3 Topics to Discuss before Writing a Founders’ Agreement
Co-founder disagreements rank among the top mistakes that kill startups. How can you avoid that outcome? Many entrepreneurs and lawyers advise that, to protect each co-founder’s interest, creating a formal founders’ agreement should be a first step in establishing your relationship. We disagree with that logic. To reach an agreement that’s fair and effective, you need to have potentially difficult conversations with your partner—before you begin writing. We talked with serial entrepreneurs and investors Lara Hodgson, co-founder and CEO of NOW Corporation, Sunil Nagaraj, founding partner of Ubiquity Ventures and co-founder of Triangulate, and Adam Enbar, co-founder of Flatiron School. Looking back on the lessons they learned when formalizing their partnerships, they share three topics all co-founders should discuss before writing a founders’ agreement (FA).
Topics to Discuss before Writing a Founders’ Agreement
- Compatibility of Core Values
- Personal & Professional Motivation
- Expectations—Personal & Venture-Related
Within each of these core areas, we compiled a list of questions that can help you facilitate a meaningful conversation with your co-founder. Taking time to discuss these topics before writing a founders’ agreement can help ensure that you craft a well-constructed agreement that is fair to all.
Compatibility of Core Values
Maybe your co-founder is a friend who also wants to start a business. Or perhaps you’re considering a partner who possesses strengths and skills you lack—a technical expert paired with a business-minded person should make a good team. While diversified skills matter, functional difference alone can’t ensure that you’ll make good partners. And friendship can’t predict whether you’ll work as business partners.
Don’t assume you’ll learn what you need to know about your partner as you work together. Make time to learn about your co-founder independent from work to discover if you’re compatible. For instance, do you see the glass as half-full or half-empty? Are you chronically late or always on time? Are you an early riser or a night owl? It’s important to discuss attitudes and backgrounds before you start thinking about a formal FA.
If you avoid having potentially awkward conversations in the early stages, you’ll struggle to find common ground when conflict arises.
Outlook on Life
One of a co-founder’s most important responsibilities is establishing and modeling company culture. Whether you’re aware of it or not, a co-founder’s attitude and general outlook on life will shape the culture of the startup. That means you need to get to know your co-founder on various levels—plan to discuss your general outlooks. For instance, how would you describe a great day? What would a great day for your co-founder look like? Are those compatible?
Sunil Nagaraj, founding partner of Ubiquity Ventures and co-founder Triangulate swears, “it’s not just because I ran a dating company that I fall back to dating as a great analogy for co-founders.” A co-founder relationship requires an initial attraction—a spark. But, similar to dating, once the spark fades you need an underlying foundation—long term compatibility—for the relationship to survive.
However well you think you know your co-founder, Nagaraj recommends that you don’t make assumptions that they feel the same way you do about core values. For instance, “Do they like to sit on $5 steel folding chairs? Or do they want a beautiful office with a view?” What are their primary motivations for starting a business? To make a lot of money? Or make a big impact in the world? Neither is bad, but Nagaraj learned, “finding that alignment on core values is much more important than the initial spark.
“In a romantic context, the underlying foundation is ‘how do you feel about money?’ ‘How do you feel about kids?’ ‘What are your key values in your life?’ Those actually apply almost identically to a co-founder.”Sunil Nagaraj
Nagaraj’s first founding relationship failed. As a result, during his second founding experience—building his founding team for Triangulate in Palo Alto—he prioritized aligned attitudes and core values. “I had already started working on the product. So I needed people who could code with me and who were okay working for free in a small apartment, sitting on a $5 steel folding chair, above a subway. That automatically filtered people.”
Do Your Values Align?
Finding alignment on core values matters because your startup’s culture builds upon your values. Unspoken differences in values can have a significant impact, affecting myriad decisions, such as where to seek investments, who to hire, when to hire, and how to structure your company.
Jessica Alter, co-founder of FounderDating, recommends asking potential partners, “If you had to come up with three words to describe the culture you want to create, what would they be?” Similarly, asking questions about financial goals, including an eventual exit, can help you determine whether your values align. At the same time, you should consider the big picture. Lara Hodgson, co-founder and CEO of NOW Corporation, strongly advocates that all co-founders think about and share their long-term personal aspirations.
What Are Your Personal Aspirations?
Hodgson observes that founders commonly share the vision for their venture but often refrain from talking about their personal goals. But failing to discuss your personal ambitions with your co-founder is short-sighted. She encourages co-founder to discuss your family responsibilities—current and future. Perhaps you already children. Will you need cash for college tuition in five years? Maybe you don’t yet have children but plan to. Would that entail cutting back on the time you spend on the startup? “You might have aging parents that you foresee yourself taking care of in a few years,” Hodgson adds. She strongly recommends having these “what-if” conversations about future scenarios before writing a founders’ agreement.
You really have to force yourself to say, “Where do you want to be five years from now?” That doesn’t just mean socioeconomically, in terms of how much money do you want to make. But where do you want to be in terms of your family? Where do you want to be geographically?Lara Hodgson
Have Scenario-Based Conversations about Your Venture’s End Game
In addition to talking about your personal circumstances and aspirations, think about possible scenarios in your professional life. What will you do if the business fails—do you have a fallback? Does your co-founder? On the other hand, what if your venture takes off and someone wants to acquire you? Will you agree? Hodgson observes, “some people will hang on forever because the company becomes a part of who they are.” It may seem counterintuitive or awkward to discuss how you envision exiting as you launch, but these types of conversations are essential to developing a sound partnership. Having a sense of the person’s approach to problem-solving, outlook on life, and personality can help you determine your chances of succeeding as long-term partners.
I’ve made mistakes when we’ve brought people together and talked about all the things that could go right. But we didn’t have that somewhat awkward conversation, “if this blows up, what are you gonna do?”Lara Hodgson
Ask These Questions about Core Values before Writing a Founders’ Agreement
- What do you enjoy doing in your free time?
- How do you deal with conflict?
- What are some of your favorite products and why?
- How do you deal with stress and big obstacles?
- When have you failed and what did you learn from the experience?
Personal & Professional Motivation
It’s important to understand why the venture matters to your partner and articulate why it matters to you. Adam Enbar wanted to develop an alternative model for education. He had an instant connection with Avi Flombaum, a programmer who taught students to code and helped them launch careers as developers—without obtaining computer science degrees. Flombaum’s philosophy, “Technology isn’t important. People are,” resonated with Enbar. He recalled, “I said, ‘you have to start a school, I will invest in it. This is the thing I’m passionate about. I will quit my job and do it with you.’”
I’m passionate about education. And I met this one guy that was teaching people and getting them jobs. It blew my mind. It solved so many problems. There’s a real reason I’m connected to this. There’s a real reason this moves me. That’s one of the things that VCs look for.Adam Enbar
As a result of their matching motivation, the two co-founded the Flatiron School, an accelerated coding school that provides intense hands-on experience enabling graduates to land good-paying jobs in tech. The co-founders’ shared passion for their company’s mission to transform education has helped Flatiron School flourish. In short, having analogous motivations between co-founders can help stabilize a startup internally during chaotic times—like rapid scaling.
Ask These Questions about Motivations before Writing a Founders’ Agreement
- Why do you want to be a part of this startup, right now?
- Are you attracted to solving this specific problem or you enjoy solving problems in general?
- What do you like to do? Are you happy learning at all stages or do you like being an innovator? Are you a startup junky?
Expectations—Personal & Venture-Related
A surprising number of co-founders fail to discuss their expectations about commitment when writing a founders’ agreement. But having a candid discussion about what your professional expectations at the start can help future problems from arising. Hodgson advises founders to consider their level of commitment from several angles, especially time and finances. For instance, do you view your startup as your primary working activity?
Will you and your co-founder work on the startup full-time? Will this be your life’s work or do you see it as a two- or three-year commitment? Likewise, consider personal financial goals. Would you sell for $50m? Or are you hoping to scale the venture into a unicorn? Over what timeline? Not all co-founders share identical motivations and failing to understand your partner’s expectations can lead to fragmentation down the road. It’s especially important to have these discussions about projected time-commitment before writing a founders’ agreement and dividing equity.
Are you thinking about what happens in the event that somebody’s life takes them in a different direction? Is that neat and easy to undo or does it become a mess?Lara Hodgson
Ask These Questions about Financial Goals before Writing a Founders’ Agreement
- Is your business’s financial success your primary or secondary motivation? How big do you want the company to become? Do you see your startup as your primary source of income? If so, at what point in time?
- Do you want to see a particular liquidity event or would you like this company to continue in perpetuity?
Tolerance for Risk
One area in which expectations often differ involves tolerance for risk. If you haven’t prepared for disagreements in your co-founder relationship, you may damage your relationship and your business. Many entrepreneurs learn this lesson the hard way.
In 2016, during his second year at Harvard Business School, one student and a close friend from class co-founded an innovative service startup that uses crowdsourced drivers to deliver packages from local warehouses to customers’ doors. They leveraged technology to maximize efficiency, giving customers more control over delivery time in order to minimize package theft.
Less than a year after founding the company, they began to see traction in Boston and invited a third friend to join as co-founder and CTO. When they launched the company, the friends felt inspired and enthused. All felt aligned in their passion for the company’s mission. But when investors criticized the startup’s business model, fundamental differences among the 3 co-founders began to surface. One friend expressed significantly less comfort with the risk required to challenge industry giants. Uncomfortable with long-term financial risk, he advocated pivoting to a completely different business. Another founder vehemently disagreed, creating irreconcilable founder conflict.
Conflict Can Kill Your Business or Your Relationship
In their enthusiasm to launch the startup, the trio believed that their friendship and a passion for solving the problem would enable them to succeed. But they failed to have deeper conversations about their personal expectations about commitment, time frame, willingness to assume financial risk, and exit strategy. After spending months debating the best course of action, the co-founders ended their business relationship. One chose to continue the startup himself, and the co-founders salvaged their friendship. But they had wasted months of valuable time and burned through a significant portion of their investment. In retrospect, the founder we interviewed advises anyone about to launch a partnership with friends to take time to discuss expectations about the business.
“The most important decision you will make as a founder (and arguably — in life) is the people you partner with. And you should be very, very sure they are completely aligned with what you want to build and are comfortable with the risks that your vision entails.”Anonymous Co-Founder
Ask These Questions about Expectations before Writing a Founders’ Agreement
- What title do you expect?
- How should we treat IP—what are your thoughts on taking IP outside of the company?
- Is there some aspect of the business plan that you are unwilling to change?
- Do you view employees like family or contractual workers?
- What are your personal cash needs in the short term? Will you pursue this venture unpaid and if so, for how long?
- Do you want to raise outside money? And if so, how much?
- Where should the business be based?
Creating a binding founders’ agreement too soon can have serious repercussions. Yet waiting too long to create a formal agreement proves equally disastrous. We scoured hundreds of articles and talked with experts about when and how to plan and negotiate a founders’ agreement. We recommend the following.
- In “34 Questions to Ask a Potential Co-Founder,” Jessica Alter, co-founder of FounderDating and Entrepreneur In Residence at Social Capital LP, created a master list of questions in four areas—personality, personal priorities, working styles, and roles—that you can use to get to know potential partners.
- “10 Big Legal Mistakes Made by Startups,” by venture capitalist Richard Harroch and lawyer Richard N. Frasch, list “not making the deal clear with co-founders” as the primary reason startups fail.
- In “The 18 Mistakes That Kill Startups,” Paul Graham list of 18 decisions that cause “startups not to make something users want. Nearly all failure funnels through that.” Founding team decisions and founder conflict factor high on the list.
- “Why You Need Founders’ Agreement?” by Bittu Kumar, an abbreviated post, provides 7 basic reasons that co-founders should draft agreements to prevent mitigate conflict, including aligning on exit strategy and founder departures.
- In “The Founders Agreement: Saving Your Startup From Co-Founder Conflict,” Meghdad Abbaszadegan shares the story of how on-going fundamental disagreements with his co-founder forced him to resign from the company he founded.
- “12 Brutally Honest Lessons about Life and Entrepreneurship” by Itamur Zur, shares his personal experience, including what went wrong, co-founding a startup with friends.