doing what they said they would do, but in life, change isn’t always easy to measure on a daily basis. It is best, therefore, to agree to a timeline that makes sense relative to the severity of the issue, then hold each other to account on that timeline.

Outcomes:

It will take time to really assess if the newly agreed plan will work. Make sure to keep to the interval of check-ins and take the review of desired outcome seriously, this is not the time to be ‘nice’ by caving-in/chickening-out if it’s not what you both expected, that will just lead to more resentment. If it goes well and resolves itself, this tribulation will cement your relationship even more deeply and become a pillar of strength in the future tests that will inevitably come your way.

However, if there is a failed outcome where it’s clear that you will have to ‘break up’ as a team, there are solutions, they’re just not ideal. All outcomes from a co-founder fallout are shit, and they don’t always play out the way they are outlined even on legal docs. Even the best case scenario involves the loss of a friend or relationship, and at the worst, a drawn out dispute over equity ownership with other shareholders getting involved.

That said, you have two mechanisms (depending on where you are in your company’s formation) to protect yourself from a departing co-founder:

Prior to company formation, rely on an agreed Founders Collaboration Agreement, so that there is clarity on what to do in case of something going wrong.

Post company formation or post financing events, rely on a reverse vesting schedule as a mechanism to deal with the unwinding of a co-founder’s equity position.

Keep in mind that even after a co-founder leaves, if they have a form of vesting, then they will continue to be a shareholder in your company. As such, it would be short-sighted to polarize the relationship so much that you permanently damage the relationship going forward.

In conclusion, it’s not uncommon for co-founders to get into arguments that can escalate into full-blown points of division. Usually these are rooted in a mismatch of expectations and a deterioration of communication links due to the pressure of having to ‘move fast’ in the early stages of a company’s life. The solution is therefore unsurprisingly rooted in the problem. Employing patience and grace to go through an analysis of perceived breaches of trust due to a lack of role and responsibility clarity, and then coming up with a solution and timeline to judge its effective resolution will help. Should things fail after an attempted intervention, then yes, ideally you will have adequate measures in place to unwind your relationship.