Friday, August 12, 2011

Am I my brother keeper? It is all about the team!

When a start-up has a good team of founders, the sky is the limit.  Even if the initial product does not fly or is not focused, a good team can turn it around and create the thing that will work.  If you look at most companies, that's their story.  It is all about the team and the founders.

In my experience there are more companies that fail because of interaction between founders than as a result of the technology failing to pick up.  Many times the company goes bust, before the first product is actually developed.  It is more common for first time founders, but they don't have exclusivity on the issue.   It usually happens because of different expectations.  For example, one of the founders has an irrational expectation that the start-up will be sold in a year and he will then move on. When it does not happen, he wants to move to the next project.  Another example is a start-up with too many alpha personalities.  It starts with an unsuccessful model called co-CEOs and ends up with the founders not talking to each other.  Childhood friends are sometimes the best founders, but they are not shielded from this issue.  There is a big difference between dating and living together, and working on a start-up brings out the best and worst of people.  

Founders are really like a married couple, and while you may choose not to have a prenuptial agreement with your wife to be, you need to have that with the other founders.  There are two main reasons for that.  First of all, founders need it to protect themselves from each other, and second the investors will likely want to see that they have something in place and if there isn't - the investors will set the rules.

An agreement between founders touches very core issues, like who does what, initial board structure, whether each person is going to contribute 100% from day one or maybe after the initial investment, and assignment of relevant IP.  Most importantly, it states what happens if someone leaves.  The common practice is to have the shares of the founders subject to reverse vesting for a few years (ranges from two to four).  This means that if the parties agree that the founders’ shares are subject to 3 years vesting, and one of the founder decides that he would like to move on after 2 years, he will only be entitled to 66% of his original shares and he will need to return the balance to the company.  There are always discussions around what happens if a founder is terminated by the company without cause and what happens if he leaves for a good reason.  It is difficult for founders to decide what is good for them, because it not easy to predict who will leave before the term is up.  It is important to keep these terms normal and standard as much as possible.  If the terms are normal, the next round of investors may accept it as is.  If they are not, they may reopen everything, and this may end up not being beneficial of the founder.

It is always great to see founders working on their third and fourth start-up together, but it all starts with the right expectations.