I got a request for a free consultation from Tom* the other day telling me he had an urgent matter.
His co-founder was threatening the solvency of the business if he wasn’t paid out right like he was previously promised by Tom.
I jumped on a Skype call to talk with Tom, who was abroad at the time, to discuss the problem.
He had promised his co-founder a lump sum of money, which he accepted, thinking that that would mean he would immediately quit.
He later found out that the co-founder wanted to stay on and continue receiving his salary until the end of the contract on top of receiving the payout.
According to Tom, the co-founder thought of himself as a “big whig” that deserved to stay on and receive the payout for his shares of the company - even though he hadn't done anything in awhile
The company was barely a year old though, and had only made a small profit.
Because of a lack of trust, Tom wanted his co-founder gone immediately.
He didn’t know what to do though.
Which is why he came to me.
As a Mediator with experience helping startup partners with these difficult conversations, I have seen the different types of co-founder disputes that threaten healthy businesses when the co-founders no longer get along.
I come in and mediate (if you don’t know what mediation is, read this previous article that explains the process) so the partners can avoid lengthy courtroom battles and get on with their lives.
Because a lot of startup founders enter business with one another without a contract, I have my work cut out for me.
It makes for interesting cases.
These handshake deals, however, leave a lot of ambiguity as to the how, why, and what regarding dissolution, equity restructuring, and other possible breaches of contract that may occur.
So if you’re involved in any of the following co-founder disputes, consider mediation as an option:
Like Tom, co-founders don’t always get along and some end up wanting to dissolve the partnership.
One founder may stay on, attempting to find another co-founder to continue the business, or the entire startup may dissolve, dividing the assets if there is any.
Typical reasons co-founders dissolve the partnership include:
- One co-founder isn’t living up to the expectations of the agreement(s).
- One co-founder wants to voluntarily leave because he’s no longer passionate about the project
- One co-founder wants to push the other out but there’s no clear way of doing it
- Trust between the co-founders has eroded and the relationship seems unsalvageable
An expert, neutral third party can help these situations by assisting the co-founders in a rational conversation around next steps.
A mediator with expertise can provide the bird’s eye view necessary to tackle the dissolution issue rationally.
And that could mean the world of difference for a transfer of power should one co-founder continue with the business or both want out, as they may need to divvy up the assets and liquidity of the venture.
Money talks are difficult - plain and simple.
And after some time, the initial 50/50 handshake agreement that brought the co-founders together may seem unreasonable.
I worked with a startup team that had two co-founders.
After two years in business, one co-founder was working way more on the venture then the other and that co-founder wanted to change the terms of the agreement.
So he came to me and contracted me to assist the parties in the conversation.
After an initial consultation, reviewing the contract, I conducted a four-hour mediation via Skype.
Through a series of reality checks, the other co-founder agreed that his level of engagement had drastically declined.
He even acknowledged that he wasn’t as passionate about the project as the other co-founder anymore, which helped secure an agreement.
They agreed to a new 70/30 split.
Which left everyone happy.
It sometimes takes these “reality checks” by a neutral third party to show one or more of the co-founders the truth of the situation: one co-founder is pulling their weight way more than another and/or someone has lost their zest for the project.
The equity split should represent that.
Also, because startups evolve and grow, get funding, or bring on additional founders, the initial agreement is no longer valid.
Restructuring may be the only way forward.
And mediation helps manage the different egos in the room in order to keep the business relationship, and everyone by default, happy.
POSSIBLE BREACH OF CONTRACT
Potential breaches of contract could have substantial damages that need to be adjudicated.
Meaning people go to court.
However, when I have a possible breach of contract matter cross my desk I always tell the potential client that mediation has a 90% success rate when all parties involved negotiate in good faith.
Which is an awesome success rate!
Even if they can't reach an agreement, mediation is also a low-cost option compared to litigation and could reveal facts early on in the process that could save you a lot of money down the line.
The types of breach of contract issues that could be mediated include:
- Failure to pay
- Unethical business practices
- Intellectual property issues
- Breach of the covenant of good faith and fair dealing
Breach of contract cases are different, and sometimes complex, but why spend a lot of money, time, and energy pursuing something that could have been resolved easily via mediation.
Bottom line: mediation is useful for resolving a variety of co-founder disputes. Most are unaware that the process exists, but if done successfully it can lead to an agreement in less time that it would take to go through the courtroom route. And it could even save the startup, and the business relationship, down the line!
*The names and any other identifying information has been changed to protect the confidentiality of the clients as well as the mediation process as a whole.