‘All Business Relationships End, Whether It’s An Exit, Illness Or A Falling Out. What’s Your Plan?‘

Cillian Balfe – Lawyer

‘Everyone has a plan till you get a punch in the face’. Losing your co-founder feels like that. Over the past decade, I’ve started a good few businesses, some more serious than others.

Starting a business can be quite impulsive and tends to draw optimistic people together, which maybe isn’t a great recipe for pre-planning. But, over that time I built a simple pattern for spotting types of co-founders.

In this post, we’ll learn about my experiences with 3 types of co-founders, the good, the bad and the ugly. How you can avoid the ugly, and find the good.

Ultimately all relationships end, whether that’s an exit or a fallout. I’ll show you what I did with each real-world situation, and how you can be smarter about it.

We’ll hear from my solicitor who advised on some of the exits. He’ll give his experience dealing with a lot of company breakups.

Also an interview with my co-founder of Bullet and how we managed our split to remain friends and work buddies.

I’ve put together a simple founder’s workbook I think every team should fill out, it starts a good framework before the high fives stop.

Take Away:

– Founders can be grouped into the good, the bad, the ugly. Avoid the latter.

– A little pre-planning will help you find the right partner and save a lot of heart-ache.

Over the past 10 years, I’ve got into business with a good few co-founders. They can be loosely grouped into three.

The ‘Good’, these are people who want the same things as you out of the business.
The ‘Bad’, these aren’t bad people they’re just not looking for the same things out of the business that you are.

The ‘Ugly’, these were bad people you don’t ever want to get into business with.

The most common fall out is the ‘Bad’, where people just want different things. Let’s dig deeper.

– Our Mail To Our Lawyer –

Over the past 10 years, I’ve got into business with a good few co-founders. They can be loosely grouped into three.

The ‘Good’, these are people who want the same things as you out of the business.
The ‘Bad’, these aren’t bad people they’re just not looking for the same things out of the business that you are.

The ‘Ugly’, these were bad people you don’t ever want to get into business with.

The most common fall out is the ‘Bad’, where people just want different things. Let’s dig deeper.

What Happened:

This was with Bullet, and the founder in question had a close connection with another founder. There was a complete miss match from this person who we’ll call ‘Frank’, and reality.

This role of Frank was to provide accounting expertise, this person was writing books on the ethics of accounting, so a pretty well regarded and knowledgeable person. So he’d expert knowledge, we’d some history with him – all looked good.

This person worked remotely so most of our dealings were over emails with say a two-week meetup. We started to notice that emails would be answered in bursts every 3-5 days, most of them with short answers or links to sites. Sound familiar.

This built into a bigger problem when we drove 3 hours to meet this person and he didn’t respond to any calls, or texts when we got there.

After about 6 months plus of this we finally had a meeting with him and to our amazement, he got very erratic and aggressive when we confronted him with fact after fact. Within about 10 minutes he’d stormed off, unfortunately not into a moving bus.

Telltale Signs:

The above story stinks of a couple of personality traits.

A little narcissism, it wasn’t his fault – he couldn’t see the problem even when we drove 3 hours to meet him for a no-show. If you’re presented with two people telling you the same thing, you’re going to have to believe some of what they say. He didn’t.

Defensiveness, super irate when confronted or stone cold during the meeting with an angry follow-up email blaming everyone.

Impulsiveness, everything was now-now-now with him.

 

How to spot it:

With narcissism, a good way to look for it is in their previous dealings with clients or people. They’ll always be in the right, or even explain a situation to you where you’re thinking how wrong they are and they’ll finish the sentence with an exasperated look seeking confirmation that they’re right from you.

A way to spot this impulsive behaviour is when you’re having a project meeting with them they’ll say they’ll get everything done ASAP, there is no planning, it’s very now behaviour and they’ll probably tend to come from a services business (that’s not a give out).

Defensiveness links in pretty close with the narcissism, they’re never wrong and they’ll push back on if their idea isn’t loved during an idea brainstorming session.

How to resolve:

I’m going to split this into 3 subparts, legal, company and mental health.

Legal:

Legal was a problem as we’d taken a shareholders agreement off the web. The agreement was ok in principle but it didn’t provide the framework for removing him. By framework I mean, putting a valuation on the shares, creating a bank account and placing the money for his shares there and other procedural stuff. Seems simple right.

– From Our Lawyer To Us –

That mistake would mean to get it fixed we’d have to go to the high court (the highest court in Ireland) and the costs start around €50-€70,000.

Our legal advice was that the judge would just tell the two barristers (lawyers) to work it out amongst themselves.

The biggest learning curve I got from the Courtside of Law is unless a law has been broken it’s very hard to prove anything. It’s a lot of he said, she said. Pointless.

How even if we had had a contract and myself and John deemed that contract was broken we could remove him and it would be up to him to pay €70,000 to take us to court. So the €1,500 we saved on a shareholders agreement could have cost us €70,000

* Note I’ve heard few stories of people using the high cost of a legal system to force young bootstrapped founders hands do be careful.

In the end, our solicitor Cillian suggest just sitting on it. He felt over time the guy would get bored and want an out. That’s exactly what happened, he offered his share for about €4,000 and we bought them from him.

Company:

If we hadn’t have been able to shake him off it would have affected our ability to raise money. Usually, founders are connected to a company in 3 ways, employee, director and shareholder. The later, shareholder, is the hardest to shift. Shares are seen as private property. It could have killed our company.

You want to manage this situation well but also don’t let it consume the company. Nothing happens fast, get good advise and be clever. You might be all angry and ready to take them to court but is that a wise way to spend your money.

Regarding his skill set – we simply hired a new accountant. There was no need for him in the end after all. To save some money we hired a graduate and paid in cash.

Mental Health:

If startup life isn’t a struggle already having a Frank wandering around your company can really bring you down. It’s like you’re working your ass off so they can just turn up for the party and their slice of the cake.

Manage it well and stay focused on the company. BTW Getting a lawyer who wants to go to town on them, isn’t always the best solution. Your solicitor should give you a good rationale soundboard, even if at the time you want them to empathise with your anger at the unjustness of it all.

Take Away:

– Absolutely keep away from ‘Ugly Founders’, at all costs.

– If any of the flags I’ve highlighted above happen, start to document situations and look for a 3rd party to give you objective feedback.

– Don’t rush to court. Everyone loses.

“Working Together For 3 Months Told Us It Just Wasn’t Going To Work. We Just Wanted Different Things “

What Happened:

This was with another business I started with a good friend and this is probably the most common situation you’ll be in. Although movies are all about underhanded deals I’ve seen over the past decade that this founder issue is the most common.

Pretty much it’s two founders on the wrong page. So a simple example would be a founder with grown-up kids, no mortgage and is bored with the job and wants to try something new. He’s at a different stage in his life, has no financial pressure and just wants to turn up at 10 work a bit and head home at 3, but he might have some skills you need.

The other founder is a young ambitious woman, she knows building a company is 12 hrs a day, probably no holidays for a couple of years, no sick days and she might only have a year savings to live on.

Boom, everything is going to start out great. When the share split is happening he’s going to have a higher value on his time/experience and feel he should get 50%. 6mts in she’s pulling all-nighters and he’s on holidays.

In my case, we were the same age, same ambitions but I hated my job and his career was starting to take off. So we were a complete miss match, not bad people just a miss match.

Example 2 

– My Response Email To Starting A New Agency –

What Happened:

When I started out learning about the web I originally wanted to build a web agency, so I partnered up with a great guy who was looking to do the same.

So we decided to work together. I already had a pretty young and crappy web business. He had a more established business. I had 3 web products built and he was focused 100% on building a digital agency. Me product and him, service, you know where this is going.

We found out pretty early on that we were a mismatch although we got on great and had the same vision about what an agency should be doing. I ultimately wanted to focus on ‘product’. I had hated client work but thought it was the kind of lowball clients I was pulling. He was pulling a higher quality client, but to me, it was the same crap.

Neither of us was wrong, or right – we didn’t want to work in the same business. He went on to found a great agency and I founded Bullet.

Telltale signs:

Remember ultimately every relationship comes to an end. So at some stage, there is going to be a mismatch with your founder, someone might get sick, buy a house and need to pay a mortgage, have kids, want to leave.

On the miss match seeing as neither party is wrong we have a questionnaire you can download that will help you build a framework for dealing with founder conflict and seeing where you both are. It’s a working document, so good to update it every year. It just gets everything out in the open that you normally wouldn’t talk about.

Here are some obvious things to look at and some good questions to ask.

1) What stage in your life are you in?

2) How similar is your life?

3) Are you both in a similar financial position.

4) What do you want out of your business?

5) What to do if someone gets sick?

* Download a full free workbook of this questions

How to resolve:

You really want to avoid an obvious mismatch, so again look at the stages you are in life, see how you work together before making the jump.

Have a framework document done for a when the relationship ends so everyone is clear on that they agreed to.

On the second example, we worked together for about 4-6mts on his business. He took a desk in the office I was in and I just invoiced him for the work I did. No big legal setup or complex contracts. We just worked together with a goal, I got paid for my time as did he. Simple.

Outside of a miss match pay attention to your work-rate, the stage of someone’s life can give you an indication of this. But, I see a lot of founders falling out cause one works at 20% and the other works at 90%. They are really hard things to prove in court, like impossible. So again work together first before booking the little white chapel.

John and I went into business over a coffee, but by 11 pm. that night we were still working, and that continued on for years.

Take Away:

– Work together for a period of time before starting a company. Just bill the project for your hours and put the profit into a pooled account for your new company.

– Keep an eye on work-rate, make sure that matches or you’ll see resentment building later in the day. 

– Download our workbook below, it will help you focus on the right questions. 

What happened:

John (Bullet original founder) and I were introduced via a mutual friend. I’d built a product that automated company formations and John was starting to work on Bullet. When he showed it to me it was just a powerpoint presentation.

Two coffees later we were in business. I wouldn’t advise that to any founder. All startup people are optimistic and hunting for the good in everyone.

But, it worked. We had the same heavy work ethic. I remember being in London for the summer and one balmy night I couldn’t sleep, so I started working on some screen designs. There was John’s skype showing ‘active’, so we worked to the early hours of the morning.

We worked like that for about 6-7 years. But, ultimately we weren’t getting the growth in Bullet we’d hoped for. We’d launched in Ireland which didn’t suit the kind of marketing we were looking to do. It took two years to reverse the Irish tax automation out of the product so we could sell internationally. Lots of reasons.

About a year before he left, his partner Louise, a developer was looking to go contracting. We agreed that Lou would swap places with John. She’s getting back to core development which she wanted. We get to upskill another senior developer which removes risk.

TIP: You also have to take into account family life, if this worked for both of John & Lou then it worked for the company.

But, taking John out of the daily business removed him from the wins and just left him with crappy accounting problems to solve. John just got fatigued with it. He didn’t pull a salary at any stage from the company, he lived on savings and his partner supported him. That’s a long time with no reward.

 

Telltale Signs 

One of the giveaways was that tech wasn’t being delivered as fast as normal. John was to work on Growth with me, while Lou focused on product. But, that’s a kind of hacky development that John didn’t enjoy.

In true form to his character, he raised it with me after a couple of months. Not an easy thing to do. I’m sure he wanted to just flick a switch and turn it back on.

We said we’d try a couple of things and then the ice cracked.

How To Resolve:

It certainly wasn’t news I wanted to year. It’s not just an employee leaving. It’s someone you’ve spent more time with than anyone else. It’s the possibility of everything you’ve worked for collapsing. Ultimately it’s a feeling of powerlessness.

Like that first break up you had after a tumultuous 7-day relationship when you were 16. You were thinking honeymoons in Barbados, she was thinking ‘Dave’s quiff is bigger, I see a better future there’.

No matter what you do nothing is going to change that decision. For the sense of relief, they’re probably feeling, you’re head is exploding. Best thing, take a day, get a walk in and focus on the future.

Good marriages don’t end in divorce, so don’t force it. Here are the key things we did.

We took a day, and drew up a list of pro’s and con’s here are some of the core ones.

Cons:

– I’d lost my CTO (probably the worst thing that can happen to a SaaS business).

– We weren’t marking enough money to hire a new one (probably the 2nd worst thing that can happen).

– I’d lost a soundboard, I realised that more as time went on.

– I’d added workload to sort out.

– The accounting knowledge was lost. I’d kept ignorant of all the account so that I could design an accounting product for someone just like me ‘an accounts hater’.

* BTW all those cons would have closed the company down that day. 7 Years of work gone.

Pros:

– It was out, now the frustrations made sense. Cool, we can now move it forward.

– No CTO meant no product development which would allow me to focus 100% on growth.

– Those growth tasks could be allocated to other people.

We met up a couple of days later. I was just super focused on keeping the company going and not losing a friend. We shook hands and just talked it out, we focused all our conversation on the future not the why. What’s the point in talking about the past – that’s over.

Sure did I reflect on it, what we could have done different – deffo – but that wasn’t going to help now. I was fighting for my future.

We both owned 50% of the business so we agreed on a price for 50% of the company. There was €30k in the bank so John suggested €15k, 50% of what was in the bank account. That was for 8 years full-time dev work, that’s a big pill to swallow 

We talked about keeping some % of the business, but Johnny wanted a clean break.

I talked about the cons I faced and suggest if I put a hold on feature requests (new dev) could he support the product. Bullet was pretty much built now and was bug-free at this stage.

Bullet only needed some budget updates, general maintenance and the odd curveball accounts questions answered. He agreed. I can tell you that was some weight on my soldiers.

Although the agreement had worked out god for Bullet i.e. the company could still operate. I felt I’d let Johnny down terribly. Although I’d no marketing experience before joining Bullet, it was my role and I’d failed at it.

Johnny had put so much into Bullet, we’d built a product that scored 72 in a Net Promotor Test (6 points more then the iPhone scored – hello! We’re an accounting product, not a shiny iPhone).

He’d never pulled a salary, contracted to support the company and above everything we’d a vision for Bullet, a joint vision. It was a truly sad day for me.

After about a month where I felt like there were a days work a month for Johnny. I wanted to make sure he wasn’t feeling used 

We agreed to a day a month of work, I said I’d pay him a daily rate of €500 for the continued support. He agreed, this pacified my concerns and reduced my risk, we put a time limit it on it of a year.

In a testament to our friendship and partnership, John still hasn’t officially left the company, nor taken his money out, nor invoiced me 

He kept his part of the deal and I kept mine.

– John To Say He’d Just Updated The Servers, I Never Asked – 

 Take Away:

– They all come to an end, take some time to calm down.

– Write a list of the pro’s and con’s to the breakup, see if you fill the gaps yourself and can they help with the ones you can’t.

Introduction

Cillian is Head of our Corporate team in Whitney Moore and advises clients on transactions in and investments through Ireland. He advises many leading Irish and international companies on mergers and acquisitions and equity investments.

Whitney Moore is a law company that has experience in a broad range of practice areas and industry sectors acting for Irish and International clients.

Founder Agreements

Shareholders agreement is the key document to setup, addressing issues like founder illness, how and when the founders want to exit, if additional capital is needed where does that come from, also a founder’s means might be addressed for example does one founder have secondary income requiring them to need less from the company etc. It’s to highlight any miss matches and to build a framework of what happens if that mismatch happens in time, like illness. ‘Ultimately every relationship will terminate you just don’t know when’, the shareholder’s agreement tries to build a framework around that.

Founders tend to fall out over a mismatch in expectations, and other mundane issues.

Options When Things Fall Apart:

– Best option – is to sit down and sort it yourselves, early.

– Mediation – brings two parties together to help them come to an agreement.

– Arbitration – more formal they decide what outcome is, more expensive than litigation.

– Litigation – is usually fatal for a startup so avoid it. Even with small startups litigation might mean you’ve to do to the high court, that starts at €50-70,000. Never mind the time lost.

Take Away:

– Chasing the courts isn’t the smartest thing.

– Start building your founder frame agreement.

Valuation:

A lot of the time when it comes to founders parting ways there is a big, usually deluded conversation about the valuation of your business.

I’ve been there a lot of times and it’s usually a mash of someone thinking they provided more value to the business then perceived. Or they won’t be rewarded for time worked, but the reward isn’t there because the business is still struggling.

People outside of the business world put a lot of value on the lightbulb moment. People inside business but little value on it. Everyones has had an ‘OMG I had that idea about ten years ago’, moment, but few did anything about it.

Here is how I approached the valuation of any business I wound down. Everyone thinks they can turn it around. But, usually when the team turns sour so does the momentum.

3 key things to keep in mind.

– If it’s not making a lot of money don’t fight over it. Just split it.

– Nothing built is really that unique so get over it.

– Just share the software (that’s where you think the golden egg is) you get a version of the software and so does the other person. You’ll feel like you’ve got something for your hard earned work and feel rewarded. Everyone is happy.

Take Away:

– Be realistic, and focus on the future, not the past.

Recap: 

We’ve talked about the 3 main types of founders you can work with and look at real-world examples of what happened, telltale signs and what you can do.

Avoid the ugly as much as you can. Make sure you’re a good match so you turn the bad into the good, it’s just a match.

We’ve seen two founders who parted ways talk about what happened and how the world kept on spinning.

Cillian the lawyer gave his thoughts on founders fallout, usually the most common intercompany issue he comes across. He backs up the thinking throughout the post.=

Take Away: We’ve Just Started – What Can I Do?

– Fill out the workbook.

– Work together before committing to anything, 2-3mt would be a good time frame.

– When you’re working together keep in mind the questions in the guide.

– It’s better it doesn’t work out now, then a year down the road.

Take Away: We’re Breaking Up – What Can I Do?

– Just pick a price on the product/service, remember both of you are losing so compromise.

– With product split, the software out it alleviates a lot of I the ‘I’m losing out’.

– With service split your customers out.

– Create a list of all the tasks your co-founder did in the company and start looking for replacements, outsource on Upwork, hire consultants.

– Remember, it’s better to lose a founder who’s not engaged.

– Focus on the future, it’s not going to be with that person no matter what you do.

What’s your founder story? Let me know in the comments below. I always respond.

Everything You Need To Do Next

Is In Our Workbook Below