I’ve seen numerous founding teams come to heartbreak when, before things even get exciting, they arrive at irreconcilable differences. Usually a camel-back-breaking event is related to some business issue. But the problem probably started before that. Usually I’ve noted serious personal differences in style, ethics, experience etc., that actually have little to do with the business usually break up the founding team. It is imperative that some legal corporate structure be put in place that allows the founders to separate in an orderly and fair manner. This is fairly easy to do, and I’d start with Chris McDemus’ excellent advice below. In addition to this hard advice, however, I’d add some softer work to accomplish. Share a vision for the business.
Write a business plan together. Agree on big ideas of 1) responsibility separation; 2) operations fundamentals of the business; 3) the vision. Discuss what success would look like with a critical eye. Yes, success would be cool. But talk about your viewpoints regarding number of employees, outside capital to take and likely company exit points. Can you imagine running a $1 million business? $10 million? What are the implications of success? If you share that, it might be easier to make good decisions together to get there. Now, on to Chris’ good advice in this regard.
The entry below is from attorney Chris McDemus, aka, the VC Deal Lawyer. You can follow him on Twitter @vcdeallawyer.
“Picking the wrong type of entity and structuring early ownership 50/50 – see my earlier posts regarding picking the right type of entity and the difference between entities. In my humble opinion, if you plan on seeking outside investors, then go with the corporate structure. You avoid the whole issue of VC funds requiring blocking entities (a result of some of their limited partners being non-profit companies) and the possible need (and accompanying cost and time) to convert your limited liability company to a corporation at a later date. In terms of how you structure ownership, if there are two founders then find some difference between yourselves to rationalize one person taking 51% of the ownership. 50/50 deals, absent some complicated deadlock breaking provisions, simply result in a standoff the minute the founders disagree. In order to make the 51/49 split more palatable, you can give the 49% owner comfort that he/she will have a say in material decisions (e.g., taking on debt, sale of the company, major hires, etc.) by giving the 49% holder certain protective provisions (i.e., the need to obtain their consent in order to approve these material decisions). If you do provide protective provisions, then make sure you look at them in the totality. You don’t want the exception to become the rule and end up in a 50/50 situation inadvertently. ”