7 simple steps of cofounding the right way
Cofounder teams are more likely to succeed in the long run than solo founders. This belief is shared among many startup ecosystem members - from investors to accelerators. However, unfortunately, about 70% of business partnerships fail because of people / cofounders’ issues. How is it possible that if partnerships are good for us, why are we so disastrously bad in it? Because we underestimate the conversations necessary to set it up right, the knowledge required, and the time needed.
The next practical question is: can we do something about it? The answer is yes, we can. It starts with awareness and knowledge. That we should not expect and assume that we know how. What do you think would be a failure rate for first timers jumping with a parachute without previous experience or instructions? Somehow, there are very few of us who would even think of jumping from 10km high without a parachute or with a parachute that we do not know how to use. I believe it is mainly due to that fact that the fatality rate for skydiving is even less than the one for car driving — below 1%. It is because we are aware that before trying to do that we should first learn how.
However, we consider it completely normal to enter business partnerships — without learning about the pitfalls and mitigating the risks.
So how to do it right? Combining my own experience and expertise, listening to many cofounding stories gone wrong (and occasionally some gone right), working with 100+ cofounding teams and researching everything I could find out there, I developed a methodology of 7 simple steps of cofounding done right.
Step nr. 1: confirm that partnership is right for you. There is no one size fits all. Before going down the partnership route — check if partnership is the right choice for yourself and your project.
Step nr. 2: know what you are looking for: the specification of your future cofounder needs to be based on your business plan. Next important step is to be crystal clear about your motivation. Many failed cofounding teams could be traced to ‘I did not want to do it alone’ motivation.
Step nr. 3: preselect potential cofounders: once you know what you are looking for — spread the nets. Usual categories are friends, family, ex-colleagues — and while cofounders found in these pools can work — they do have some inherent increased risks. Plus — there might be other — more suitable candidates out there. Act as if you were recruiting your first employee — look wider & keep looking until you find the right one.
Step nr. 4: dating times: do the due diligence! Get to know your potential cofounders — what are their working styles? Personalities? How do you work together? Try before you buy! Very important in this stage is to define the framework — what happens if the person joins your team? What happens if they do not? Do they have any right for compensation? Does that impact the ownership of the intellectual property potentially developed in this time? Make sure you have the conditions clear and understood by all parties and preferably documented in writing.
Step nr. 5: get serious: in this step you are going to set a foundation of how well (or not) your team will perform. This includes allocation of roles and responsibilities, defining the milestones and KPI’s for individual team members, flagging potential risks and mitigating them, designing the working culture and going through a list of conversations you need to have — aka what happens if? .. a cofounder leaves, a cofounder gets long-term ill, a cofounder stops performing…
Step nr. 6: split the equity: potentially one of the most sensitive and crucial parts of establishing a business partnerships. Default equal splits or ‘naked’ equity splits without vesting — are by definition a wrong choice. For cofounding team to be stable — fairness of the equity split is nr. 1 factor. The discussion about equity should also, next to equity allocation framework, include equity recovery framework — aka what happens with the equity if a cofounder leaves or stops being an active cofounder!
Step nr. 7: cofounding agreement: only now talk legal. Once you defined the framework which fits your team — it is time to implement it in your cofounding agreement. Do go through the effort to find a lawyer who will help you to draft a cofounding agreement which is clean and simple. If you do not understand any part of it, it is not good enough! Crucial element is to keep it as a living document — make it a Christmas party tradition to look through your cofounding agreement and see if any part is dated and should be updated to reflect the actual reality of your cofounding team.
Follow the map! It does help to get to the destination of stable and successful business partnerships.