Founder conflict: disagreement on fund raising

This article is the nineteenth in the Startup Series on FirstPost’s Tech2 section and first appeared on July the 12th, 2017.

Is there such a thing as disagreement among founders on fund raising? Isn’t external fund raising seen as some kind of marker of validation for startups, one that sets them on the growth path like a rocket ship?

Yes, I know you are incredulous.

But it happens.

Founders can and do disagree on the idea of external fund raising, on the timing, on terms, on some combination of these.

First, the idea of external capital. In his research, Stanford’s Professor Noam Wasserman has found that most founders give up management control long before their companies have an IPO. The process of letting go of control to maximise financial gain, he found, is not easy. He asks: do you want to be “rich” (less control but maximum financial gain) or do you want to be “king” (all control but less than potential financial gain)? These two aims are often at odds with each other. It is important to understand and agree on the vision for the startup, but also on how each founder visualises the path to get there.

Can doing due diligence before agreeing to be cofounders help us with the dilemma in the future? May be.

How can you assess whether you are talking to a “rich” or a “king” type potential cofounder? Look at their past decisions! Even though past behaviour may not be a guarantee of future decisions or performance. How did they choose investors, employees, team mates? What kind of relationships have they built and with what kind of people? Did they make different decisions when they were in control versus when they were given an order?

Doing all this helps, but the revealed preference when push comes to shove may be quite different. That is where conflicts arise, and as conflicts go, this one is pretty fundamental to the direction a startup will take. The founder who wants to be “king” may not want external funding, which means the startup may have to rely on organic, often slower, growth. The founder who wants to be “rich” would want to get on with the job of raising capital, and will have to be the one to recognise signals that warn him or her of the challenges ahead.

Second, some founders may disagree on when to raise funds. Fund raising can take anywhere from 6 months to a year. Founders, who disagree on timing, may also not recognise that fund raising takes time and that the company may run out of money before they succeed at raising. This can be a challenge to the existence of the business. Founders need to start discussing and working on the fund raising much earlier than they think they will want the money.

Third, some founders may disagree on terms on which to accept money. Since no investor worth taking money from will fund an unincorporated company, this is something founders can and should have addressed at the time of forming the company.

The question of resolving disagreements amongst founders would have been addressed in a good shareholder rights agreement. Including the scenario, where there is an impasse or a deadlock on a material action such as fund raising. Remember how I have harped through this column series on about paying a competent lawyer? This is another reason why. A good lawyer would have had experience of conflict and conflict resolution between founders, and should have advised you on its probability.

If there is no shareholder rights agreement in place, then like much else, it is a matter of negotiation. That means the outcome cannot be predicted.

Finally, what if you come to the fund raise, and one of the founders wants out? Should the other founders try to talk him or her into staying, or should they let him or her go? This can be tricky. The founder, who wants out, may be tired, fed up, no longer interested. The feelings can be fleeting or they may have made up their mind. Find out which it is. Make a call on whether it is a distraction you can afford right now. Whatever it is, your shareholding rights agreement should have addressed this scenario. When someone wants to go, let them go. As long as the rest of you are on the same page, you have a finite chance of making something of your startup and your vision.

Founder Conflict: the troublesome star in the team

This article is the eighteenth in the Startup Series on FirstPost’s Tech2 section and first appeared on June the 19th, 2017.

Both business and sport celebrate stars. In sport, especially football, star performers are often traded for huge sums of money, without regard to the fact that football is a team sport. The history of player trading shows that too many “stars” fail, when placed in the context of another team than their last one that let them shine. Startups are a team sport too, and founder conflict can sometimes arise from one “star” disrupting the team.

In an earlier column, I had written about a founder and her challenges with the technology lead. She had given the tech lead co-founder status and given him a considerable chunk of equity. Much conflict later, she had to part ways with him. That did not come without a lot of legal trouble and negotiation. The delay in resolving the conflict also derailed some of her timelines.

Are stars, especially uncooperative, uncollaborative and egotistic ones, worth it in a startup founding team? And what happens when you, as a co-founder, find yourself wasting altogether too much time on resolving team conflict due to a disruptive “star”?

Such conflict, if repeated or persistent, obviously does not bode well for the long term future of the startup. It is therefore best addressed when it first arises because if it is not nipped in the bud, you might find yourself expending too much energy on non-value generating activities rather than on core business issues.

Most people however do not relish confrontation, leave alone interfering in conflict and resolving it. So how can one approach this unwitting role of being a “peacemaker”?

As a first step, give yourself some time out. Separate yourself from the situation and take time to think clearly about the long term and ask these questions: Who in the team has a good attitude about working long term in a rapidly changing environment; who brings their competence to the work; whose ego hampers their delivery even though they may be competent; who is likely to be a better ambassador for the company in its growth years some time down the line; whom can you see yourself speaking and working with everyday for the next foreseeable future. These are deceptively simple questions with meaningful answers that bring clarity. In exploring all this, do not just go with your rational mind e.g. thinking the “star” may be irreplaceable or very expensive to replace. Pay heed to your feelings and your gut feeling e.g. does the “star” make you uncomfortable enough to avoid him or her altogether?

Consider the implications of breaking a relationship now on not-very-friendly terms. Can it bring you or your startup reputational damage? Will the break hurt a friendship? Will it shut doors to potential customers and investors for you? How will you protect yourself and the startup from the fallout?

Further, calmly assess the complete cost – legal, time, money – of getting rid of the “star” or indeed people that are conflicting with the start. Does the person have equity? Did the person do a lot of sweat equity work? What legal protections did you put in place for the business? If the person is a shareholder, what is your written and/ or implicit agreement? If you have been reading this column series, you will know we have discussed these issues in various columns and the importance of thinking of these challenges right when forming the startup and creating founder agreements.

Assess also the cost of replacing the person or persons now or later in time. This cost should not just be monetary but also the cost of delays, lost motivation, the risk of others quitting because they cannot bear to work with the troublesome star. The non-monetary costs are not quantifiable but could make or break your startup.

Last but not the least, remind yourself why you are creating the startup. I have often helped concerned founders visualise the possibility of a shattered vision if the bad situation persists. It is remarkably effective in spurring them out of paralysis and into effective and immediate action.

Once you have built a clear picture of the present and the future — with or without the “star” — you will be able to make a decision that is justifiable, fair, and, above all, taken in the best interest of the business and not just to pander to egos at war.

Early employees and the art of equity distribution

This article is the fifteenth in the Startup Series on FirstPost’s Tech2 section and first appeared on May the 10th, 2017.

As a professional and an advisor, I have been on both the founder’s and the early employee’s sides of the question of equity for early employees.

In an early stage venture, equity is an idea, and equity distribution an art rather than a hard science, regardless of how much algorithmic formula type advice you find floating on the web or from well-meaning people. At an early stage, both founders and early employees are driven by the vision and the possible value creation from realising that vision. Both sides need preparation and clarity on their best number, their best alternative to a negotiated agreement (BATNA), and their respective exit strategies.

This column draws upon the several startup situations I have been or advised in and covers some essential considerations in such a discussion.

For her part, the founder sets aside a pool of X percent equity, from which early and later-but-crucial employees, and members of advisory board etc., will receive shares. Some of this X is designed to be given away as restricted stock, which is “granted” or “given”, and other as stock options, which must “vest”. The founder should have at least a rough plan for using this pool, with clear ideas on how the cliff, vesting, clawback etc may work. If she is unable to find how other startups are thinking about this, she may be able to get advice from an experienced startup lawyer, whose role in a startup has been discussed in earlier columns in this series. I have experienced at least one situation where creating the pool was an afterthought and created avoidable friction among the co-founders.

Often early employees are advised by well-meaning mentors to demand a percent of equity and not budge. Equally, founders are advised to make a fixed offer and stick to it. Both of these are poor advice. Not only is the making and the accepting of the offer a very personal decision for both sides where formulaic approaches may not work, but negotiation is also normal and an inflexible attitude does not help the situation.

Both stock grant and stock options have different implications for the recipient’s personal taxation and wealth generative situation as well as his “tie-in” to the company. Both may have a cliff, and a lock-in period or vesting schedule. The lock-in is where the founder’s and the early employee’s interests may diverge. The founder wouldn’t want a valuable employee to quit as soon as his options vest, for instance. The potential employee may rightly want to maximise his professional and wealth generative opportunities. The founder should be clear about communicating the terms of such grant or options. The potential employee will have to determine for himself whether the schedule and the lock-in are in line with his vision of his career and life.

It is worthwhile for founders to be transparent about exit avenues being envisioned or developed for the startup, and for early employees to understand those possibilities. In very early stage startups, this can be a fuzzy discussion. But it can be made better by discussing what the company is already doing, what the trajectories are, and what outcomes are feasible. This would enable the potential employee to make up his own mind about whether the offer is appealing enough for the associated risks of accepting a pay cut and the uncertainties that come with a startup.

Who drives the process? Here is some advice specifically for the potential employee. Unless you are an absolutely crucial hire, the founder will get distracted if the negotiation carries on too long. In a start-up, there are always more important things to do than discussing your specific situation ad nauseam, so you have to be the one driving the process. It would be wise to agree on a date to close an agreement. This is just a practical pointer. Sometimes we can get so hung up on the maths that we forget to have the actual conversation.

Finally, if things do not work out, it is worth remembering that walking away is a valid option for both the founder and the potential employee.

Leaving on good terms may earn the startup a friend and there may be a chance to engage again sometime in the future.

Losing and finding your mojo as a founder

This article is the fourteenth in the Startup Series on FirstPost’s Tech2 section and first appeared on April the 21st, 2017.

The journey of a founder can be exhausting. Those in solid founder teams too don’t just have a collective experience; they also have their own, personal experiences of the founding journey. It is not always easy to be in sync with others on the team, or their level of focus or motivation. Decisions are not always easy to make or consensual. Role cleavage is not simple or trivial, and yet without it, things may start to slow down. Given all this, it shouldn’t surprise us to know that founders often lose their mojo.

An entrepreneur I advise has had several such phases through the years. Helping him work through them has been a lesson in human resilience and the purposiveness that drives founders. Crucially, he has come out of each such phase with renewed vigour and focus. That should give hope to other founders in the same situation.

Building a venture is hard work but also strangely exhilarating. Even the tiredness is satisfying because you know you are building your dream and you cannot wait for the morning to come so another day could dawn and you get on with it. Intrinsically rewarding activities can be quite motivating for founders and others.

But what when you start finding all that work fills you with negative feelings instead of the exhilaration you expect? It is time to ask tough questions, to answer them honestly and to take appropriate action.

One of the more business-related, less soul-searching type, questions to ask is about founder-product or founder-market fit, which is more crucial than product-market fit to the success of a startup, especially for first time founders. This fit could come from the founder’s or founders’ core values, or their commitment to a cause, or their deep interest in the product category. Is it a lack of this fit that is dragging on you? If so, what can you do to change that?

It is also worth thinking about the specific things about your work that take the wind out of your sails and the things that energise you. The founder I mentioned earlier found the CEO responsibilities difficult to balance with the creative aspect of the work he wanted to do. There were also other activities that needed developing and executing but neither did he enjoy doing those nor were they the best use of his time or skills. With some introspection, he identified the need to expand his team to bring in skills that he did not have, and the skills that could be hired in and scaled without needing him to be involved in managing. He also realised he had to get really good at planning and time management so he could fulfill both the roles he wanted to.

Crucially, it is worth delving deeper. If the venture does not really excite you as much as you anticipated at the very beginning, why are you still here, working your socks off? Is it your ego at work? Do you feel beholden to commitments made to others? Do you fear failure? Is it a sense of deontology at work? Are you indulging in sunk cost fallacy? Something else? The founder I mentioned earlier has an overarching commitment to practising and defending certain values with vigour. When he has bad days, we talk over the issues separating the operational niggles from the strategic challenges. The exercise helps him not be overwhelmed and instead focus back with renewed vigour on what matters most to him and the startup.

Last but not the least, building a startup venture is like any long term relationship. There will be good days and there will be bad days. Good days are easy, uplifting, energising. However if you cannot hack the bad days, the relationship will feel toxic and draining. But if the bad days are too numerous and frequent, and overwhelm the good days, it may be advisable to consider quitting altogether.

What happens next?

Most people who quit a really bad relationship don’t “fall in love again” without a shed load of hard work either by themselves or in therapy. Founders who quit because the bad overwhelms the good may need some time with themselves to understand how to avoid the same fate the next time around. Knowing what sort of person you are is a good and essential first step.

Leadership and the importance of changing one’s mind

Martin McGuinness, former deputy first minister of Northern Ireland and also former IRA commander, died today. I was shocked to learn he was only 66. Shocked because I have known his name since I was a child growing up in India, and had always thought he was much older.

But he wasn’t. In that short life, McGuinness, as many obituaries are reminding us, went from being “the butcher of Bogside” to “brave statesman”. In other words, he changed his approach to finding an acceptable settlement and peace. And he did it in the glare of the public eye.

Changing one’s mind, one’s opinion, one’s approach is an important trait for good leaders. It shows their ability to take on board new information as well as their ability to admit mistakes and course-correct. Not only are these traits indicators of an open mind, they also enable people around the leader to speak truth to power, for the consequences of silence can be many and unwelcome.

Yet we — the press, the analysts writing about companies, the electorate — find it difficult to forgive anyone, especially a politician, who changes his or her mind on an issue.

Not changing one’s mind is seen as a virtue, immortalised by Mrs Thatcher’s punny soundbite “You turn if you want to; the lady is not for turning”, before Mr Blair even tried his hand on the politics of soundbites.

Even the liberal press finds it hard to resist the chance to take a dig when it discusses a change in the direction of travel, a “u-turn“. See, for instance, the Guardian insist Philip Hammond digs in on his u-turn on national insurance for the self-employed.

This bald criticism creates pressure on leaders to be perfect, in-control, and always-right. It is unfair and wrong. And sad, because it demonstrates the rigidity of the electorate and the press pundits, who expect a leader to remain rigid, regardless of circumstances and possible outcomes of the original course.

An open mind is not cynical; an open mind is sceptical, inquiring and searching.

An open-minded voter or commentator does not distrust a change in stance as a knee-jerk reaction. What s/he does or must do is question the reason for the change, without sarcasm or without expecting an abject apology.

Is the change really just political expediency?

Is the change informed by new information?

Is the change driven by a new understanding of historicity, and how one might have been on the wrong side of history due to any number of reasons?

These questions hold good in both hierarchical societies as well as those who see themselves as more egalitarian.

Further, we need to remember that hindsight really is 20/20, and our understanding and memory of history both short and imperfect.

A friend and I were once discussing the leadership of Nelson Mandela. He is often cited in the same breath as Gandhi, who too had his flaws but steadfastly refused to support or choose violence. Mandela however categorically refused to denounce violence as a weapon in the pursuit of his cause. At the time the UK government under Mrs Thatcher was fighting another nationalist cause, which used terrorism and violence as its tools, namely the IRA. The policy of branding both the IRA and Mandela/ ANC terrorists was consistent with the thinking at the time.

As the President of South Africa, Mandela has been on record speaking in favour of luminaries, such as Colonel Gaddafi , the common cause being Africa and their shared identity as Africans. General Suharto was another one accorded high state honours by Mandela while he was a serving President.

Yet over time, the former “terrorist” Mandela came to be hailed as a hero. This shift took more than just one change of heart or mind.

In the United States, the Democrat Bill Clinton, the “first black president of the United States” did nothing to remove Mandela from the US Terrorism Watch list, while the Republican President George Bush signed a bill to change that in 2008. In the United Kingdom, where then-PM, David Cameron, who had once worked under the Thatcher government as a young whippersnapper, publicly noted in 2006 that the Thatcherite policy to brand the anti-apartheid movement terrorist was wrong. Predictably, the latter lead to many wondering aloud if Cameron was a Conservative at all — making one wonder if an extreme form of white supremacism is an essential quality to one being a Conservative in the UK!

But here is the rub. Post Robben Island, in his writings and speeches, Mandela was brutally honest in admitting his errors of judgment, mistakes, and shortcomings.

In other words, Mandela changed his mind too.

As leadership — and indeed, statesmanship — go, there are lessons in here for us all.

Especially in these times, when it is increasingly in vogue to dig in and refuse to consider the damage hard, inflexible stances can do.

Preferably before it is too late.