Committing Your Co-Founders
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When you’ve found your co-founder, how do you make sure you’re both in it for the long haul?
There are so many scenarios that can play out in this, but sometimes you only find out the true nature of your co-founder when the going gets tough.
I’ve mentioned in the last couple of posts about the need to get to know your co-founders on deep levels, but even with that done you might still hit a situation where your co-founder lets you down or comes up short.
I’ve seen so many scenarios that justify taking this very seriously. It’s one of those things where planning and considering it in advance can save you a lot of time, money and heartache if things don’t go as hoped.
It’s hard to remove a co-founder, but you ought to have an early chat as a founding team to lock in some rules and conditions that give you both security for the future.
This is where tools like earn-ins can make a lot of sense.
Most often, when a company is started you will divvy up and split the equity between you based on what seems fair and meritocratic. If you’re equal founders then you might go 50/50, if one of you is putting in slightly more cash, or time, or assets then you might make it 60/40 in favour of one or the other. You might have some other folks helping you out, or early team members, and you want to reward them, which could make it a 40/40/20 split. There are a million different ways this could go.
But you might do something a little more based on proving your worth. An earn-in is an allocation of shares which are unissued but are agreed to be issued based on you doing certain things.
What this means is that you get the shares, but only if you do the work.
Rather than the 50/50 terms from before, it’s easier to explain this with a number of shares. If you register the company with 1,000 shares, then you and your co-founder might decide you take 500 each.
With an earn-in, these shares are allocated but you don’t have them issued to you unless you hit key agreed milestones, for example they might be simple things like still being at the business after 12 months, or 36 months, through to delivering the product, securing your first customers, or hitting turnover targets.
Earn-ins seem logical, but most companies are started much quicker than this so you might not have the foresight or legal support to implement something like this.
This is the main lesson if you’re pre-launch or an early stage founder, try to leave a little bit of time to have these conversations and not rush into something that might be hard to wriggle back out of.
Earn-ins can also imply an element of mistrust between you and co-founders, which might make each other feel like the partnership is getting off on the wrong foot, but equally should be view as being a way to keep everyone honest, so one party shouldn’t be at an unfair advantage.
If you don’t want anything as complicated as earn-ins then you at least need to have some kind of good leaver and bad leaver policies.
I’ve known so many businesses where one of the co-founders hasn’t pulled their weight, or an equity holder has been super supportive at the start and then dwindles off.
In one scenario the co-founder was painting the picture of being busy and productive but it was only after they went AWOL that the others realised how little they had been doing — people hadn’t been paid and legal commitments hadn’t been completed.
But even after they had left, they still held equity, and just as much as the other founder who was carrying the can and trying to tidy up the mess they had left behind.
Even as a founder you can still be fired, and you could fire your co-founder if things aren’t going well.
Bad leaver policies can give you protection, so if a co-founder doesn’t do their job, or stick at it, then they forfeit their equity.
Defining what a good leaver is might be harder than judging a bad leaver, but you might use some specific things as examples of what makes them a bad leaver, like if they leave early or don’t do what they’re committed to — similar to earn-ins but in reverse.
It might also give you each a way to get out when the time is right while still retaining some value that you have earned in the way of your shareholding.
That might be a clause that says you can keep 10% but the directors have the right to buy the rest of your shares back at a reduced rate per share, regardless of the value of the company.
These things shouldn’t be treated as an insurance policy for your company, but more of a way to keep everyone honest and incentivise behaving in the long-term interests of the company.
Of course if a key co-founder leaves then the company might be worth nothing anyway, so by walking away they sacrifice their value, but there should still be an opportunity for you to make it right, and that the bad leaver then doesn’t benefit in the long term.
One final point on this is that you don’t want any equity sitting with zombies. Those folks who sit on your cap table* and stand to benefit if you ever sell the company.
Equity is expensive, in that you can only give it away once. Be mindful of who you give any ownership of your business to, and only do so if you feel they’ve really earned it or can continue to provide support and create value down the line.
You don’t want to look back in ten years at the 5% equity holder of your business who hasn’t spoken to you for eight years but who you’ve now made very well off, when others in your team who haven’t done the work have no stake.
This is the final point for this section but not one I’m going to go into great detail on just now. Think about how much ownership you want the team you build to have. They’re the ones who are creating the value, so how do you reward them and incentivise them to stay loyal and reap the rewards?
*A cap table is a spreadsheet that explains who owns how much of a business, what round they came in on, and can be used to forecast future ownership scenarios.
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