Profitable Partnerships and Cofounder Relationships

Profitable Partnerships and Cofounder Relationships
November 18, 2016 Brett A. Cenkus
partners and founders

Famous Business Partnerships

What comes to mind when you think of a business partnership? Most people will think of a famous pair of partners like Bill Gates and Paul Allen or the famous founders, Steve Jobs and Steve Wozniak. These are presented as perfect partnerships — each partner as a strong complement to the other. Obviously, these partnerships were wildly successful, although I am sure they had their challenges, especially during the startup phase.

Those challenges are often what comes to mind when we think about business partnerships. We think about good partnerships gone bad. There is an entire show on AMC called Halt and Catch Fire that follows the story of business partners creating and growing their company. Since the show is a drama, there are constant train wrecks along the way.

A former hit AMC show, Breaking Bad, provided a fictional account of the challenges presented by a two-man partnership. Granted, their business partnership was cooking meth, not exactly meeting the “any lawful purpose” language lawyers typically insert in company formation documents. Still, their highs and, even more so, their lows resonated with viewers.

In my own businesses, I’ve had a couple not-so-great partners. I had two cofounders in a business that we grew to just under $10MM in sales in less than 30 months. That company went from imploded almost overnight due mainly to the renegade actions of one of our cofounders. I won’t air the specific issues, although even today I struggle to understand what could have possibly motivated some of those actions. A fragile ego was among the drivers, although there must have been other issues. That experience will always stick with me since we had a great thing going, although we ultimately couldn’t survive the damage this person inflicted on our customer relationships and on our internal cohesion.

Hearing about and seeing so many challenges with business partnerships prompts the question, are they even worth it? Are Jobs and Wozniak the rare exception? Do the hassles of most business partnerships outweigh their benefits?

The Correlation Between Cofounders and Startup Success

Despite the focus on the struggles, I believe that business partnerships are overwhelmingly positive. They bring many advantages, not the least of which is increased odds of success. According to Aileen Lee of Cowboy Ventures, the most successful ventures, and those most likely to become “unicorns” (a term for software companies started since 2003 and worth more than $1 billion), are birthed by cofounders who have a history together. Of the 39 unicorns Lee researched, 35, or just under 90%, had cofounders. That 90% figure is especially significant when you take into account the fact that solo founders make up close to half of all technology company startups.

Technical lawyer sidebar: I use the term cofounder interchangeably with partner, although the latter is a word that has special meaning in the law. Partners owe one another fiduciary duties, which a very high standard of dealing with each other. Not all  cofounders have a fiduciary relationship, depending on how they structure their business relationship.

The dangers of flying solo have long been acknowledged in the startup community. Renowned author and venture capitalist, Paul Graham, lists being a solo founder among the top mistakes you can make when launching a startup (http://www.paulgraham.com/startupmistakes.html). So, why is it that flying solo is so challenging?

Benefits of Having Business Partners

Multiple founders means multiple opinions. You’ve heard the saying, “two heads are better than one.” Making decisions in a startup environment can be difficult. You have to move quickly, with limited information and many paths available to you. While startup advisors, employees and others may be able to offer great advice, there is something unique about the role of a founder. Not only do founders have serious skin in the game in the form of equity ownership, but they are also deep in the trenches, building the company, engaging with customers and vendors and doing things from which the investors are far removed.

Besides helping make better decisions, partners help pick one another up when things are not going so well, and they provide extra motivation to each other when they are. I’ve run companies on my own and it’s a far different, far lonelier journey than when you have a partner or cofounders who are all-in on making the company a success. This is something very, very few employees can provide. Employees simply think differently than founders and there is much less that keeps them up at night. The glory and the sorrow belong to the founders and it’s a benefit to share both with the right, properly-motivated cofounders.

Back to those with the gold … venture capitalists overwhelmingly prefer companies with two or more founders. The greater chance of success is one reason. Another reason is the mitigated risk that comes from backing a solo founder. When the success of an idea relies upon a sole individual, a single crisis in the founder’s life can level the entire organization. When you have cofounders, if one person burns out, gets sick or has some other personal crisis to deal with, there is a partner there to pick up the slack. Partners create a support network that increases the likelihood of success and reduces the downside in the case negative contingencies arise.

The Price for Strong Partnerships

Multiple opinions about how to steer the startup ship means increased possibility of disputes. This translates into some work to make a partnership function well. Partnerships require what I refer to as the 3 C’s — communication, compromise and checking your ego at the door. These are terrific traits for all of us, although I appreciate they don’t always feel wonderful. We might not choose them in a vacuum. Sometimes, they just feel like work.

The communication and compromise remind me of marriage. Cofounders and spouses face similar challenges. Who is watching the staff/kids? What will be our management/parenting style? What are your responsibilities and what are mine?

One thing that comes up in my household is sharing the domestic workload. My wife stays at home, raising our daughter. She expects to handle most of the workload at home, although not all of it.  Lately, she has be doing a little more than we expected. Still, I am conscious of carrying my weight, doing what I can. It gets old feeling like you’re shouldering a disproportionate amount of the burden relative to your partner. And, we talk about this — we check in and discuss if the workload is dispersed evenly enough given all the other commitments and responsibilities we each have.

Cofounders will all have different motivations, work ethics and out-of-the-office responsibilities. Working exactly the same hours may work for a handful of 21-year old programmers living in the same house, although as founders get older and responsibilities change and grow, founders need to accept that there will be some differences in workloads. That’s okay, provided everyone understands the expectations and they are willing to give and take on other aspects of the partnership structure. If you’re going to work 40 hours a week and your partner is going to work 80, think long and hard about requiring 50% ownership. The handwriting is on the wall for that future disagreement. Compromise and give a little to get a lot.

Then there is that little matter of sharing the perks. I said earlier that founders get the glory and they bear the sorrow. With cofounders, you share both. This is a major issue with some people. Some egos demand attention. If you aren’t prepared to share some of the spotlight, don’t take on a cofounder. I’m tempted to go a step further and say you shouldn’t take on employees either because letting them shine is part of being an effective manager. However, when it comes to employees, you may be able to skate by being that boss who never gives credit where credit is due. Take that approach with cofounders and you are in for trouble. This applies regardless of who is wearing the CEO title. People want to be validated. They want credit for their successes. They want to feel good and play a vital role.

Choosing a Business Partner

Like a spouse, when you pick a business partner, there are certain important traits to look for in partner and certain traits that should send you running for the hills. Here a few personality “types” to avoid in the business context:

  • The founder who thinks launching the company proves they are a success. This person loves the idea of being an entrepreneur, but not the reality. They will likely lack the drive and tenacity to do the hard work day in and day out. This goes for you, too. Are you dreaming of owning your own business, so you can take more time off? Think again. You may have some scheduling flexibility in your startup, but your customers will be your new boss and you’ll have to work hard to be successful. As Gary Vaynerchuk says, “It’s easy to dream about it … much harder to execute. WORK!”
  • The smooth salesperson and gifted talker who could sell ice to Eskimos, but won’t take the time to figure out how your product or service actually works or what makes it different. An outgoing, assertive sales personality can be a great trait. However, some people with the gift of gab have learned to get by without getting deep into the weeds on anything. Some sound brilliant even when they have no idea what’s going on. This may work for your star salesperson (still not recommended), but it won’t work for a cofounder. You don’t want someone who talks a killer game, but won’t take the time to really grapple with the issues at hand. You need cofounders who understand the intricacies of your offerings and can analyze what’s working and what’s not working. They need to enjoy that part of the process.
  • The founder who is never, ever wrong. When you kick around tactics and ideas for growing a business, this person can never admit that one of their ideas isn’t that great. We all fall in love with our own ideas a little too quickly, although some people lack all perspective. They can never admit one of their ideas isn’t revolutionary. C’mon, no one bats 1000. Your discussions with cofounders should be a search for truth, not a search for personal validation in the world. You absolutely must find partners who will admit when they are wrong and take the time to see other perspectives.

Those are the types to avoid. At the other end of the spectrum, a person that will make a great partner will generally have skills complementary to yours, have a sense of humor, and be fair and transparent in the gray areas.

I will talk later about having open and honest discussions with partners and laying things out clearly on paper. However, no matter how great a job you do making things black and white on paper, partnerships are defined by how they perform in the gray areas.

Michael Eisner once said, “It’s rare to find a business partner that is selfless. If you are lucky it happens once in a lifetime.” I’d choose a different word than selfless because I believe we are all hardwired to pursue our own interests. What you are looking for is someone who is interested in seeing others succeed and someone who feels great being of service to others. If your goals include growth and profit, you want cofounders who are hungry, although you’d be wise to choose partners who have motivations other than lining their own pockets. Money and success flow from doing great things. They are by-products and they rarely arrive if the focus isn’t first and foremost on providing amazing products and services to your customers.

Some of these things are challenging to suss out with someone you have only known for a little while. This is why Aileen Lee at Cowboy Ventures talked about founders who have history together. It’s also why I believe advice to never do business with friends or family is ridiculous. Frankly, I tread very cautiously when approaching a business partnership with someone that isn’t a longtime friend or family member, someone I know very well. Sure, there is risk involved in merging a personal relationship with a business one, although I believe it’s well worth it, and it helps address (potentially even eliminate) the risk of not knowing someone’s true colors.

Making Your Partnership Sing

In my years of experience working with cofounders in my legal practice and having cofounders in my other businesses, I’ve identified a few key tactics for making partnerships work well. While not a cure-all, they will improve your business relationship, hopefully leading to higher productivity and a greater chance of achieving your goals. These things take effort. You should think of making your partnership function well as its own project. It takes time to align two or more people to push a boulder in the same direction.

Again, the marriage analogy fits. Few couples sit down before marriage and have an open discussion of expectations for the future. Will they both work full time? How many children do they each want, if any? Do they each want to live in a high rise in the city or move to a 4-bedroom suburban home? What do they want to name the dog?

Cofounders engage in these conversations a little more often, although I see plenty of founders dodge them. They may not value these conversations. Either they are running too fast to take the time to have them or be afraid of what they might uncover. Regardless of the reason, it’s a mistake to avoid them. In a business partnership context, some questions you might ask are why are you doing this? What motivates you? How much will we each work? What does success look like next year? In 5 years? What does a successful partnership look like? What are your expectations of each other? This is not your 5-year plan, but rather the definition of the shared dream and personal preferred approach to getting there.

For some tougher questions, try these: What does failure look like? What happens if you fail? When will you give up? When will you pivot and try a different approach or business model? Even if neither of you think failure or struggle is a possibility (you and every other startup founder!), discuss these questions. Play the what if game? By talking through failure questions, failure will be that much easier to recognize and avoid.

Spend plenty of time on these questions. Turn them over and approach them from different directions. You want to really understand one another’s perspectives and beliefs about how things should work in the business. Then, revisit these questions periodically. Things change. Take regular stock of how things are going and how your partner feels about the venture and working together. This doesn’t have to be the dreaded weekly business meeting that half the participants would rather avoid. This can be fun. This can be heading to someone’s apartment with a six-pack in tow or a weekend BBQ.

Set Ground Rules

From your conversations together about expectations and how you each define success and failure, lay out some ground rules for how the partnership will function. Examples of ground rules are:

  • Minimum working hours for each cofounder
  • Who will handle which responsibilities
  • When it comes time to take titles, who will be the CEO?
  • How will you communicate when there is something wrong in the business or one of you is upset about something the other did?
  • How much will you tell the employees about challenges and struggles?

Write down your ground rules. Stick to them, although don’t be afraid to set new ones or revise existing ones (together, of course. Unilaterally changing a ground rule is not in the spirit of a strong partnership!).

If you take the time to have open, honest talks about expectations and roles and to write down clear ground rules, you have a strong basis for launching your partnership.

Navigating Choppy Waters

Even with clear ground rules, disagreements and other problems will arise. Like marriages, few business partnerships are always rosy. When things get a little challenging, focus on these things.

Communication. Back to the first of our original C’s — keep up the conversations. Check in regularly. Ask how things are going. Ask what you can do better. Ask if your partner’s expectations are being met by the partnership. Ask if their goals and desires have changed. I call this syncing up. If you have these heart-to-heart conversations before you launched the business, you should be in sync at that point. Do this regularly. This doesn’t mean you have to agree on everything – syncing up is about fully understanding and appreciating the other’s perspective. Most business problems and disputes can be resolved quickly over a drink when they first arise. Address concerns quickly and do the hard work of having forthright conversations about real issues. That is part of being a successful business person and part of being a mature adult.

Acknowledgement. Recognize the strength each person brings to the business partnership. What skills does each person contribute? Always remember what your partner brought to the table and why that made sense for you to partner up. It is very common for partners to downplay the contributions of the other over time. This is especially true when partners bring very different things to the table. For example, if one partner contributes all the capital and the other contributes all the sweat equity, it’s human nature for each to focus on why their piece is the more critical one. The person putting in the work will downplay the money because they already have it. It’s common to want what we can’t have and take for granted that which we do. Don’t make this mistake. Make good decisions upfront about a fair structure to the partnership and honor your decisions.

Flexibility and Fairness.  While partners should honor their agreements, keep a little room in there for flexibility. If you both agree at the outset to work “as hard as you can” (not a great agreement because it lacks specificity) and then you marry and have a baby one year in, your “hard as you can” will likely change. That’s the kind of game-changer that would merit tweaking your arrangement with your partner(s) – maybe you put in a little more capital, guarantee a credit line on your own, give up a small piece of your ownership position. This all depends on everything else going on, although clinging stubbornly to your original deal if assumptions turned out to be incorrect is not playing well in the gray area.

Keep in mind that finding the right partner starts with being the right type of partner yourself. You want a fair, transparent partner who has your back. In order to get this, you have to give it. If things aren’t going great, take a long, hard look at what you could be doing differently. Spend some time looking at things through the eyes of your partner. Turn the lens inward now and again.

Choice. I said earlier that business partnerships are like marriages. I believe that with marriage you don’t say “I do” only on your wedding day. You say it everyday you choose to be in the marriage. It’s the same with a business partnership. You aren’t stuck in it and neither is your partner. So, don’t take your partner for granted. Don’t assume they can’t move on to another partnership or other opportunity. Similarly, don’t allow yourself to feel hopelessly trapped. Both of these mindsets undermine otherwise solid partnerships.

Putting Pen to Paper

Having a mutual understanding of how the business partnership is expected to work is critical. Putting the understanding on paper is the next step. Documenting the relationship protects everyone involved. There are many ways to document the partnership, although not all of them are equally valuable. Some cofounders order a partnership agreement (e.g., operating agreement, shareholders agreement or other founder agreement) off LegalZoom. Without an understanding of business law, they answer some questions, kick out a document and sign a subpar template agreement. Online Q&A template contract systems work well for very simple documents like non-disclosure agreements. For something as complex and custom as a partnership/founder agreement, they often come up woefully short.

Conversely, outsourcing everything to lawyers is also a bad idea. Lawyers don’t know you and your partner like you know each other. Some of your founder agreement is legalese and you will want a lawyer to draft it. However, most of the agreement should be a clear description of how you want things to work between the two of you. Sending the lawyer off to prepare a document and signing whatever they produce is a mistake. You want to read everything carefully and confirm that all aspects of your agreement with your cofounders is properly handled in the document. The best way to lead this process is by bringing your agreement to the lawyer(s).

A Final Piece of Partnership Advice

Whoever said that it’s best to separate work and personal life clearly didn’t have their own business. Bonding with your business partner is important. That bond you work on early on will help you over the rough patches.

Nothing is better for a business partnership than spending time together outside of work. If you take one thing away, it should be to simply spend time together. Talk about your business. Do it often. But talk about life too. Spending time outside of work, not talking about work, strengthens your partnership to get you through the tough times, so you can persevere to reach your goals!

Brett is The Startup Shepherd™. He has 20+ years of experience in business law, entrepreneurship and finance. He spends most of his time on startups, joint ventures and mergers & acquisitions. Brett believes there are a lot of dumb questions, but we should ask them anyway, along with the challenging ones (and sometimes it's hard to know the difference). The real travesty is silence when you have something to say.

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