During the garage-stage and Zoom-room days of a company’s life, fluidity can feel key to idea creation. The lack of contractual obligations is baked into how we understand the origin stories of the most famous startups. We celebrate rapid pivots, love scrappy MVPs over perfectly polished platforms and pay attention to repeat entrepreneurs who raise money for their next idea before they even know what it is. The ability to quickly spin up a team and launch something is clearly the core of what makes startupland so special (and, candidly, fun to write and talk about).
Yet, even though the amorphous beginning of a startup can feel energizing beyond belief, formality matters. There’s a difference, both in ownership and weight, between a founder, a founding team member, an adviser, an investor, an angel investor and an early employee. As shown by the Winklevoss twins versus Facebook, Reggie Brown versus Snapchat and, most recently, Avi Dorfman versus Compass, disputes can often arise simply because of differing definitions on all of the above.
“I don’t think it’s the title of the agreement that is magic; I think it’s just thinking through how you’re going to deal with the different possible scenarios.” Jonathan Harris, managing partner, law firm Harris St. Laurent & Wechsler
While the string of high-profile legal cases shows just how pervasive, and common, founder disputes have been for years, the current startup environment makes me think that there could be a jolt of new disagreements ahead of us. Why? Well, there’s a number of factors that could spark a fire right now: frenetic funding, a wild startup formation environment and the glorification of being a disjointed team with no titles — just passion and whiteboards.
Startups and movements need to establish clear governance to manage expectations and avoid late-stage conflict. While this formalization is easier said than done, it’s often a process dictated by your ability to confront, have conversations and, most of all, be transparent.
What else causes a rift, if not money and power?
Akshaya Dinesh, the former co-founder of Ladder, once got rejected from an accelerator program because she didn’t have a good answer to who the CEO was.
“This was before we had even fundraised anything, and it was just the two of us working on it,” she said. “We said something like, ‘We’re very early and we’re both technical so we’re kind of doing everything together,’ but if we had to choose it would be X.” Later, the entrepreneur said, she realized that the “right answer” is to confidently give a name and give a clear distinction of what each person’s focus areas at the company are and will evolve to be.
“Titles are one of the biggest reasons why co-founders have conflicts, so they’re trying to assess how comfortable you are having tough conversations early,” she said. The stress test is likely why one of the classic YC interview questions is “Who’s the CEO?” (Dinesh went on to raise millions from Alexis Ohanian’s Seven Seven Six Ventures, DoorDash, Harry Stebbings, Pear VC and Forerunner).
Techstars investor Saba Karim agreed with the notion that, after lack of product-market fit, the biggest startup killer is co-founder conflict. “And what else do you think causes a rift, if not money and power?” he said.
“What you decide today may not hold true in two years, or even two months, so it’s crucial there are cliffs and vesting schedules put into place,” he said. While the investor hasn’t noticed an uptick in founder conflicts or title inflation in the current climate, he thinks written agreements are important to prioritize once there is funding or revenue in the picture.
Plus, somewhat counterintuitively, Karim thinks an equal split of equity between everyone on the founding team is an adverse sign.
“There is typically someone who brings more experience, is working more, funding the startup where others aren’t or is the CEO — and therefore should have more equity to show for this,” he said. “If you know each other well, (and not knowing the person well is a red flag in itself), coming up with an agreement that it will be 50/50 (for two founders) or 33/33/33 (for three founders), assuming you’ll also work on it equally, is fine to shake hands over.”
Knowing your co-founder well was important for Rent the Runway co-founder Jennifer Fleiss, who stepped down from her role at the recently public company in 2014. Jennifer Hyman, her co-founder, continues to run the company as CEO.
“I feel just very lucky of having had the perfect setup to meet a co-founder: We were at Harvard Business School, we happened to be in the same section of 90 people, and it was a really authentic way to hear how we each thought about business case studies because it’s what you’re doing every day for a year,” Fleiss said. “Not intentionally during that first year, it was this trial of, ‘Would this person be a good fit?’”
Fleiss’ advice to founders is to simulate those relationship-building moments before committing to business with each other. For those who aren’t lucky enough to find a potential partner in their business class, though, her advice is to do MVP tests of your product early.
“You’re testing consumer reactions, but during the process, the biggest thing you’re testing is working with your co-founder,” she said. “Yeah, focus on the data and if this idea is going to work and make money and all that, but most of all, decide if you like doing this and enjoy dealing with this person.”
The entrepreneur, now an investment partner at Volition Capital, thinks more frequent questions about who deserves what title is a “sign of time in the moment we’re living in right now.”
“Obviously salaries and perks are at an all-time high and the asks from employees at startups can sometimes feel like a lot,” she said. “To me, if it’s not crystal clear that you were there when that decision was being made or during the first discussion of starting a business … I’d feel awkward to even ask for that [title] or assume that.”
That said, there’s a difference between entitlement and self-advocacy.
It’s an ideas economy
Arun Subramanian, a partner at Susman Godfrey who worked for Dorfman on his recently settled lawsuit against Compass, spoke to TechCrunch about how difficult it can be to argue impact. Subramanian noted that money, and the success of a business either through a flashy valuation or impressive revenue, can be what triggers early team members to care about credit. But, he said, the cases that escalate from arguments into the legal world often come from a more human place.
“I think that for entrepreneurs who are out there, what they care about first and foremost is their career and their track record,” he said. “If you’re not going to recognize the contributions that I made, that’s something that is a serious issue for me and one day impacts my life and my career.”
Adam Wolfson, a Los Angeles-based partner at law firm Quinn Emanuel, was involved in the early innings of the Compass lawsuit. Before that, though, he represented the Winklevoss twins when they sued Facebook founder and Harvard classmate Mark Zuckerberg for stealing their idea for the social network platform. The contentious lawsuit is perhaps the best-known founder dispute story out there and ended in a private settlement with the twins, now the co-founders of Gemini, winning tens of millions.
“Avi brought the technical know-how to Compass, but with the Winklevoss twins it was the opposite — they had a germ of [an] idea and had no technical no-how on how to do it, so they brought on Mark Zuckerberg who not only saw the value and better version of the idea, but was also able to deliver,” Wolfson said.
Jonathan Harris, a managing partner at law firm Harris St. Laurent & Wechsler, thinks that while the general contours of founder disputes look similar, the results and nuances behind each argument are different. That said, for those who feel wronged, Harris has the general philosophy of trying to resolve these issues without litigation. “I don’t see how making this stuff public helps the business,” he said. “You want the business, and the business wants the business to succeed.”
He always asks co-founders to talk through three different scenarios: What happens if the business is a home run? What happens if this business is just fine? And what happens if the business works out but you don’t stay a part of it?
“I don’t think it’s the title of the agreement that is magic; I think it’s just thinking through how you’re going to deal with the different possible scenarios,” he said.
The conclusion here is a somewhat obvious one: First, it’s important to build a co-founder relationship built on confrontation, transparency and willingness to have difficult conversations (even about failure). Then, prioritize records, either through an operating LLC agreement, a shareholder’s agreement or even an email.
Don’t let the whimsical early days of your startup distract you from formalizing important differences in how ownership looks. As we’ve learned through loud legal disputes and quieter signs, titles matter — perhaps even more than the name of your startup does.