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.

Founder Conflict: Key Asset Ownership

This article is the seventeenth in the Startup Series on FirstPost’s Tech2 section and first appeared on June the 7th, 2017.

In this and the next couple of columns, I shall write about founder conflicts commonly encountered but not often easily resolved.

Some are foreseeable e.g. what happens to the equity of a co-founder who ups and leaves, and hence addressable, e.g. in the case of this example, through a shareholding rights agreement for which you ideally paid a lawyer, who helped you understand what you were agreeing to.

Some arise from human beings being human beings, ranging from unpredictable and flaky, to stubborn and demanding. These conflicts are harder to resolve because they require us to think creatively, to minimise immediate and future damage to the startup, and to stay focused despite all provocation.

One of the most common disagreements arises from the ownership of things that founders may bring to the potluck called the startup, and that really are essential business assets. The social media real estate is sometimes acquired before the company has been formed. Getting handles on platforms aside, this may mean one of the founders, who may not yet legally be in a contract with other founders, pays for the domain name or names. In the hubbub of early days, the domain name ownership transfer never happens and the founder, who paid for it, continues to own the domain name.

Should he? The short answer to that question is: No.

The domain name is an intangible asset of the business, among other IP. The renewal incurs a recurrent cost. If the person makes the expense out of his pocket, he can solidify his claim on the domain name. If the company reimburses him this expense, it is further unclear why he continues to hold on to the domain. This creates a fog for accounting and governance purposes.

As the business grows, in revenue and in value, the domain name will also grow in value. But hey, if you didn’t effect a clear transfer of ownership, it doesn’t belong to the company. How will it be accounted for in the books? At any rate the person owning the domain can hold you to ransom and play hardball at any time he likes. This is unlikely to end well.

Should the business wish to file a trademark on the name, the person holding the domain may be in violation of the trademark, assuming he lets you file trademark in the first place and doesn’t stake a claim. See comment about hardball above.

Should you attempt to raise growth capital at some stage, this will come up and raise a red flag as to the vigilance of the directors and founders. See comment about hardball again.

Transferring ownership is the ideal scenario. But let’s imagine, other founders agree that he can continue to own the domain.

The company may then want to consider signing an agreement with him to let the business use the domain name. Such a deal will have an agreed monetary consideration and will hopefully be for a clear but renewable term. Your shareholding rights agreement should allow for such a deal, and as cofounders, you should consider the governance and risk impact of such a deal on the future developments in the business. If you don’t, your investors, if vigilant, will point out what a bad idea laxity on this account has been!

While this sort of a deal remains a possibility, you may want to consider negotiating a one-time offer to buy the domain off him instead. If there is resistance, I would ask you to consider the possibility that the domain name ownership issue is just an indicator of other undesirable issues that may arise in the future.

As cofounders, you can apply this test of ownership to any other assets essential to the business that one of the cofounders brings to the table. It is worthwhile taking stock of “who brought what” at the time of forming the company and start with a clean slate where all assets are placed on the company’s books, with adequate compensation made as agreed.

Attracting talent

This article is the sixteenth in the Startup Series on FirstPost’s Tech2 section and first appeared on May the 25th, 2017.

Apart from having a strategic direction and enough money to execute on the vision, the key challenge for founders is talent. Based on my experience, I will go out on a limb and say this: talent is not scarce. No matter what we hear about the “war for talent”. What is scarce is the ability to know what talent you need, find that talent, and find that talent efficiently, quickly, and affordably. This is truer still of the earliest hires, who shape your vision and your startup’s culture.

Here are some pointers based on my experiences with helping founders find people for their teams.

Making a successful hiring decision requires a process: knowing whom you seek, where they hang out, whether they see and notice your call for talent or otherwise know of your need, whether your call for talent is attractive enough, whether they are interested enough to apply or reach out, whether your hiring process confirms a mutual fit, whether you agree terms and, finally, whether they are still interested and have not been poached by a better offer in the meanwhile. This step-by-step looks obvious when one lays it down in black and white. In reality, most founders founder when it comes to hiring because they are haphazard and their follow-up is poor. Avoiding disorganised thinking and the ensuing chaotic hiring process, which can repel many a good candidate, is therefore the first thing to aim for.

The second thing is to avoid obvious and easy answers. At every step.

Most founders look in one type of spaces e.g. online startup communities or mailing lists or Slack groups. These are also spaces where your target talent is most likely to see all the other competing possibilities. Avoid being so narrow and niche. The wiser thing to do would be to tap your IRL network too. Ask the people you know who are not connected to the startup space and you may unearth several new possible candidates. As a bonus, your contacts would also have vouched for you and your startup before those candidates agree to talk to you.

People have CVs and people have side projects. These side projects in many cases provide insight into a person’s thinking as well as their skills. The obvious mistake is to not probe these side projects and thus miss possibilities. In two instances that I have been involved with, the side projects pursued by potential hires showed how those hires were perfect for the company’s international expansion plans.

Falling back on unconscious biases is another obviously easy thing to do in hiring. And avoidable. It has been shown that women get hired on proof, while men get hired for potential. If you are not finding or reaching talent of the kind you want, it would be foolish to let your unconscious biases against an entire gender make your hiring outcomes worse. Unconscious bias training goes some way not the whole way in addressing these flaws in thinking although it would be advisable for your own personal growth as a leader and entrepreneur. Emerging hiring technology could give a helping hand too. For instance, Blendoor enables merit based matching by hiding irrelevant data and thus widening your candidate pool.

Google’s chaotic hiring process in the early years has now passed into tech industry legend. It is also something best avoided and not emulated. It is crucial that founders build a creative but robust hiring process that scales, including for collecting candidate data, made simpler by platforms such as Workable, and conducting telephonic and face-to-face interviews. Equally it is important to make references as systematic and methodical as interviews themselves. Not asking meaningful questions and failing to listen actively to what the referees say is unwise, although it is easy to do cursory checks and feel you are done.

Last but not the least, avoiding firing people who aren’t a great fit is not a great move. Especially early hires, who will shape your startup’s culture, have to enable your vision and not sabotage it. If they are being disruptive or otherwise do not fit the startup, the founder has to learn to let them go. There are laws of the land that will cover firing within and outside probation periods. Of course this assumes you have given people employment contracts! It is also useful to talk to people in “exit interviews” before they leave to understand what you might have contributed to the disagreements.

Hiring is a contact sport. Putting this advice into practice will take commitment to solving the talent puzzle for your own startup.

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.