Founder Issues – How To Protect Your Startup Team From Failing?
There are many reasons why startups fail – having no vision, lacking focus, not listening to the market, draining capital, hiring the wrong people, scaling too quickly etc. But as startups are all about the team, founder issues is the number one factor bringing down a startup. How can we protect ourselves from it?
On the 28th of October, Startup Wise Guys and EIT Digital in cooperation with Hedman Partners, SORAINEN and Testlio, held a practical workshop, where successful startup CEO’s and legal experts openly talked about founder issues.
Initially the organisers had thought around fifty people would show up, but in reality there were around two hundred participants, showing the magnitude of this problem. Therefore, I will conclude the main points made in the four amazing presentations and a panel for Q&A.
First, co-founder agreement issues by Valter Võhma from Hedman Partners.
Apparently there are three big problems startups do: 1) They do not register a company; 2) They do not legally divide the shares & 3) They do not transfer the IP to the company. All of this can be done quickly and cheaply (at least in Estonia), but in case of any problems, this can save the startup. Valter stressed to sign the Founders’ Agreement ASAP (not to wait for months) to reduce the risk of founder issues.
Founders’ Agreement should be kept simple, but should still distinguish, whether the party is an individual or a company, as the latter might hurt you in the long term.
Also, one should not use a template, as they are usually: 1) Wrong!; 2) Hard to understand by the founders OR 3) Right, but founders do not understand how to use all the clauses.
Second, founders split by Kadri Kallas from SORAINEN.
Other than just transferring the IP to the company, Kadri suggested people to always leave paper trail behind them, as this can help parties in case of any founder issues. As ideas cannot be protected, they must be expressed in some fixed way. It is also wise to keep a log of everything done, so one would have proof of their activity.
Foundership can be seen as a marriage so everything should be discussed before it gets emotional. Which it will! So simply document the responsibilities and stick to them. All in all, building a startup is like playing sports. One should focus and keep their eyes on the ball, because everyone wants to win. There should be no room for emotions and reasonable resolutions about founder issues should be reached without court. But still, having a Founders’ Agreement always helps.
Third, Red Flags for Angel Investors by Tapio Siik from EIT Digital.
Tapio started with green flags to investors: 1) Having one or more people on the team, who have had at least one positive exit (for investor that is) & 2) No bullshitting to investors (e.g. about team competences). He said that investors do not just bring in money, but also help with the red flags if the team does not bullshit.
He gave some tips to startups about choosing an investor. And yes, team should evaluate the investor as much as it evaluates the team. First, investors should always bring more than just money to the game – usually their networks. Second, do not tie the knot between the investor and the team, when the chemistry does not feel right. “With investors there is no divorce, only heaven or hell.” You either end up with a great exit or go down together.
Fourth, CoModule case study with Kristjan Maruste and a panel for Q&A.
Kristjan gave us a great story about how having a Founder’s Agreement really helped their team solve their founder issues. They started with a team that had previously worked together on another project, but started to gain and lose members shortly after their start. Some did not feel it, some did not want to commit or move to a different country. Having a Founders’ Agreement helped them keep the IP, not go to court and keep good relationship with bad leavers.
But as it was said in the panel, Founders’ Agreement should be the last helpline, just there for emergencies. First, one should still create and maintain relationships within the team and with investors, so there would be no founder issues. That can be done by bonding on a lonely island (or Survival Camp) or by going to Sauna every now and then.