How to Survive a Co-Founder Divorce while at an Accelerator
Accelerators can certainly help a startup reach new levels. But when the relationship between the startup’s co-founders is already on shaky ground upon entrance, the only thing the accelerator (by no fault of their own) accelerates is the co-founder divorce and possibly death of the startup.
In a co-founder divorce situation, rather than using the fresh capital that an accelerator invests to spur the growth of the startup, this money ultimately provides the co-founder who wants to depart leverage to get paid on the way out.
Note that usually the main/first co-founder who originated the idea wants to continue with the startup and the other co-founder wants out. It’s rare that you would see both co-founders wanting out or both wanting to stay, leaving the co-founders to negotiate who stays/goes.
It’s likely that this is the first time the startup has had any money in the bank account and any inkling that the company may be “on its way” to unicorn status. Thus, it ends up being a strategic departure point for the departing co-founder to ask or suggest a buyout. Whether they know it or not, the departing co-founder can play on the emotions of the main co-founder here, as they main co-founder may have more invested, emotionally and financially, at this point in time.
At the same time, the fresh capital provides the co-founder who wants to stay with “currency” to get rid of the other co-founder. A currency different than stock. Hey, what’s $5,000 now when you have pitch day and the prospect of further investment in 100 days?!? Worst case, it gets the “bad seed” out of the company (and by this time the main co-founder might have already found a backup plan to replace the departing co-founder).
Don’t Go in the First Place
If there is already a tumultuous co-founder relationship, such co-founders should not join an accelerator in the first place. In reality, the co-founder divorce is already in progress. The accelerator, with their investment, the ensuing program and dreams of VC money on pitch day, is not going to solve co-founder issues. In fact, the frenzy of an accelerator program acts like a stress test that usually finds and exploits cracks in the co-founder relationship.
Using an accelerator as a last ditch effort is a waste of everyone’s time and the accelerator’s money. If the co-founders have to resort to pulling rabbits out of hats just make it to pitch day, it’s almost a certainty that both co-founders will be updating their LinkedIn profiles within the next 3 months.
Self-Destructive Actions and Thoughts
If the co-founders are at their breaking point and it is time to negotiate a co-founder’s departure, there are three main ways in which co-founders can mess it up for themselves and their startup by not negotiating a quick departure.
The first way to ensure an agreement will not be reached is by sending threatening, demeaning and/or angry emails back and forth. This should never happen, there is no excuse, and it, among other things, guarantees the destruction of the startup because now the co-founders will move farther away from a settlement because now one or both are ‘hurt’ and want to take it out on the other.
And when a co-founder cc’s various people at the accelerator or such emails are forwarded on to the accelerator and mentors, etc., it just makes things worse. Of course, with all the emotion of the startup, it’s hard for people to remain civilized. But if a co-founder chooses to send nasty emails, he or she is now shanking their reputation each time they hit the send button. Hey startups fail all the time, but at least give yourself a chance in a future startup. People have long memories.
One. Billion. Dollars.
The second way to ensure a quick settlement will not be reached is to take the mindset that you are arguing over something worth one billion dollars.
Co-founders going through a divorce at an accelerator have the tendency to feel that this is their “Social Network” moment and the whole world is watching. All the press from making the accelerator coupled with the attention from the accelerator and its mentors can have the negative consequence of co-founders massively over-valuing their startup.
In reality when there is a co-founder dispute, the accelerator, its mentors and maybe even the startup’s lawyer all pretty much see a corpse of a company. The co-founders need to realize they are not a unicorpse, but more like a nanobe-corpse. Thus, the co-founders should value the company at about the cash invested (or at a maximum the valuation from the accelerator investment). That extra 2 percent the departing co-founder is asking for which you are not budging on…it’s not $20,000,000. (And heck, even if it ends up being $20,000,000, I think the remaining co-founder be happy with his or her end result.)
“They deserve nothing!”
The third way to self-destruct the process is to believe that the departing co-founder should get nothing, simply because “they didn’t do anything” or some other reason, even if legitimate. It doesn’t matter. The remaining co-founder usually has to get the deal done fast because the accelerator program is going on without him or her and this is what gives the departing co-founder leverage to get some type of premium. The fact that negotiations are taking place and the company is asking for a subsequent signature from the departing co-founder supersedes all the reasons why the departing co-founder “shouldn’t get anything”.
The fact that the accelerator is so invested in the startup (hey, who wants disappearing companies during the program or to lose an investment in 4 weeks?) can become an unintended obstacle to an effective and quick resolution.
The best programs will try to help co-founders work it out, but frankly it’s a complete waste of their time to spend more than a nominal amount of time brokering a divorce. There’s likely many other companies in the class that don’t have co-founder issues that are actually doing something towards growing the company rather than squabbling over a mythical billion dollars.
Worst case scenario, by spending so much time with the disgruntled company, the accelerator runs the risk of potentially validating the co-founders’ notion that this is a huge $$$ deal and should spend all waking hours for weeks thinking and discussing every aspect of it.
What to do
So what happens if you are in a co-founder divorce at an accelerator?
While there’s no magical solution, the best thing you can do is figure it all out as quickly as possible. Not months or weeks, think a couple days. It really should only take about 45 minutes if you sit down together and have a frank conversation (yes, really).
The best solution is generally to come to some kind of agreement in which one co-founder leaves with some vested equity (not a huge chunk), ZERO cash, with the departing co-founder signing a non-disparagement and release on their way out. (Quite frankly, a co-founder who departs with equity and cash always gets the best deal…that’s upside in the form of equity, current cash compensation and now freedom to do something else). Thus, the fresh cash from the accelerator should be used to grow the company, not buyout a departing co-founder.
Again, please figure it out fast. If you can’t agree to do something reasonable with one week – give your money back to the accelerator and rescind the transaction (or something similar). Move on with your lives rather than waste so much good time fighting over a nanobe-corpse.
A couple final notes: (1) Vesting shares may help somewhat in this situation, but not everything is as simple and ultimately taken care of by a repurchase of someone’s shares. There may be IP assignment issues, potential causes of action, etc., or the fact that you need to get a release agreement to give future investors’ comfort (which isn’t always easy to get…). (2) In addition to ‘co-founders’, the departing co-founder role could also be a “lost co-founder” or otherwise someone who may have a claim on the company’s equity or IP (think prior advisors, that one contractor who did some work for the company, etc.).