The Practical Ways Cofounders Protect Your Best Interests
As the cofounder of a startup, to protect your best interests should be a priority. No matter how friendly you are with the other members of the founding team, you have to look out for your own best interests. Otherwise, you could end up on the outside looking in.
5 Tips for Protecting Your Best Interests
As much as you may like to think other people are looking out for you, the reality is that you are the only person who is 100 percent focused on protecting your best interests. Thus, you’re the only one who can develop a strategy that keeps you safe from undue harm. Here are a few suggestions:
Develop a Sound Founders’ Agreement
When starting a business with a cofounder, you should develop what’s known as a “founders’ agreement.” This is nothing more than a clear agreement between all founding partners about a number of key issues the company may face. It’s not necessarily a legally-binding contract, but it’s a nice baseline to keep everyone in check. Think of it as a negotiable document that provides a framework for the business, but that can be adjusted as time goes on.
“If a founders’ agreement isn’t as legally binding as some other documents you’ll be dealing with, does that mean it’s less important? No, not at all,” entrepreneur Ben Rashkovich explains. “It might not be binding, but a well-done founders’ agreement will protect you in case of a dispute later on. You’ll be able to point back to the founders’ agreement to explain why you did this or why your co-founder shouldn’t have done that.”
Founders’ agreements typically touch on things like business names, company goals, roles and responsibilities, equity breakdown, vesting schedules, intellectual property, salary and compensation, termination clauses, etc. Again, you aren’t etching these in stone, but the agreement should carry some weight.
Have a Strategy for Your Board
It happens more often than we’d like to think. A couple of entrepreneurs create a product, start a company, and the business experiences tremendous growth. Eventually the business grows to a point where equity investors enter the picture and a board of directors is formed to help shape the direction of the company. All is well…or at least the founders think.
At some point, the board of directors gets together and decides that the founders, as innovative and creative as they are, no longer represent the best interests of the company. So they gather together and vote to remove the founders from the executive leadership team. They quite literally get fired from their own companies.
Successful entrepreneurs and founders like Steve Jobs, Jack Dorsey, George Zimmer, Daniel Zappin, David Neeleman, Jerry Yang, and Andrew Mason – just to name a few – were all fired from their companies at one point or another. And though many of them continued to hold important roles – or were even asked to return to their former positions at a later date and time – situations like these speak to the reality of entrepreneurship.
According to one estimate, 45 percent of founding CEOs are fired within 18 months. While the exact number may be slightly lower or higher, one thing is clear: you aren’t as safe as you think you are. As your business grows – and growth is obviously the goal – you naturally lose some of the control and influence that you had on day one.
If you’re a “product guy” – an entrepreneur who innovates and creates, but doesn’t necessarily have the business leadership background that’s common in executive roles at large, successful companies – you face an especially high risk of being ousted in the future. Ryan Howard, former CEO of Practice Fusion, is a classic example of this. The self-proclaimed “product guy” was fired from his company not once, but twice.
This article isn’t meant to scare you, but should light a fire under your seat and convey the importance of being proactive in how you protect your best interests. And, thankfully, there are several steps you can take to lessen the risk (or at least soften the blow).
The first suggestion is to plan for these scenarios ahead of time. As awkward as these “what if” scenarios may be, it’s better to flesh them out now than deal with them later.
“Don’t avoid prickly or uncomfortable subjects, like ‘what will happen if this all ends today,’” Howard advises. Instead, make a very clear plan around things like vesting schedules and rules/restrictions regarding termination.
It’s also wise to hire a lawyer – one who has nothing to do with the company. By separating your own identity from the company’s identity, you can avoid getting too wrapped up in something that’s difficult to control. Your personal attorney can help you draft sound agreements and things like accelerated vesting or generous severance packages.
Take Equity Seriously
Equity is a serious deal. Not only does it determine your financial standing, but it also says a great deal about your power and influence. While you should avoid being too heavily focused on equity – at the expense of ignoring the product and customer – it’s something that requires a great deal of attentiveness.
Be very careful with how you discuss equity with potential hires, investors, and outside partners. It’s also imperative that there are clear vesting rules in place to prevent founders or other key business partners from leaving the business and taking their substantial ownership in the company with them. This is a key factor to protect your best interest in your company.
Because topics like equity and vesting can be sensitive ones, it’s helpful to hire an attorney to provide an objective third-party perspective. If there’s some hesitancy among founders, concessions can be made. For example, acceleration of vesting can be used to quell someone who is fearful of being terminated without cause before vesting takes place. These little nuances must be considered and taken seriously.
Prepare for Life Without Your Cofounder
When you launch a business with a cofounder, there’s an additional layer of risk that must be accounted for. For example, what will you do if your cofounder suddenly and unexpectedly dies?
In many cases, the premature death of a founder causes the business to fall apart. But with the right agreements and provisions in place, you can keep the company together.
One of the more common strategies is for cofounders to purchase life insurance policies on one another. There are a couple of ways this can work:
- The life insurance policy is coupled with an agreement that states the surviving partner will use the funds from the life insurance payout to buy the deceased partner’s shares (thereby avoiding the problem of having them spread out among people who have nothing to do with the business).
- In a case where each partner has a unique skillset that’s critical to the operations of the business, the life insurance policy is structured to provide the surviving founder with enough money to hire an adequate replacement to keep the business running.
Thankfully, life insurance is pretty inexpensive when viewed as a business investment. Shop around and compare insurance rates from a variety of providers. You’ll find that, for just a few hundred dollars per year, you can secure a sizeable death benefit that keeps your business headed in the right direction.
Make Yourself Indispensable
Many entrepreneurs think that, once they start a business, they’re done proving themselves. As a business owner, you have to protect your best interests each and every day. After all, they now control the reins and can make all of the important decisions. But this isn’t necessarily true. As we’ve discussed rather extensively in this article, founders aren’t always immune to criticism and consequences. Thus, you have to continue proving yourself.
Even as a founder, you must set a goal of being indispensable. In other words, you should bring so much to the table that there’s no questioning your value. Thus, when a disagreement arises, or there’s a fork in the road where the board can go in one of two directions, decisions are made in your favor.
Stop viewing yourself as the person pulling the strings and instead look at yourself as an asset to the company. The moment you stop providing value is the moment you risk becoming obsolete. Prove your worth every day.
Be a Proactive Founder
There may be a time and place for being reactive, but this isn’t one of those areas. What starts as a small business in your basement can quickly scale up to a successful organization with dozens of investors and board members. If you aren’t careful, their collective voices can become louder than your individual voice – even if your voice is the one that’s been there from the beginning.
Whether it’s getting ousted by the board, having a disagreement with a business partner, or having your cofounder pass away prematurely, there are a myriad of risks that threaten to disrupt your role as you know it. By developing a proactive plan that accounts for each of these possible threats, you can set yourself up for success and stability for years to come. Don’t miss this!