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14 August 2018
A few days ago, a friend of mine asked me to join him in a new startup. He said that he needed a partner, to help him partially finance the project, promote it, bring in new ideas, and push the business forward. I liked the business idea and wanted to participate. I started to ask questions about our future partnership and attempted to draw a simple partnership agreement. He quickly got offended. He said that he was looking for a real partner, who would share his goals and would never require any papers or lawyers.
Here is a list of the questions I asked him:
- What happens with my shares if I stop working?
- Can I start a similar business with another partner later?
- Who will have a checkbook and bank account access?
- Who has final say if we disagree?
- Do I need your permission to sell my shares to a friend?
- Will there be any vesting schedule?
- Who approves expenses?
- Who controls the domain name registrar account?
- Who pays if the project needs more money?
For the majority of people I attempt to do business with, these questions are indeed offensive. They feel like I’m trying to draw a prenup between us, while they would prefer our “marriage” to be based solely on love. They would have us promise to never betray each other’s mutual interests but then the business suffers and eventually collapses.
Why so? Because it’s impossible to be equal in business (just like it’s impossible to be equal in marriage, but that’s a topic for another blog post). Eventually a conflict of interests shows up and the inability to resolve it affects and damages the business. “Co-founder disputes have historically been one of the top reasons startups fail at the earliest possible stage,” says Garry Tan.
I would call that type of partnership, which many young startup founders enter into, “70/70.” For them the initial agreement is not a formula of future growth, but a symbol of respect. Each of them wants to be respected and that’s why they demand 70% of the business for themselves. They don’t care and don’t understand how exactly the distribution of assets and profit will work in the future. They don’t foresee forthcoming conflicts and fights, mostly because they are too young or naive (or both). According to the The Founder’s Dilemma by Noam Wasserman, “Founders’ attachment, overconfidence, and naïveté may be necessary to get new ventures up and running, but these emotions later create problems.”
They just want to have 70%… each!!!
It’s not even 50/50 in most cases, but 70/70. This is what makes it funny. Very often each partner thinks that he or she is the major contributor to the project and that’s why it’s 70%.
And they have it.
When I was younger, I had no problem with entering into such an agreement. I was saying to myself: he wants 70% but he doesn’t understand that in reality he won’t even get a single percent, since, for example, we didn’t put the ownership of the domain name into the contract. It is obvious right from the start that the partner is ready to trust me blindly, without even thinking about possible consequences. In the end, all of us, and our startups, were losing.
Don’t get me wrong, trust between partners is a crucial and mandatory element of any deal. But you can’t trust me to stand by my words, if there were no words. If we never discussed, for example, how much I get when I quit because I’m fed up with you, I will try to get as much as possible and where exactly that line of 70% goes will be a subject for an ugly debate. And this will happen in very different circumstances, where there will be, most probably, no love between us or maybe even friendship. In that future fight the one who is the most aggressive and cunning will win. Do you really want that to be me? Or do you expect it to be you?
Now I’m a bit older and more experienced. I’ve seen those ugly debates and don’t want them anymore. I don’t want the investment of my time and my money to go down the drain. I want to know upfront what exactly will happen with them in a month, a year, and a few decades, when I retire and my grandchildren inherit them.
That’s why I ask all those “offensive” questions upfront. If the other side does indeed get offended, I attempt to explain to them what I just said in this article. If they don’t understand and still want to marry me out of love, I walk away. As Paul Graham, a co-founder of Y Combinator, said, “Most of the disputes I’ve seen between founders could have been avoided if they’d been more careful about who they started a company with.” I don’t want to start a business with those who are scared of a prenup. I know that in that case the divorce will be ugly.