Every startup faces significant challenges on the road to success. With more than 50% of all small businesses failing in the first four years, and the fierce competition faced in most industries, you need every advantage you can get.
Which is why it is so important to start on the right foot. Having two founders instead of one can greatly increase the odds of success for a startup. According to a recent Kauffman report, two founders see 30% more investment and three times the customer growth rate than founders who go it alone. They’re also less likely to scale too quickly and take on more than they can handle.
Knowing you need a co-founder in theory is one thing, but not every entrepreneur with a million-dollar idea has a partner lined up with whom they want to start a business. How then do you go about finding the right match? For a young entrepreneur with a head full of ideas, this is often the first challenge they face, and they’re not alone. Matchmaking sites like Founder Dating or CoFounders Lab were built with this problem in mind – to help find someone with the right profile who compliments your personality.
When searching, or when you think you’ve find the right partner, you want to know you’ve made the right choice. Let’s take a closer look at some of the factors that drive success and how to formalize a relationship between new co-founders.
Looking for a Good Match in a Co-founder
The very first thing potential co-founders should discuss is their motivations. Why are they launching a startup, and what factors are most important to each of them?
By stacking and ranking three primary motivations – Control, Fame, and Money – prospective co-founders can understand one another’s key drivers and sign off. You likely won’t have identical motivations, but you’ll better understand who you’re going into business with, and can manage your expectations of each other.
A good rule of thumb is that co-founders should share symmetrical values, but complementary skills.
Cultural values should match up as much as possible to avoid potential issues. By contrast, their skills sets should be more or less opposites. If one co-founder is highly technical, the other should be great at sales and business development. Two engineers, neither of whom have experience in sales, will have a much harder time pitching their new company to investors. Similarly, two former executives with sales backgrounds won’t be able to directly support or oversee development.
Finally, the best co-founders have worked together in the past or know each other from a previous walk of life. There is a line, though. Starting a business with your best friend, spouse, or a close family member can have its own challenges, not the least of which is the potential damage running a business together can inflict on that relationship.
Remember that relationships are inherently unpredictable. If two co-founders suddenly realize they don’t get along, the company will suffer. Take the time to understand your co-founder, their values, and their motivations before you reach that point.
Defining and Formalizing the Co-founder Relationship
Another important step to take before your company starts developing is to map out legal and financial details. Collaboration on a new company idea may happen well before you reach the stage of launching your startup, so equity needs to be hammered out and codified in the shareholder agreement as soon as you are ready to have such a conversation.
The actual paperwork is relatively straightforward – you can setup and document everything in Clerky for less than $1,000. But getting to that point can be difficult, especially if the co-founders have different ideas of how equity should be allocated. It’s incredibly important to get this right, though. Unbalanced equity arrangements can turn into resentment in the future and lead to a potential rupture in the relationship.
Startup success is 2% ideas and 98% execution, so in most cases, equal equity split is recommended. If you don’t feel your partner will be an equal partner, it’s unlikely to be a good relationship to begin with. If you are concerned about equal input in execution, some of the specific factors you may want to consider include:
- Professional background
- Technical expertise
- Professional network
- Intellectual property ownership
There may be situations in which the above factors require a non-equal split, but know that there is always risk in such an equity arrangement. In my experience as a coach, equal splits are the most stable in the long term. At the same time, however, take into account the need for clear decision making power to avoid a stalemate from fully equal stakes. Within the paperwork that defines your arrangement, clearly define decision making power to avoid a stalemate situation.
Beyond equity, take the time to prepare a social contract that exists as a shared document only between them. This simple non-binding agreement outlines some of the most important components of a new company: cultural values, work life balance, communication style, limelight and press. Even more importantly, it addresses how a co-founder will be treated if they leave the company, how money and spending are handled, and the implementation of a diversity and inclusion policy, among other potential factors.
Starting in the Best Possible Position
When starting a new company with a colleague or friend, transparency is vital. You should both understand the other’s motivations, goals, expectations, and values. There should be a shared core set of values that will act as the bedrock of your new company, and help you approach challenges together, as a united front.
Take into account the personal character traits of your potential co-founder, as well as where they are in life right now and their personal priorities in the short and long term. If you’re two years out of college and they’re recently married and preparing to have children, will you have the same priorities in a year or two? The answer may be yes, but have the conversation in advance to know for certain.
The more open you are with each other and the more you lay on the table, the better starting point you’ll have for your relationship. By being transparent about how you work best, what your personal goals are and how you see your professional ambitions supporting that, you make it very clear what your expectations are for the business, your co-founder and the relation between the two.
Through the co-founder matching process, equity arrangement, and non-formal discussions around how you’ll run your company, pay close attention to all of these factors, and things will run much more smoothly as your company grows.
Learn more about how to build, manage, and maintain the health of a co-founder relationship in a replay of our recent webinar, featuring Torch CEO Cameron Yarbrough and co-founder of Justin.tv and Twitch.tv, and current Atrium CEO Justin Kan, The Secret to Successful Co-Founder Relationships.