Startup Lawyer | Keep Your Startup Co-Founder Closer
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Keep Your Startup Co-Founder Closer

Posted 21 Oct 2007

Sun Tzu is generally credited for coming up with the phrase, “Keep your friends close, and your enemies closer.” He obviously never launched a startup and got shafted by a co-founder.

Entrepreneurs often believe their startup company faces legal threats from only external sources. And that’s a big mistake. Instead of worrying solely about some 3rd-party stealing your business idea or a “slip and fall,” your startup company’s top legal priority should be the reduction of its internal legal threats: co-founder disputes.

You can start by examining every aspect of the co-founder relationship. Your startup company could be ultimately doomed by a co-founder dispute, as even small disagreements can systematically erode the core of your company. Therefore, at the earliest time possible, sit down with your co-founder(s) and talk about issues like:

(1) the goals each of you have for the startup;
(2) the goals each of you have for yourself;
(3) duties, job descriptions, and hour commitments;
(4) who pays for what;
(5) who gets paid first and why;
(6) what happens if one of you wants out;
(7) what happens if one of you wants to sell the company, raise capital, or end it;
(8) what happens if one of you gets disabled or dies;
(9) what happens if things take longer than expected; and
(10) whether launching other startups, i.e. “moonlighting,” is ok.

This is not an exhaustive list of topics and by no means whatsoever will such discussions be easy. If it is easy and everything sails through without a hitch, someone’s holding back and you’ve all wasted your time. And for the love of high-speed internet and all things Web 2.0, do not think being friends or relatives reduces the need for these difficult and/or awkward conversations. In fact, if your co-founder is a friend or relative, that should trigger even more issues and discussions. Because now you have more to lose than just a company and your (or someone else’s) money.

After you have discussed everything that needs to be discussed, DOCUMENT-DOCUMENT-DOCUMENT. Make sure your startup company documents reflect all of your discussions. Don’t leave anything out just because you and your co-founders already talked about it. Take nothing for granted because memories will inevitably differ.

Once you have discussed and properly documented your co-founder relationships and thereby protected your startup company’s core, then you can focus on external legal threats.

22 Comments
  • lk
    Posted at 21:56h, 23 October Reply

    the co-founders of textworks just experienced getting shafted by a co-founder! so glad we found this blog [too bad it was a little too late]. would you like to link to one another?

  • Ryan
    Posted at 07:00h, 24 October Reply

    I’m sorry to hear about that. I wish I could say that my experience was limited to listening to my clients’ stories.

    Even so, I believe the negative experience can end up producing a better entrepreneur if he or she applies lessons learned to current and future startups. Because inevitably, there will be more projects and ideas down the road.

    We entrepreneurs constantly try to refine our product or model, so it is only natural to think that we should refine ourselves.

    BTW, I tried visiting your blog but it crashes my Safari browser (Mac version) each time.

  • ProBlogReviews
    Posted at 19:09h, 28 November Reply

    These are all great points, when I formed my business, my co-founder and myself (relatives) ended up in many heated arguments over what direction to take our company.

  • ProBlogReviews
    Posted at 14:09h, 28 November Reply

    These are all great points, when I formed my business, my co-founder and myself (relatives) ended up in many heated arguments over what direction to take our company.

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  • North
    Posted at 20:50h, 09 June Reply

    Thanks for this whole blog its the best I have found.

    Who must be a co founder and who can remain a hired principal? I am the idea guy, but I am the only guy right now. Before I bring in any principals I will have the company all set up, some engineering done and patents pending. When I find, and hire on options, the three perfect CEs/directors must I consider them co founders and treat them accordingly? Will (should) they insist on it? I guess what I mean is, can all the nasty issues everyone writes about between co founders be avoided this way? Can I remain the sole founder even though I must get people 'in" far, far more skilled and qualified than myself.

    I am totally "unqualified" as CEO, but so what.

    Thanks

  • North
    Posted at 15:50h, 09 June Reply

    Thanks for this whole blog its the best I have found.

    Who must be a co founder and who can remain a hired principal? I am the idea guy, but I am the only guy right now. Before I bring in any principals I will have the company all set up, some engineering done and patents pending. When I find, and hire on options, the three perfect CEs/directors must I consider them co founders and treat them accordingly? Will (should) they insist on it? I guess what I mean is, can all the nasty issues everyone writes about between co founders be avoided this way? Can I remain the sole founder even though I must get people 'in" far, far more skilled and qualified than myself.

    I am totally "unqualified" as CEO, but so what.

    Thanks

  • Ryan Roberts
    Posted at 11:10h, 16 June Reply

    You can be the sole owner of the startup, but it sounds like you need skilled people to implement your idea. I think you'll have trouble developing your idea without bringing on people, probably as co-founders. Even if you are able to do so w/o bringing these skill people on, potential investors will likely ding you since you can't implement the idea (even if already 'developed').

  • Ryan Roberts
    Posted at 06:10h, 16 June Reply

    You can be the sole owner of the startup, but it sounds like you need skilled people to implement your idea. I think you'll have trouble developing your idea without bringing on people, probably as co-founders. Even if you are able to do so w/o bringing these skill people on, potential investors will likely ding you since you can't implement the idea (even if already 'developed').

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  • Tamer Salama
    Posted at 11:32h, 14 August Reply

    Thank you for your great posts. Startup legal advice is hard to come by, and you're definitely providing some valuable info.

  • Tamer Salama
    Posted at 06:32h, 14 August Reply

    Thank you for your great posts. Startup legal advice is hard to come by, and you're definitely providing some valuable info.

  • Ryan Roberts
    Posted at 09:41h, 20 August Reply

    Thanks for the kind words, Tamer.

  • Ryan Roberts
    Posted at 04:41h, 20 August Reply

    Thanks for the kind words, Tamer.

  • Hammertorch
    Posted at 13:12h, 12 July Reply

    Nice blog, great post ever…. your site is very helpful for start up business…

    I have a question though I don’t know if this may be related to the topic, or this applies to a group of friends (more like colleagues) that share the same ideas… and more or less a non-profit organization (at first), more like a team(we started as 3 individuals)…. my question is, what if in the near future our group/team will grow big and a lot of individuals will be involved and soon be added in the organization and we will then soon becoming an LLC or more like converting the group to a company…Does the co-founder’s agreement applies to those who started when it was just group? or co-founders agreement applies only by the time the company will be created?

    I’m sorry if my question does not make any sense…

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  • sam
    Posted at 22:41h, 11 April Reply

    me and two others are seeking to incorporate a startup. the lawyer is quoting us a fee of $3k for the formation package. is that reasonable?

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  • Sujay Maheshwari
    Posted at 00:10h, 26 April Reply

    Grreat post Ryan. There are many bitter stories around co-founders we have heard or might have gone through.

    I tried to put together a a checklist which one should go through as a co-founder and see how they are performing and at times correct themselves.

    Add you comments/ points there, if you think it’s worth your time.

    http://sujaymaheshwari.netcurate.com/stories/are-you-a-cofounder-lets-find-out

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