How to Create a Great Co-Founder Relationship
The successful or failure of your startup has a lot to do with the success or failure of your co-founder relationship (#27)
The world has seen its fair share of dynamic duos.
Batman and Robin (although this wasn’t an equal partnership.)
Warren Buffett & Charlie Munger
Abbott and Costello (although communication was not their strong suit.)
Calvin and Hobbes
Thelma and Louise (although that didn’t end well)
Frodo Baggins and Samwise Gamgee (oh, Frodo…)
John Lennon & Paul McCartney (who was the better Beatle?)
Han Solo and Chewbacca
Fox Mulder and Dana Scully
Laverne & Shirley
(sorry I got carried away there…)
The list goals on and on. While we hero worship individuals and put them on pedestals, we also appreciate the notion of teams.
Starting a company with someone is a big decision
You’re committing to a 5-10+ year journey, side-by-side with your co-founder(s). A number of founders told me they jumped into a co-founder relationship very quickly, without knowing the people well and no due diligence. You’d think a decision of this magnitude would be done more thoughtfully, but that’s not always the case. I think it’s because founders are an inherently optimistic bunch, who believe they can build something from nothing and change the world. When they meet likeminded people, and they collectively get excited about an idea, they jump into the partnership.
Finding a co-founder: A bad reality show?
Some accelerator programs promote the idea that you can find a co-founder quickly and magic will happen. It can work, but in a lot of cases those founders break up.
I spoke with a few founders that went through these types of accelerators. They felt a lot of pressure to “pair up” quickly and get to work. Some said it felt like a reality dating show.
We need to create more opportunities for people to connect, get to know each other, and ultimately co-found companies together, but it doesn’t change the fact that finding a match (that will survive and thrive) is incredibly difficult.
Can you date first?
“Let’s start a company together,” shouldn’t be the first step in the process.
Even if you know the person (and we’ll talk more about working with friends in a bit), you should consider dating your co-founder(s) before committing.
This isn’t always easy to do. One of the big challenges is figuring out what to work on. Some founders I spoke with worked on “side hustles” together, to see how the working relationship functioned. Others already had an idea for a startup, but instead of incorporating and locking it in, they started working on it together to see how things went.
In both cases you still need to set expectations clearly, and this is a big part of figuring out if you can work with someone as a co-founder.
A lot of the big issues hopefully emerge during this dating period:
Core values / purpose (why are you even doing this in the first place?)
Ambitions / goals
Financial expectations (both in terms of what you’re investing and what you’re expecting out)
Decision making approach
Unfortunately dating for a long time is also risky. If you start to build something real, launch in-market, etc. and there’s no legal structure behind it, breaking up can be even more complicated.
Some founders date and never build anything. They ideate, brainstorm, hang out, etc. — all of which are good things to do — but this “work” doesn’t translate into truly understanding what it’s like in the trenches with someone. At the same time, dating before starting a company isn’t just about the work itself, it’s about finding alignment on everything else (including the items listed above.)
Can you do due diligence on a potential co-founder?
Yes. And you should. Talk to others, including ex-employees of the potential co-founder, other co-founders they worked with, past investors, etc.
Don’t take a person’s public reputation as absolute truth.
Someone might be very well regarded in the “ecosystem,” but that could be superficial brand reputation. I know quite a few “famous founders” who are considered amazing entrepreneurs that are brutal to work with. Heck, I’m sure some folks think the same way of me! 😄
Should you start a company with someone if you have doubts?
Probably not. Doubt has a way of creeping in, growing and then consuming you. One founder I spoke with said:
“Having doubts about a co-founder is a killer; this stuff is difficult enough, so you can't afford to expend energy on worrying about how your co-founder is performing and second-guessing what they are doing. Also, those doubts don't disappear by themselves. You have to face and hammer them out head-on and early. The issues that led to us splitting up were the same ones that we had three years ago that weren’t formally resolved.”
If you do have doubts, you’ll need to talk about them with your co-founder (or soon-to-be co-founder.) Burying this stuff won’t work. Having hard conversations is part of the job.
Should you start a company with friends?
This topic came up a lot when speaking with founders. Some were 100% for it, others had bad experiences. So the answer is (not surprisingly): it depends.
With friends, there is inherent trust. And trust is critical to succeeding with co-founders. The challenge is that “friendship trust” is different from “working relationship trust.” In a working relationship as co-founders you have to be aligned on a lot more than you do as friends.
One person I spoke with started her first company with one of her best friends. It seemed like an obvious choice. But since they were already close they didn’t spend time aligning on the core issues they’d face, which ultimately led to the startup failing.
“I didn't take into account the real need for complementary skills -- I just thought of starting a business with my best friend. This doesn't necessarily translate well. Much like any personal relationship, it's vitally important to determine outcomes and expectations and have some hard conversations from the start in order to avoid any misunderstanding downstream. I realized after starting the company that he didn’t have the same level of commitment and willingness to hustle that I did.”
Y Combinator prefers founders that have worked together, which makes sense. Personal relationships aren’t enough. You might like someone as a person but not as a co-founder.
Friendships come with baggage. In some cases the trusted relationship you’ve built as friends could strengthen the co-founder bond, but that’s not always the case.
Whether you start a company with friends or not, you still need to ensure transparency and honesty in the relationship. Here a few perspectives that people shared with me:
5 key things to get aligned on when starting a company with co-founders
Everyone I spoke with, whether they had good or bad co-founder experiences (or both!), talked about aligning across these variables:
The problem being solved
Values, ambitions and goals
Roles, responsibilities & decision making
Financial expectations & equity splits
Let’s dig into each one.
1. Are we solving a problem we care about?
Often, one founder has an idea and then recruits co-founders. If you can convince someone to join you on a crazy startup journey that’s a great sign! But it’s important that your co-founder is joining for the right reasons, and very early on that means they need to be passionate about solving the problem.
You may be more passionate—it was your idea after all—but you need a co-founder that’s aligned on the company’s purpose. If they’re there for another reason, it will result in future discord.
I spoke with several non-technical founders that recruited technical co-founders. The technical co-founders weren’t in love with the problem, but thought it was interesting, or the potential solutions could be technically challenging and fun to build. They liked the non-technical founder as a person. But they weren’t really dedicating themselves to solving the problem—they’re jumping in for other reasons. In some cases this works, and some technical co-founders told me they became more passionate about the problem space over time. But often it fails. When the going gets tough (and it always does!) the lack of shared purpose drove a wedge between the founders.
2. Do we have shared values, goals and ambitions?
Even when founders are equally passionate about solving a problem, they also have to be aligned on why they’re going after it. What are they hoping to get out of it?
“We want to win!”
Sure, that make sense. But not everyone defines winning the same way. And not everyone agrees on how to win either.
“We didn’t have the same values, on one end it was for money and glamour and the other it was for a social purpose.”
A lot of co-founders realize that what motivates and drives them differs. This creates conflict as a startup grows, especially with the addition of employees that are looking for a singular, aligned purpose.
One founder told me, “A big lesson for me was that some people actually want to run companies, not build them, and there’s a BIG difference between the two.”
Being a founder is romanticized and idolized in the media. It gives the false impression of all the glory and money that will be earned, without necessarily articulating how tough it is to win. Be careful about co-founders that want to jump ahead to the “winning stage” without a willingness to do all of the hard work first.
“I underestimated the importance of being able to work in a context with basically no product, no customers, no data, etc. Many people want to create a company and be the ‘next Steve Jobs’ but really, most people aren’t ready to deal with the level of messiness, ambiguity, uncertainty and gambling that comes with it.”
I see this quite a bit. People get excited, they picture themselves making tons of money, and they jump in right away. If you’re an inherently optimistic founder you may dismiss the intensity of the process (especially if you’re a first-time founder.) If you don’t appreciate how hard it is to build a company, it’s going to lead to a ton of tension and conflict with your co-founders.
Values aren’t what you paint on the walls in your fancy office when you raise a lot of capital. They represent the underlying framework by which you run your business and make decisions.
Sidebar: Write everything down
Quite a few founders that I spoke with, for whom the co-founder relationship was a success, recommended writing everything down.
“After we agreed to start the business together, we sat down and identified our purpose and principles. How do we relate to money in the business, how do we prioritize relationships, how do we think about measuring impact, etc. We wrote it down.”
There’s something powerful about writing things down. You will, of course, spend countless hours in conversation with your co-founder(s) but it becomes more real and clear when people are forced to put pen to paper. People’s thoughts often crystallize and reveal themselves through writing.
3. Roles, responsibilities & decision making
Having complimentary skills is the best practice when working with a co-founder. It’s why you often see a non-technical and technical co-founder pair. They each know what they’re good at and create their appropriate swim lanes.
Overlapping skills definitely creates more conflict. But having complimentary skills isn’t enough. You also need to make it clear what you’re good and not good at (beyond just your skills.) This might be around communication, managing teams, making decisions, etc.
No matter what, someone has to be the CEO. (You can try co-CEOs or no CEO, but they’re both tougher to pull off.) The CEO is the ultimate decision maker. The CEO is also the one that’s typically front and centre with customers, investors, media, etc. Put it this way: the glory isn’t equally divided. And for some that’s a problem.
One founder I spoke with said this, “As a founder you grow by doing, but I feel that in the respective positions you are in, you don't grow equally and you can grow apart. You may grow at different speeds.”
I thought this was a powerful insight. Co-founders that are more stuck in their ways, or who believe they have less to learn may fall behind. If you’re a co-founder CTO and you say, “Well, I already know how to build software, so my role is pretty clear,” you’re missing the point of what it means to start a company. Building the software—the thing you already know how to do—is one way to look at your responsibilities, but as a co-founder you have much more responsibility & accountability than that.
There are going to be a myriad of decisions that require involvement from all co-founders, regardless of who holds the CEO title. In other cases, decisions have to be made independently. As a founding team you have to figure out which decisions require the team, and which ones are made individually. You also have to figure out what to do when you disagree. Do you spend hours debating until one person finally acquiesces? Or are you able to “pull rank” on each other and then everyone falls in line even if they disagree?
4. Time commitment
You’d think this is obvious, but it’s not. It’s especially tricky in the “dating phase” when one founder may be spending more time or is more invested in an idea.
It’s not just about the amount of time someone commits. There’s more to building a company than the time invested. Someone could be working “full-time” but not be all-in. They’re doing it with one foot in and one foot out. If all the co-founders are the same, then it’s manageable, but it breaks down when one founder feels like they’re more committed than another.
Sidebar: Some founders have an expiration date
Not all founders survive the whole journey. In some cases a co-founder may want to step out and it’s an amicable departure. For example, I know quite a few people who love the initial few years of building a startup but don’t want to shift gears into scaling operations. Those founders bow out and get replaced. This can be done strategically and smoothly, and ultimately helps the company win.
In some cases a founder starts out strong, seems committed and is investing the time & energy required, but then…fades…
There are lots of reasons for this. Shit happens in people’s lives. Or they can’t keep pace with the growth. Or they get bored. Etc.
Ultimately a co-founder relationship is always in flux. It might start strong and then weaken. It can then resurge and strengthen, or it might fall apart. It might fall apart with a lot of stress and tension, or it might just fizzle out.
“We had four co-founders initially, but then had to let two of them go. They couldn’t fill their part of the initial bargain. We had to offer to buy back their shares for peanuts or shut down the company.”
The important lesson here is founder vesting. Founders often don’t setup vesting on day one, which can be a mistake. In some cases, investors will require that founders do a “vesting reset” because they don’t want to invest in a company where the founders already own all of their shares. In the case above, they didn’t have vesting so it made the situation very complicated.
Here’s a good excerpt from Holloway on vesting:
“When getting started, many founding teams delay legally outlining the terms of their vesting. Often this is because the founding team trusts each other and believes it is safe to figure out the terms of their ownership later. This is always a mistake. Founders also get into trouble when they decide not to use a vesting schedule but instead give each founder a share of the company that is fully vested on day one. This practice is the cause of endless headaches and can ruin long-held relationships. Consider the following scenario. Three founders start a company, they’ve been friends since high school, they trust each other, and everyone says they’re committed for the next ten years. As a result, they agree not to utilize a vesting schedule. Two years later, two founders agree to fire the third founder for inappropriate behavior. Since they didn’t utilize a vesting schedule, the third founder will continue to hold their full share of the company; had they used a standard vesting schedule, they would hold half as much. This failure to utilize vesting is why investors usually require founders to all be on a vesting schedule, just like employees.”
5. Financial expectations & equity splits
There are three critical questions you need to answer:
How much are we each investing?
How much do we each need to make?
How much equity do we each want?
How much is each co-founder investing in the startup?
Startups don’t survive on sweat alone. They need money. It might not be a lot of money, but there’ll be stuff to pay for immediately.
You might have investors right away, but they will, or should, ask if the founders are putting money in. Each founder may not have the same financial background or means, which can lead to some difficult conversations.
Whoever is putting in the most money is going to have a bit more control. If one founder invests $100 and you invest $0, they’re taking more risk, contributing more up-front (even if you work more hours) and they’re not only going to own more of the company, they’ll likely be in a position of power. This “inequality” trickles through everything else including decision making, company direction, etc. It might not even be intentional by the founder who invested the most, but I’ve seen this quite a bit. In some cases it’s expected and everyone is OK with it, but in others, where the “second” co-founder believes they’re an equal owner, it causes trouble.
How much salary does each co-founder need to take?
In most cases I’ve seen, founders pay themselves the same amount. Early on this isn’t much (if anything at all), but it’s usually equal. Having said that, there are cases where one founder needs a higher salary, and similar to the situation with investing capital, this creates inequality.
If one founder is wealthier and doesn’t need a salary for 9 months and another needs to earn $100,000 immediately, you can almost guarantee that the latter founder is not considered an equal.
One founder said to me, “Get clear on what you need to live on. Align on this.”
This is very good advice. Founders may have incorrect assumptions going into the relationship (i.e. “We’ll earn the same” or “We can each live without pay for 6 months,” etc.) You need to have early and transparent conversations about money.
How do you split up the equity amongst co-founders?
The simplest thing to do is split the equity equally, but that’s less common than you might think. It depends a great deal on what people are bringing to the table.
If there’s a single founder first, it’s their idea and they’ve started working on it, they’re going to expect more equity than the second co-founder they bring in (most of the time); and I think that’s fair.
If one founder can take less salary, they’ll likely ask for more equity in exchange. This is reasonable, but starts to highlight potential inequalities between founders and that can go sideways quickly. Be careful about this. You might even agree to take the same salary to minimize conflict.
If one founder is investing more than the other, they’ll earn more equity. This is completely reasonable, but a way to make it easier for everyone is to split the founder/common shares equally (or at least without considering the investment) and then do a financing round where the founders invest what they can and earn extra equity for those investments. The investments shouldn’t colour the “sweat equity” portion of the cap table.
“I was the initiator of my most recent startup. I prototyped the first MVP, brought in the first customers and so we agreed to an ‘unbalanced’ cap table with my co-founders. I own 70% and my two co-founders own 20% and 10%. I had a very bad experience with a 50/50 split when I tried to start my first startup 10 years ago. It's like we got deadlocked 10 minutes after working on the project.”
Equity splits can be one of the most emotionally charged aspects of starting a business. There are a lot of variables (i.e. dollars invested, time committed before starting the company, etc.) but also a lot of preconceived notions about each person’s importance and role.
People’s true colours (good and bad) emerge when talking about compensation, including dollars and equity.
You might do all of this work in advance and still fail
No one wants to start a company on the wrong foot. But getting perfectly aligned and trying to deal with every potential issue that may arise before you even start is equally difficult.
One founder told me that she spent an enormous amount of time with her co-founder aligning on mission, values, responsibilities, etc. They wrote it all down. They talked about and figured out their communication approaches, strengths, weaknesses and so on. They did everything you’re supposed to do up-front before becoming co-founders.
The founders still didn’t end up in a good place when things got tough:
“When it was going well I felt like it helped a bit, but it also felt like overkill at times. Focusing more on team dynamics than on product-market fit. Ultimately startup failure is hard (and my cofounder was at risk of losing a lot of money), so it felt like all the good work and communication we did early on ended up not mattering because the fear/greed set in and the bad behaviours came out.”
When you start a company you are in a honeymoon phase. It doesn’t last. Eventually reality sets in, you realize you’re in for insane ups and downs, and a lot of people aren’t cut out to survive or thrive through the intensity. You may have spent hundreds of hours attempting to build a strong relationship and set yourself up for success, but when the going gets tough, people can get nasty.
Don’t use a handshake agreement; get the legal docs in order
Building a startup with a co-founder is a legal contract. No one wants to talk about the legal stuff—it’s boring, annoying, costs money, wastes time, etc.—but it’s critical. Jumping into a long term relationship on a handshake is a recipe for disaster.
I heard several stories from co-founders that didn’t have the proper shareholders’ agreements in place or didn’t really understand the agreements they had. Later, they felt screwed over by their co-founders.
“In my experience as we were drafting the shareholders’ agreement, there were a lot of unknowns and misconceptions on my end. I believe my co-founder was well versed and influenced clauses without my consent or despite my ignorance.”
If you don’t understand something in a legal document at the formation of your company (or frankly at any time), you need to figure it out. I don’t see a lot of co-founders start a company with separate legal counsel, but it does happen. Your job is to protect yourself, and initially you may find yourself on the “other side of the table” with your co-founder. I know this is incredibly awkward, but if you don’t understand what you’re agreeing to or fight for what matters to you, you’ll have no leg to stand on later.
It’s important to recognize that startups aren’t always founded by perfectly “equal” people. One may have more experience than the other. Or more money. Or a bigger network. Etc. The two+ founders don’t always come into the relationship with the exact same assets. When everyone is pumped about starting a new company and taking over the world, this might not matter—but at some point in the relationship it will.
Shareholder agreements can also be used to define the rules by which decisions are made. In the case I quoted earlier where one founder owns 70% and the other two founders own less, they still have a clause in the shareholders’ agreement that says any decision involving $1k+ must be approved by 2 founders.
The co-founder relationship takes constant work
Building a startup is incredibly stressful. And that puts a lot of stress on the co-founder relationship. There is absolutely no way you start a company with someone and never disagree or fight. It’s almost inevitable that you’ll ask yourself at some point, “Did I make the right choice starting this company with so-and-so?”
You should not pretend it’ll be smooth sailing.
In speaking with a bunch of founders, I got a number of suggestions on how to deal with these issues. Of course the standard stuff applies: always communicate, don’t hold things in, be transparent, and hold your co-founder and yourself accountable. But here are a couple other ideas:
Go on walks together: Although this isn’t something I’ve ever done with my co-founders on a consistent basis, a few people said this changes the dynamic of the conversations and puts people in a better head space.
Get a therapist (for the co-founders together): There are therapists or startup coaches that will work with the co-founders together. Therapy isn’t something you only go into when “things are broken.” Some founders I spoke with make this a priority right from the get-go, bringing in a 3rd impartial person to support the journey.
“Fundamentally we liked each other and had a ton of respect for each other. We had fallings out, things got hard, things got harder, things got harder still. We remembered that tending to our relationship came first above all else. We made time to go for walks every week to have focused time with one another. It was a practice that made a massive difference as the years went on.”
When things get tough, it’s easy to forget that the person on the other side of your frustration is human. They have feelings. They’re imperfect. And they’re probably struggling as much as you are, even if you believe they’re to blame.
Your relationship with your co-founder is a professional and personal one. It becomes very difficult to untangle the two. And you might argue it’s the actual integration of the personal and professional that can make a co-founder relationship so strong, unlike most other relationships you have in life. When you’re clicking on a personal level and cranking at a professional level, co-founders can accomplish a ton.
In my experience one of the most important roles of a founder is lifting up your co-founder when they’re down.
You should know when they’re feeling low, when they feel like there’s a boot on their neck. You might also feel it, but if you can muster the strength to carry the burden for a bit, and encourage your co-founder through a rough patch, they’ll (hopefully!) do the same for you.
Two additional resources:
If you’re looking for a co-founder, I suggest reading The Founder Dating Playbook, which includes a 50-question co-founder questionnaire.
And here’s a very comprehensive Founders’ Agreement template that you can leverage. The agreement explains many important concepts as well and provides suggestions (i.e. vesting, decision making, etc.)
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