Ask a Birb: Trouble in Cofoundland
Breaking up with a co-founder while raising a round.
Dear Birb Street,
I’m the founder of a pre-seed stage company. We’re a small team that’s operating off of a few angel investments as well as money both my co-founder and I put into the company, and we’re trying to raise a seed round as soon as possible.
My co-founder went to a prestigious school and has an impressive resume. I had been working on my startup alone for a while, and I thought they would complement my skillset well, so I recruited them to join me around a year ago; we hadn’t worked together before.
We were working together fairly well until a few months ago. My co-founder had left a well-compensated job and was starting to become dissatisfied with the level of compensation, so I gave them a raise and also promised that there were more improvements, both in terms of compensation as well as day-to-day work, to come after the fundraising process finished. However, weeks later, after our most promising lead for our seed round ended up not working out, I noticed their performance was slipping, and I found out later that they had started a part-time job without telling me.
I can definitely understand founders needing to pick up a side gig to pay the bills; however, I had made numerous compensation and role adjustments to try and keep my co-founder happy, and now they were going behind my back to pick up side gigs and did not have nearly the same level of commitment as before; I couldn’t even tell if they were still working full-time hours.
Furthermore, their decrease in performance is jeopardizing the morale of the rest of the team; I have non-founder team members who have more initiative and passion for what we’re building here, and I’m worried that my co-founder’s lack of commitment will start to impact them negatively.
I’m considering revisiting my co-founder’s compensation again, but I’m not sure that it’ll be very effective given that the last few adjustments didn’t prevent this from happening, and I’m hesitant to fire them given that I’m in the midst of a fundraising process and that investors might be scared off by a split now.
— Irreconcilable Differences
Dear Irreconcilable Differences,
First of all, I’m very sorry to hear that you’re in this situation. I imagine that in situations like these, not only does it feel like the company itself is on the brink of imploding, but, emotionally, it can lead to some toxic interpersonal feelings.
I don’t want to downplay the stakes of the situation; it’s startup folk wisdom that north of 60% of startups fail due to co-founder conflicts. However, the good news is that this is a widely-acknowledged breed of startup trouble, so I think you will find more sympathy than you expect from other founders and even investors.
What you should do is going to be quite specific to your relationship with your co-founder and your current fundraising situation, but a few tips I’ve heard that might come in handy are the following:
It’s probably not about the paycheck.
It sounds like you’ve already made a lot of compensation adjustments, but it doesn’t sound like they’ve made much of a difference. Although your instinct may be to try and incentivize your co-founder to stay engaged, you need to step back and ask yourself: Is it really about the compensation? At the end of the day, if your co-founder doesn’t want to be there, no amount of compensation adjustments or promises will keep them around.
Don’t be afraid to break up.
It’s much better to have a quick, clean breakup early in your startup’s life than a long, protracted deterioration of the co-founder relationship that eventually explodes when a lot more money is on the line. The task of negotiating a graceful exit and cleaning up the cap table may be daunting, but it only gets worse with time; plus, VCs have seen more co-founder breakups than you think. What seems like devastating news to you is actually something any experienced investor has seen numerous times.
Don’t delay.
Your chances of success increase significantly if you prioritize getting this resolved quickly. It’s not a good idea to try and juggle something as complex and emotionally charged as a co-founder breakup alongside raising a round; since both can be very complicated, having interdependencies between them makes it a lot more likely that one will delay the other or that a hitch in one arena will ruin plans in another. And, delaying a resolution is probably decreasing not just your morale, but also the morale of your more motivated and passionate team members.
You could be doing them a favor.
Honestly, your co-founder may feel just as trapped as you. They could desperately not want to keep working on the startup but feel like they can’t walk away because of their preconceptions about entrepreneurship, their unwillingness to be seen as a quitter, their hopes and dreams for the equity, their sense of duty to you, or any number of things. The best possible way to facilitate a friendly breakup is to make it their idea: Tell them that you don’t want them to be in a position where they can’t utilize their strengths and do their best work, and that you want to explore different options to solve this problem, including transitioning them out and helping them find their next role.
Don’t let things turn hostile.
If your co-founder goes hostile on the way out the door, they can do a lot of damage to the company. Do your best to frame the situation as mutually beneficial, and treat your co-founder with respect and appreciation. People are great at sensing when they’re getting screwed, so when the stakes are this high for your company and the situation this delicate, I wouldn’t recommend playing hardball.
At the end of the day, no amount of advice can make what you’re going through easier. So plan carefully, reach out to other founders for support, and, most importantly, take care of yourself so that you can weather this storm with a calm mind and balanced spirit. Best wishes, and I look forward to seeing you on the other side of this!
Sincerely,
The Birb Street Journal