CEO Shoptalk: The Escape Hatch, The Startup Pre-Nup

When a founder is giving birth to their new baby, he or she is filled to overflowing with the giddy excitement of creating life. Sure, they may create Corporate Bylaws, Articles of Incorporation, a Shareholder Agreement, or even an Operating Agreement — really good companies have Employment Agreements which subsume job descriptions with each of the co-founders — but there is one necessary element they typically fail to contempate.

OK, I’ll bite, what is it, Big Red Car?

Ahhh, dear reader, it is the escape hatch by which I mean the issue of who is in control and how is it done if the founders should have a spat or decide they need to part company. I think of it as the startup pre-nup.

This should be attacked right up front when there is nothing but goodwill about because if you don’t and such an eventuality befalls you, there will be no goodwill nor reason upon which to resolve the dispute. I have seen some brutally ugly disputes.

How does this happen, Big Red Car?

I spend a lot of time with founders dealing with these kinds of issues, so I can confirm it happens a lot. Here are the typical situations that give rise to the kind of friction that blossoms into a dispute.

 1. The co-founders no longer share the same vision for their company. This is purely organic. It happens. Every startup I have ever advised has undergone a pivot in which the original direction of the company had a course correction — often to pursue a superb new opportunity. It is inevitable.

 2. Amongst a group of co-founders, one became the Chief Executive Officer — because hierarchy, authority, and structure are necessary to grow companies — and that person has exerted the type of control or leadership style that alienates a formerly happy co-founder

 3. One or more co-founders fail to grow with the company making them a victim of success — the tech guy doesn’t have the skill set for the company’s growth or the marketing guy outruns his shadow and the company requires more experienced marketing talent. This is often combined with #2 above.

It happens gradually, and then quickly.

 4. Some outside force — often a tragedy — demands the complete attention of a co-founder and there has to be a change in the management of the company as a result

 5. A co-founder loses interest in the underlying business and desires to pursue some other entrepreneurial endeavor. There are serial entrepreneurs who know this about themselves. They like to work hard until the company has traction and then they need a bigger challenge.

 6. One co-founder wants to ready the company for a shorter time horizon sale and the other co-founder(s) do not. This often happens when co-founders have unequal financial resources.

Early on, Zuckerberg could have sold Facebook/Meta for $1,000,000,000 and he turned the opportunity down. Nice move, Zuck.

 7. A board of directors decides to replace the CEO or other co-founder. Very few founding CEOs are around at the end of Year 3 when there is outside investment and a board. It happens.

 8. There is a personality conflict and over time co-founders cannot work together. Startups are stressful and people evolve under stress. You don’t really know anybody until the blood is ankle deep.

 9. There is some kind of economic disruption that may or may not involve an act of bad faith that results in a legal confrontation between or amongst co-founders

 10. A majority of co-founders gangs up on another co-founder over control of the enterprise

 11. You raise multiple levels of outside funding and one or more of the co-founders is ready to get off the merry go round at the value of one of the funding rounds

While these are discrete issues I have seen multiple times, the environment is always a loss of trust that often cannot be rekindled. The other issue that often presents itself is a change to compensation in a potentially changed new arrangement. It is always about feelings, emotions, and MONEY.

So, what do we do, Big Red Car?

Well, dear reader, the first thing is you think about it before you sign the original documents. You contemplate — WTF could go wrong here? You talk about it with your co-founders. This will be an interesting chat and you will be uncomfortable, but it is essential.

 1. You carefully consider the language in the founding documents as to how you conduct the business when the co-founders don’t agree on some specific business decision, policy, acquisition, or other significant undertaking in the life of a business.

 2. You carefully consider the roles of the co-founders — it is wise to have written job descriptions within Employment Agreements and to update them regularly — and the authority limitations within their areas of expertise. If your founding team is a combination of a leader, a marketing person, a tech person, and you are farming out finance — you understand your roles and areas of expertise.

 3. You have a written dispute resolution technique. In desperate situations, you need to pick binding arbitration rather than the courts. In smaller matters, you negotiate directly — for goodness sake learn how to negotiate, it is a bloody skill like tying your shoes — or you go see a trusted adviser or gray haired eminence.

 4. You have a written buy – sell arrangement within the founding documents with a clear understanding of when it can be invoked, how it works, and exactly who the buyer and seller are. It must contemplate that the buyer has no money with which to buy the seller’s interest.

You contemplate all possible versions of the future and plan accordingly before they arrive.

Bottom line it, Big Red Car, going to the beach this afternoon

OK, dear reader, here it is:

 1. If you are an extraordinary co-founder, you have well drafted and well coordinated Articles of Incorporation/Partnership Agreement, Bylaws, Shareholder Agreement, Operating Agreement, and Employment Agreements.

 2. Your documents anticipate and guide you through a number of different leadership, management, and ownership scenarios that could trip you up and wreck the company.

 3. There is a high likelihood that a fledgling company will encounter at least one of these situations.

But, hey, what the Hell do I really know anyway? I’m just a bloody Big Red Car!