How to keep your partnership on the right track and avoid clashes

Entrepreneurs rarely choose to embark on their start-up journey without a partner. Two heads are usually better than one when it comes to managing the risks, challenges, and opportunities a new venture offers. But no partnership is immune to conflict, especially in the start-up world. In his book The Founders Dilemma, Harvard Business School professor Noam Wasserman noted that 65% of ‘high potential’ start-ups fail as a result of co-founder conflict.

Occasionally, a fallout can occur for reasons outside anyone’s control, when only a crystal ball could have avoided an unexpected issue. However, having worked with many entrepreneurs, we know that most conflicts could have been avoided, so here are five tips to help you keep your partnership on the right track:

1. Talk frankly about your relationship

A partnership based on assumptions will inevitably cause problems further down the line, especially if you’re going into business with a friend or family member. It’s therefore vital that co-founders start by having a frank and open discussion about their relationship and what they want it to look like in business terms. Don’t leave any stone unturned and keep any emotional ties at arm’s length so that everything is discussed on a commercial basis.

2. Review ‘founder stage’ documentation

This documentation will depend on the nature, size and value of your business but, as a guide, should cover IP ownership, job titles, service terms and remuneration, how equity will be split, vesting/leaver provisions, and a framework for decision making that avoids deadlock scenarios.

Milestones are also important; for example, some co-founders may decide that they will reconvene and review progress in a couple of years whereas for others, it may be more appropriate to have frequent overview reports on how the business is progressing or to include trigger events which would enable value to be extracted earlier. Any funding round should trigger a review.

3. Be patient

Launching a business is incredibly exciting, but don’t get carried away and cut corners to progress more quickly, even if a large investment is on the horizon or to secure IP rights. Rushing into agreements can lead to gaping holes in the expectations of both parties, which could derail any future success. Take the time to understand and appreciate what each partner expects, as well as your obligations, before putting everything in writing.

4. Don’t scrimp on your legal docs

Enforcement is the foundation of all legal rights, so getting your legal documentation right from the outset is always money well spent. Although this can be a relatively significant financial outlay for a fledgling business, it’s a worthwhile investment that will repay you in years to come.

Documentation such as shareholders’ agreements, employment or consultancy agreements, and intellectual property licences or assignments, create the foundation which everything else in your business will be built on. Scrimp on the detail or the content of these, and it’s inevitable that cracks will appear further down the line. You may be able to paper over some of these as they appear, but if your project succeeds it’s almost certain that a serious dispute will arise, leading to costly (and distracting) litigation or dispute resolution advice.

Prevention is certainly better than cure. This also applies to documenting personal ownership and the transfer of shares by gift or upon death. As a minimum, all shareholders should have a Will

5. Don’t give up hope

If you do fall out with a co-founder, don’t give up hope. Although conflict can be complex and serious for a young business, it is often possible to resolve it without having to go to litigation. Seek professional advice that’s as entrepreneurial as you are. Work with your legal advisor to get to the heart of the issue and to find flexible, creative ways to settle it, before resorting to a more formal and costly legal process.

For further advice on resolving disputes, please contact Gareth Dickson.