How to structure a startup with a small number of founders to avoid chance of 'paralysis' at some later point


1

Consider a startup with a small number of founders (lets imagine 2 to 4). At some point down the line a difference of opinion developed (such as market to target, or if to continue or fold) that can't be resolved in the normal way.

What can you do to ensure that organisational paralysis doesn't ensue?

For example

  • equity & control split 49% / 51%
  • the parties want to take company in different directions
  • controlling party can force their way - but then minority party can loose all motivation, which means majority part has no incentive to work either as they put in 100% of work for 51% of future gain.
  • controlling party may be able to buy out minority party if they can agree on price - but what if they can't agree or refuse to?
  • obviously more of a problem the closer the majority/minority part.

Board Equity Corporate Structure

asked Jul 4 '12 at 18:27
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Ryan
1,365 points
  • That's why it's better to have 3 founders. =) – Dnbrv 8 years ago
  • But even with 3 you've got the same problem only diluted a little. 2 want one thing 1 wants another and doesn't continue to work (or as hard). The other two now do 100% of the remaining work for only 66% of the reward. – Ryan 8 years ago
  • And in the beginning you vest the shares. – Dnbrv 8 years ago

4 Answers


2

Make a point to document and get into legal contracts if necessary as much as possible up front. There should be provisions to reevaluate everything in the future.

  • Decide how responsibilities are divided
  • Evaulate if everyone is meeting expectations of time, expertise and performance.
  • Come up with a tie-breaker system. Maybe those with expertise in that area are given a deciding vote.
  • Have a way to allow members to exit when the business direction is not to their liking or they are no longer a fit for the next version of the company.

Get it all in the open.

answered Jul 5 '12 at 23:27
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Jeff O
6,169 points

1

Personally, I would solve this using a business plan. I've been in situations where of the 2-4 founders, each of us had a unique skill set, and by setting up a business plan, we could focus the business goals and at a hight level, keep ourselves on the same page. A decent business plan with future planning (1, 6, 12, 24 and 60 month planning, more abstract the farther you go in time) that is a living document, combined with each of us working toward those goals in our section of the business, does amazing things.

To strengthen that, you could also add radical change clauses, as well as majority consent to any major directional changes. This means the business should be able to function for an extended period of time, while all founders work together to come to an agreement, if change occurs.

I think at the end of the day, people changing (or changing their minds) is just part of going into business with someone. If you have concerns about this, most of the time you can structure your business to handle it at the beginning, while you are all still agreeing on things. This can be rough if you're the one wanting change, but it protects the idea that caused you to form an entrepreneurial partnership. It's also another in a long list of reasons to make sure you're careful who you found companies with, and who you bring in as employees/contractors.

Hope that helps.

answered Jul 5 '12 at 20:34
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Madd Hacker
493 points

1

The best way to start a relationship between co-founders is to have a shareholders agreement which decides the basic framework within which the founders will operate. The agreement can also state up front the decisions which will a unanimous vote of all founders, which will ensure that decisions are taken in the interest of of all parties. A business plan can be made a schedule to the shareholders agreement to ensure that it is adhered to. Otherwise you may find that business plans are easiest to digress.

answered Jul 5 '12 at 21:55
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Vidyut
11 points
  • I don't see how you've even started to answer the question. Isn't requiring a unanimous vote just going to CAUSE the problem described in the question? – Ryan 8 years ago
  • @Ryan Not necessarily. – Marcin 8 years ago
  • @Marcin - How so in context of example given in Q? – Ryan 8 years ago
  • @Ryan How does it in the context of the question? We're talking about people, not voting robots. – Marcin 8 years ago
  • @Macin that makes no sense? How does requiring a unanimous vote REDUCE the likelihood of a deadlock amongst voters as you say it may? Can you imagine this working on a small board? How about in politics? I just can't see any case where it REDUCES the chance - and I am asking for you to back up your comment with some details is all. – Ryan 8 years ago
  • @Ryan Because it forces everyone to reach agreement **all the time**, not just when there is a split. – Marcin 8 years ago

1

There are a number of devices that exist to solve these sorts of problems. You need to talk to a lawyer practicing in this area in the jurisdiction where you are incorporating.

Options include requiring all votes to be unanimous (forces you all to get along from the start), favourable buy-out/drag-along/tag-along/russian roulette terms (allowing disaffected parties to cash out, and creating a financial problem for the business if a split happens), some kind of casting vote structure (e.g. chairman has the casting vote, and chairmanship rotates, or allocate casting vote by lot), or a coin-toss provision.

answered Jul 6 '12 at 00:02
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Marcin
526 points

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Board Equity Corporate Structure