Having a co-founder is, like everything else a mixed blessing of benefits and disadvantages. I think it’s time to enumerate them so that you have a little guide to decide if you should actively pursue having a co-founder or not, and if you do what kind of qualities to look for and which to avoid.
If you feel I should add more items or flesh them out (or if there are mistakes in here) mail me: email@example.com or pm me via twitter: http://twitter.com/jmattheij
Many thanks to icey, wheels, daeken, rojisan, brownies, aristid, ismarc and the others that helped to improve this by commenting on it and proofreading it.
I’ve tried to spice this document up with some of my experiences with co-founders in the past, not all of those have been positive, and I’ve left out the names of the guilty to avoid hurting peoples’ reputations.
Before we get to the lists of pros and cons, first some generic stuff.
Ideally, if you are a single founder now and you are thinking of adding another founder try to find someone that is complimentary to you. There is a school of thought that says that all founders of tech company should be technology people. That is not 100% in agreement with how I feel, but I do believe that founders should have a strong background in something useful to the company as well as a genuine passion for whatever it is that the company produces. So if the company is a technology company all partners should have a fairly solid background in technology.
The better mix usually is one partner having a very strong technical background and a lesser one in commerce, the other partner having a very strong business background and a lesser one for technology.
The main reason for that is that I think that both these aspects are ‘callings’, you can’t be equally good in business as you are in technology if you want to master either one of those to the degree of perfection required to successfully run a business. It also helps to determine ‘what to do’ in case you disagree, the partner with the most experience in the field gets to call the shots - for that field, but lively and frank discussion is encouraged.
This makes it harder to evaluate a prospective co-founder because you normally speaking are good at evaluating people that have the same skill set as you do, not one that is outside your normal expertise. Be prepared to spend a lot of time on this, and maybe read a book or two before either accepting someone or writing them off. If you are going to go for a co-founder that has skills comparable to yours then be prepared to sooner or later hire someone that brings the missing bits, or to bringing on-board more than one co-founder.
If you decide to go for more than two co-founders you will need to make 100% sure that the others are all equally happy about doing this, the number of possibilities for personality clashes increases very fast with more than two co-founders.
If you should decide to ‘go for it’ and find a co-founder for your start-up, as with any other marriage, you don’t jump in to bed with the first person that walks in to the bar. You are under no obligation whatsoever to partner with anybody, no matter what their qualifications, feel free to say ‘no’.
You and your prospective co-founders should write down what it is that you are going to contribute to the company in terms of commitment to work, if applicable funds, experience and what it is that you want to achieve together. It doesn’t need to be a book, a single sheet of paper will do. This will do wonders to help select the right people (and to disqualify the wrong ones). It will also be helpful to have these around for future reference, they’re an informal contract that can help guide the company if tempers should flare or if people are not standing by their initial commitment. It also is good to get an idea of what people think of in terms of a successful exit if that is the goal of your company, or the kind of vision they have for the company a ways down the road.
Writing this down is not just a thing that you do and forget about, it will actually change you, you tend to put things in to words a lot clearer when you write them down for public consumption as contrasted with just having it in your head.
Take your time, vet your co-founder as thoroughly as you possibly can, make sure you get to know them very well before inking the deal. A lot of misery can result from making the decision to partner with the wrong people, and it is a lot harder to get out than to get in (see below).
Lots of people think that that one aspect, the fact that the wrong co-founder can sink your business, outweighs all the others. Currently I’m in a 50⁄50 partnership in one company and ‘single’ in two others, for me it depends on the kind of project I’m involved in (the amount of work and the required expertise) and in what potential co-founders bring to the table.
What matters to you is only known to you, I would suggest to start with making a list of what a co-founders desired qualities should be, that way you can save yourself a lot of time when you meet people that you consider to be potential co-founder material.
Plan on spending some quality time with your local ‘legal business eagle’, you will need at a minimum a share holders agreement with a bunch of stipulations in it that govern you and your co-founders relationship and you’ll need to (probably) update your articles of incorporation. What is in those documents is totally un-important. That is, until the shit hits the fan and then every comma and every full stop will matter a great deal, as much for what’s in it as for what is not in it. Don’t economize on this element, get it done as good as your budget will allow.
Co-founders are not a silver bullet, just like any other element in running a company having co-founders has advantages and disadvantages, and you need to carefully weigh these in order to make the right decision, the only ‘bad deals’ are the ones that have signatures under them, but don’t let that stop you from signing up an excellent co-founder if the opportunity should arise.
Not everybody is co-founder material, and not everybody should have co-founders. It’s like in sports, where there are people that function well in teams and there are those that are loners, if you are not a person that works well in a team then probably co-founders are not for you, if on the other hand you like working together with other people and achieving things that are not just credited to you then you might go to heights that you had not imagined previously.
The right mindset for a co-founder is hard to describe but I’ll try to put it in one sentence: A good co-founder is someone that wants to work to make money together, not off each other.
If that is not your attitude, or the attitude of your prospective co-founder then you’re better off running along by yourself.
If you decide not to go for co-founders, consider the possible alternative that many single founder entrepreneurs have chosen as a way to mitigate many of the downsides of having a co-founder while still having some of the upsides: salaried employees. Of course that has a whole pile of pros and cons all by itself.
So, with that out of the way, on to the lists:
The Pros of having co-founders
- Co-founders bring more brains to the table Instead of just your own brain you now have two or possibly even more of those wonderful devices at your disposal (and so do they), this in theory increases the amount of experience, knowledge and brain cycles available to help solve the issues that your company faces. If your co-founders are as smart and capable (or even more so!) as you are then that alone should count as a gain, but chances are that they are not only that but in different directions, and that's where the real advantage lies. One of the co-founders I worked with, Michael is a very smart cookie and he helped to steer our company in a direction that I would have never picked if I had been a 'loner', he made the case for giving away the software that we were selling quite eloquently and we made out pretty good on transforming from a license based business to a more service oriented model. To help with the transition we put a few usage restrictions on the free software and sold to the companies that wanted to use it for different purposes. This allowed us to have our cake (a huge audience for the free product and the bandwidth and server capacity to make it happen) and eat it too (a solid revenue stream from the sales of the 'commercial' licenses).
- Co-founders will tell you the truths that no one else will tell you When you are working on your projects on your own it is very easy to walk down some dead end street for a long time, or to simply be doing the wrong thing. For outsiders it can be very hard to 'bring the bad news', simply because they don't have a stake in it and it's your folly after all. Customers can tell you about your product - to some extent - but are not much use when it comes to strategy or dealing with adversity. A co-founder however, has a stake in the company, you and your co-founder(s) sink or swim together, if a co-founder has the feeling that you're on the wrong track with something then you will be more likely to listen (ideally speaking) because you realize they are not saying that to make you feel bad or to hurt your business. Your fate and theirs are intertwined so that means that your goals in so far as the business is concerned are mostly aligned. The simple fact that co-founders can and will disagree with you gives room for plenty of opportunities to learn on both sides and for the company to benefit from the joint experience of all founders. Unless the disagreements become too strong (see 'cons'). One of the co-founders of TrueTech, one with only a very small stake in the company saw trouble ahead with one one of the other partners, a person that I thought would work out well. We discussed it back and forth for a while and little by little I came to lean more and more towards their point of view. I decided to confront the other partner with this so that I could justify going forward with a clear conscience, much to my surprise the whole thing crashed down on the spot with him storming off with screeching tires never to be seen again. Sometimes you can be totally blind to something right under your nose and having co-founders that are not afraid to tell you the truth can help tremendously.
- Co-founders bring more man power Which translates roughly in to the more hands you've got the more work your company can do in the same amount of time. Some work can not be sped up by throwing people at it (having a baby for instance), but a large majority of the work that goes in to running a company can be done more quickly if there are more (well organized) people working on it. Some work even has a linear effect on the growth of your business (for instance, if you are selling software to mid sized businesses, having two sales people instead of one should automatically double your turn over, assuming the market is not saturated and the sales people are not fishing in each others ponds) so it can make good sense to have someone on board that has expertise in this direction. While I was working alone as a contractor there were plenty of times when I wished I could 'clone' myself so that I could work harder than I already did. Having co-founders made it possible to tackle jobs and projects of a scale that I would not have been able to do myself in the same time. For some of the projects we did that wasn't too important, but there were quite a few where simply the fact that we could turn stuff around quickly made a huge difference in our competitive situation. Company 'X' would roll out a feature on Monday morning, by Thursday we'd have an equivalent up and running, so playing 'catch-up' or leap-frogging the competition is definitely easier when you are with multiple people.
- Co-founders can stand in for you Co-founders can go places and do things in a physically different location than the one where you currently reside. This has all kinds of practical benefits, co-founders can be sent out as emissaries of the company to multiply your presence in the physical world. They can give interviews, visit customers, approach prospects and do all kinds of business development activities in parallel to yours effectively they're like having a body-double, and that in turn should lead to more exposure, more leads, more deals. If your company is mostly web oriented then this translates in to more online presence and the ability to serve more customers. It also means that occasionally you get to take a day off to spend time with family and friends, recover from illness and a whole pile of other things that can be very hard when you are a single founder. A co-founder is like having a co-pilot, if you are looking the other way you know that your back is covered, and of course that also goes the other way around. For a long time while growing the company it was 'all hands on deck', but once things quieted down a bit I felt ok with taking it easy every now and then, kicking back a notch or two in the knowledge that the phones were manned and the customers were kept satisfied even if I wasn't there, conversely the partners in the company knew that if they needed to rely on me for some reason or other that I'd be there. This helped a lot in dealing with the day-to-day stress of a fast growing company (1 to 15 employees in a years time, offices on two continents).
- Co-founders have different (life) experience The fact that co-founder(s) as a rule have not led the exact same life that you did means they bring different experience to the table, a complimentary kind of experience, one that does not conflict with yours, but hopefully contrasts. One person working by themselves usually ends up in a virtual echo chamber, with little interaction with others that could change the dynamic. Some people think that just having a rubber duck on your desk is enough companion, but during a brain storm session the duck would be terribly quiet and it is also not very good at giving a second opinion or playing the devils advocate. For those roles a live human being is much preferred, for 'cognitive dissonance' you may rely on the duck. One of the partners in TrueTech, a guy called Bob had been a fund manager for Shell in the Netherlands. He brought a lot of experience with him in terms of how large companies look at the world, something that none of the others ever had dealt with. This helped tremendously when looking for funding and deals with larger corporations (Microsoft, AOL, Yahoo!, Phillips, Logitech and so on). He could see much further down the road to what it was that we should be doing in order to be a better partner to these giants.
- Co-founders have different skills Typically co-founders that work really well together when growing a company are not cut from the same cloth experience wise, neither do they have the same professional background. If one is a keyboard whiz it wouldn't be bad to have the other be a sales and marketing type of person or something that more in the line of business development. Like that, between the two of you with a lot of discussion and learning back and forth you can achieve things that neither of you could do alone. The sum should be significantly larger than the parts. One of our minor partners had experience as an accountant and as a bookkeeper. That's something that none of the younger techies and designers had any interest in or ambition to learn. But administrative skills are very important to have and I'm fairly sure that we would have gone under several times if not for having this particular skill on board with someone that we could trust.
- Co-founders are real people Unless you are a hermit by nature, the fact that a co-founder is a real person will help to mitigate the crises that you invariably face because you can share the burden, and it will help magnify the joy of success. That rubber duck mentioned elsewhere or your online buddies will not be able to share in the success of something that you both created in the same way. I clearly remember the day when Bob scored the MSN deal, which basically meant that there would be a segment of the MSN portal dedicated to live webcams, and that all that traffic would come to us. There was a ton of work done behind the scenes by Michael, Bianca and myself to be able to deal with the expected influx of traffic, Jonathan had made a landing page that was really nice. It felt really great to have a team like that firing on all pistons and landing the one of the largest fishes in the portal business at the time and delivering on time. It also marked the beginning of a period of lots of big partnership deals.
The Cons of having co-founders
- Co-founders can be a liability Ideally a co-founder has the same level of standards when it comes to ethics and making business decisions as you do, they won't [normally, tx wccrawford] take risks that can affect the company in a negative way and they'll do everything they can to stay on the right side of the law. That's problematic if it turns out after the deal is inked that your co-founder is not like you in this respect. One of my co-founders in a company called TrueTech disappeared for a week all of a sudden, it turned out he'd gotten himself arrested by the dutch police for hacking parking meters. Not good. It got worse, I was advised not to leave the country but that we probably were in the clear, and the business would not be raided. It all ended reasonably good (for me, that is, he got a deferred sentencing) but that was pretty scary. Other possibilities are your co-founder making debts, going to the casino with the company credit card or the contents of the checking account, disappearing to Upper Volta, developing a $200 per day drug habit or bi-weekly drinking binges with 72 hour recovery periods. Vetting your co-founder thoroughly before you take them on board and spelling things out just in case they're not clear can help a lot with stuff like this. Make sure that you're on the same page when it comes to dealing with the law, to avoid surprise wake-up calls like that. And lay out the consequences for any transgressions beforehand. Vesting cliffs and corporate form may help with this as well but they come with their own sets of trade-offs.
- Co-founders complicate things Having one or more co-founders makes running your business more complicated. Instead of just doing stuff the way you want it you are now looking to build consensus and you're trying to extract the good parts from every-bodies view on things and to suppress the bad parts. This can be quite a headache, the more opinionated people are and the more their views on subjects diverge the harder this can get. On the other hand, if all parties are on the ball great stuff can come out of this. Co-founders also complicate any exit, and it can create fiduciary responsibilities between the various share holders and officers of the company, which if you don't take them serious can result in nasty stuff down the line (minority shareholder lawsuits for instance). These complications can cost a lot of time, money and energy.
- Co-founders have equity The clear disadvantage of that is that whatever the take is, it now has to be split. This can add up, especially if you have more than two co-founders, it's a big difference if you take a 100K business, subtract your operating costs and you yourself have to live off the remainder or if that remainder has to be split two, three or even four ways. And if you thought that that problem is only there because the amount is so small wait until there is a million or more at stake. People tend - not everybody, but on average they seem to do this - to overestimate their contribution to the company, and invariably there will be one (or more) that see the rest as luggage to be carried along on their capable backs. This is also an endless source of trouble.
- Co-founders may disagree on important stuff, such as an exit strategy This can cause real trouble, if the co-founder is important enough to the company that may mean that they can block your planned exit. Maybe they think they ought to get more out of it, maybe they want to remain small. As many co-founders as there are as many opinions on things like this you'll have to deal with and that can be a real problem. When we got a buy-out offer of 5M I was all for a sale, but because the shares were distributed unevenly the rest of the co-founders wanted to go for more, and in the end lost their chance at an exit on their terms all-together. They got very close to getting an exit done for double that amount but when that fell through the window of opportunity had closed (the dot com crash was in full swing) and any other option was for substantially less than the original offer. This left a lot of people feeling very bad.
- It's easy to get in, very hard to get out It's very easy (almost ridiculously easy) to get a co-founder on board of your company, all it takes is a transfer of a couple of shares, a visit to a lawyers office or a notary public and you are now 'in business' together. The reverse is very, no make that extremely hard to effect. You can't just repossess a bunch of stock because someone turns out to be less good than you (or they, or you both) believed they were. Once someone has stock, normally speaking that stock is theirs to keep until a large number of conditions are met (or until they die, which might suggest alternative solutions to problems like these and no doubt plenty of people have contemplated such solutions but I would strongly advise against it, it isn't worth it). Dissolving a partnership can be done in several ways (without it automatically resulting in the dissolution of the company), for instance: - one of the partners can agree to be bought out by the others - a third party can agree to buy out one or more of the partners - the company can go 'dormant' (effectively that's the same as dissolution but you will still need to file taxes and maintain some other records) - one of the partners could sue the other and might confiscate the shares the other party has or force a buy-out at some (independent) valuation - one of the partners can become a 'silent partner', in other words they won't show up on meetings they won't interfere with the running of the company they have the status of a partner that is there just for the profits to be divided and a stake in a possible exit (which they can block if their share in the company is large enough). The exact possibilities are usually governed by the corporate documents, and that's one reason why you want to make sure those documents don't contain clauses that might come back to bite you later. We had a German partner that tried to pull a leveraging trick to use a small number of shares as a reason for a lawsuit to be compensated with a larger number of shares. It would have worked too if not for a very savvy German lawyer and some friends with more business experience than I had at the time.
- Co-Founders have a life too While initially that might seem to be an advantage, it may not always be so. For instance, the shares in your joint company might become a bone of contention between your co-founder and their spouse during divorce proceedings. Effectively this would mean that instead of with your co-founder you might end up with your co-founders ex-wife/ex-husband as a major shareholder in your company. This can lead to a large amount of trouble, and it is usually wise to make sure that the shares in your joint company are held in such a way that this is not a possible scenario. If you don't anticipate that and deal with it before it becomes an issue you might find that any exit strategy you had has just evaporated without so much as a bit that you can do about it. Co-founders can go from single, motivated young can-do types to hen-pecked go-home-at-5 in a hurry, if you're all single when you start your company make sure you discuss what will happen if one of you decides to have a spouse and have children because the impact could be significant. Just as co-founders have a life, they might also one day no longer have one, they might drive in to tram #9 on the way to work or die in their sleep. In that case you might find all of your co-founders heirs as your shareholders, and on top of that your co-founder will no longer be around to pull his weight. One more of those things you should think about beforehand and which the corporate documentation and shareholders agreement (and possibly the will of your co-founder (and yours!)) can mitigate to some extent. One of our co-founders was doing great until he got a girlfriend, and suddenly turned from go-getter to clockwatcher overnight. It also didn't help that his s.o. only saw his salary as the pay-off and never the value in the equity.
- Co-founders may disagree violently on important issues And normally speaking, that's a good thing too. But when the disagreements go over and beyond a normal working relationship it might lead to you or your co-founder walking out. This is a difficult situation in the best of times, and without a very capable mediator can get very messy, especially if the stakes are high. What starts out as a disagreement about the corporate direction could easily result in a corporate funeral or a forced sale. After finding that an exit at a valuation that would leave enough on the table to make everybody happy was no longer in the cards I sold my house and used the proceeds to buy out the other partners. (I've written about that before). This was because the disagreements about any new direction and the feelings that persisted after the failed exit attempts had gotten to the point that they were poisoning the atmosphere. The solution (to buy everybody out) was a difficult one for me because I ended up wiping out 10 years of savings in order to end up with a company that I had to run all by myself again (with some help from my spouse), but I'm still pretty happy that I did it that way. It solved a lot of issues that would have been very hard to solve in a nice way otherwise, nobody left with empty hands.
- Co-founders have standards of their own A co-founder that you bring on board may not do a job as perfect or in the exact same way as you would do it. How you deal with that can make a huge difference on the well-being of the company in the longer term. Some people turn in to control freaks, others learn to relax and mentor. If you can't live with other people making mistakes that you all end up picking up the pieces for then life with co-founders can be hell. That doesn't mean that sometimes you won't be picking up the pieces after all though. One of the co-founders I worked with had a Japanese holiday planned, and delivered a large chunk of code the night before the flight out was due. This would have been fine if the project had been tested properly, but it turned out it wasn't. We spent a couple of months to fix the trouble and to try to retain the customer for the company. To some extent that worked, fortunately, but leaving the rest of us to hold the bag was something that really didn't help the relationship.
In closing, I personally think that the advantages of having co-founders weigh up against the disadvantages, the net benefits that I’ve had over the years from having the co-founders that I did have been tremendous and even today I’m still in a better position than were I would have been had I decided to ‘go it alone’. It would have saved me some gray hair, a bunch of sleepless nights and at least one lawsuit but I also would have never ended up where I am today. (not that that’s so fantastic, but it could have been a lot worse :) ).