TL;DR: Without some solid agreements (and not just verbal ones) in place, your startup could fail due to cofounder disagreements. Here’s how to avoid that.
In late 2013, I felt a strong calling to help build a tech company. That urge to create connected communities through empowerment became my life’s mission.
Those ambitions were the inspiration for my startup, Feel Free. The company was designed to bring people together through technology. I poured my blood, sweat, and tears into making Feel Free a success. When I founded the company, I never thought I would one day decide to give up my equity and walk away from my passion project.
Feel Free was intended to foster physical spaces where people could connect and collaborate. We wanted to create designated areas in coffee shops and co-working spaces that would encourage face-to-face interactions.
Visitors would use our app to automatically check in at various Feel Free spaces, with geolocation technology showing whether anyone else was checked in. People in the Feel Free space would then be comfortable introducing themselves to each other and striking up a conversation. We connected people virtually and in person, fostering personal and professional relationships.
In our first year of business, we gained 8,000 followers and became entwined in the Phoenix startup ecosystem. We won several pitch competitions and were accepted into a top local incubator, Phoenix Seed Spot. People volunteered at our events because they believed in what we were doing. Local coffee shops were excited to be a part of our program, and we helped them increase their customer retention rates on a weekly basis. I had never felt more proud about something I had created.
Conflict Behind Closed Doors
Despite all of our success, we suffered from serious cofounder conflict. Those issues included ongoing disagreements and a lengthy battle over who was in charge of what.
We made a crucial mistake by not crafting an operating agreement. An operating agreement solidifies who is responsible for which duties in a company and outlines how the organization will be managed — including how leadership will make decisions. Our lack of an agreement left us unprotected and insecure, even though we had always trusted each other. Feel Free was at its peak, but we were too terrified to move the company forward.
When you first start a company, it’s easy to forgo operating agreements and other technicalities in favor of dreams and aspirations. It’s not until you achieve success, that money and greed come into play. Entrepreneurs stop thinking about the vision behind their companies and begin to think about themselves. When my cofounder and I fell victim to this, Feel Free changed from a success story to a nightmare.
Knowing When to Walk Away
This sour series of events pushed me to make a decision I previously would have thought was absurd: I walked away, giving up full equity of my company to hand everything over to my cofounder. I made the decision for the good of the company. Preserving our initial vision was more important to me than personal gain.
In making the decision, I considered why I started the company in the first place. I didn’t do it for money or fame; I wanted to make a difference in the world. I had to remind myself why I became an entrepreneur in the first place.
With this sort of difficult decision, I found it helpful to turn to other experienced entrepreneurs for advice. You might feel alone in your problems, but Funders and Founders reports that 62 percent of all startups fail because of cofounder conflict. In essence, most entrepreneurs have dealt with cofounder conflict in some way. Your mentors can be an invaluable source of advice.
3 Steps to Save Your Startup
Some arguments are inevitable, but there are things you can do to protect your company. Here are three key steps that can help prevent your startup from falling prey to cofounder conflict:
- Verbal agreements aren’t enough. My cofounder and I formed several verbal agreements at the beginning of our partnership. When Feel Free faced more difficult decisions, those verbal agreements fell short. Facebook, one of the most successful startups of our age, struggled through an ugly legal battle after the Winklevoss twins claimed CEO Mark Zuckerberg made a verbal agreement to give them equity in the company. Zuckerberg eventually prevailed, but there’s no doubt the Winkelvoss brothers wish they had more than a verbal agreement.
- Start with a simple approach. If you’re not ready to put an operating agreement in place, you’d still be wise to get some sort of agreement in writing. A simple one-page agreement between founders that indicates responsibilities, while outlining company structure and operations, can do a lot to ease tensions down the road. Skip the legalese and “parties of the first part” in favor of straightforward language that lets everyone know exactly what’s expected.
- Make sure you own all outsourced work. We had a designer on our team who created all of our branding. We had promised him equity in the company, but we never had a formal agreement in place that his work would belong to Feel Free. When our cofounder conflict sparked, he decided to not sign his work to the company to protect himself. Create a solid agreement with any contractors to help them feel protected and ensure your company’s future.
In retrospect, I wish my cofounder and I had put our verbal agreements — with each other and our employees — into writing so we could have avoided any conflict in the first place. While some proactive thinking might have prevented those issues, I still know walking away was the right decision for me. I wanted our shared vision for Feel Free to carry on, even if it meant walking away from the company I loved.