What to watch out for when founding a company with friends
Starting a company alone is a challenge, so it’s often comforting to found one with a friend. Such a partnership, however, is not to be taken lightly. In this piece, we examine the best practices to successfully found a company with friends, like hiring a business lawyer right off the bat. As well, we get into what to watch out for, such as unbalanced partnerships.
Founding a company and building it up from scratch is one of the most challenging things you can do. Working together with fellow entrepreneurs sounds like the ideal scenario, as it adds a level of camaraderie to an exciting, yet steep, journey. Even better, there’s the option of starting up with a close friend or (bonus!) an executive board of besties.
Done properly, sharing the cofounding experience with a close friend can be rewarding, on both a business and a personal level. Without a good plan or the right communication, however, you may well be venturing toward the eventual breakdown of a good business idea and even better friendship.
In this piece, we will cover some of the best practices for founding successfully with regards to your business and your friendships, as well as some warning signs to be considered prior to founding.
Best practices
As just mentioned, the entrepreneurial world is tough. Over half of promising businesses disappear within the first four years. A sharp 23 percent of that is due to startups having the wrong team. While entrepreneurs who found companies are not the only contributing factor to that percentage, it does show that having the right people at the helm matters.
Read more: Infographic: The 20 Most Common Reasons Startups Fail and How to Avoid Them
There are many ways to balance a friendship with a solid working relationship. First and foremost, it’s important to communicate clearly, openly and often.
Founders should be open and honest with each other and seek to create an in-company ecosystem where business and personal topics can be tackled maturely (and also segmented and avoided when need be). Clear, to-the-point and sincere communication is the bedrock of any successful relationship. The next layer is a concrete and organized system for sharing feedback.
“We quite often tried to have an appointment called quality time,” said Matthias Kramer, cofounder of Lizza. Matthias and his cofounder started Germany’s only flaxseed pizza crust business in 2014 and still work together to this day. “We very, very often gave, and still give each other feedback and we are pretty aware of the importance of being transparent with each other.”
On top of maintaining clear communication, it’s also vital that you put down a concrete business plan right off the bat, to manage expectations of what each friend and partner is responsible for. You want to be able to reference a document that’s been agreed on in advance when you stumble into conflict.
Going to the length of getting a business lawyer may not sound like something buddies do, but those types of official procedures could save a friendship or two in the long run.
As well, if you are unsure if you and your friend should start a business together, work on a smaller project with lower stakes and test the waters of your future working relationship. Matthias and his co-founder had a trial period, consisting of a weekend project they could work on alongside day jobs. It was a compatibility check for them.
When they started Lizza, it was all business, but now they have other familial and professional duties. They’ve managed to ward off the friction these changes could cause with an early devotion to good communication.
“It’s quite easy when you have the same devotion,” said Matthias. “It might be easier if you already know the other person has other circumstances, and that’s the reason why you work different hours.”
And of course, all relationships need a break once in a while. “It’s good when you give the other person a little bit of rest from yourself,” says Matthias.
Money talks, ego walks
No matter how proactive you are, mixing personal and business relationships is tricky and no amount of recommended practices can wipe away all conflict.
The stressful prism of entrepreneurship has a funny way of unearthing the worst in people. It’s best to have an idea of what your friend is like at stressful times. Nearly all early-stage entrepreneurial situations include some form of panic, so you will know how to approach conflict if and when it arises.
It might also be an idea to make sure that your future cofounder doesn’t have a strong ego, as that may hinder their ability to give and receive constructive feedback. Along these same lines, watch for overly passionate cofounders. Passion is often very positive, although too much of it can get in the way of getting the slower and more tedious work done.
The next and most challenging thing to watch out for is the root of all evil: money. There’s nothing like cold hard cash to set personalities ablaze.
When you start making money, you put value on your work and the work of your friends. It is, however, very easy for this to spin out of control, especially when you think your value is higher than the other person in the relationship.
“There is never a period of time where you work exactly the same hours,” said Matthias. “There’s always the feeling that if I’m working more, how does my cofounder get the same as I do?”
If preserving friendships is on the same level of importance as the business, then it’s highly advisable to split everything (read: profit, payment, assets, cold hard cash) right down the middle. “It makes sense to give equal pay when you are co-founder and co-CEO, even though you might, from your subjective point of view, deserve a few percent more equity or pay. For a strong and equal relationship between the CEOs and therefore the greater good of the company, this is often the right decision,” Matthias added.
When all else fails
At some point in your cofounding journey, you may encounter a situation in which a friend must be removed from the equation, such as irreconcilable personality differences causing company tension, a clash of company direction, or dramatic changes in priorities. In some cases, that friend might be you.
Having robust documentation that defines expectations in place may well preserve the relationships involved, and make it clearer that decisions are for the good of the company.
Thinking with a win/win mindset is also important for investors. While it may not sound wise to be upfront to investors when there is turmoil brewing in the shareholder structure, honesty is always the best policy. That way, your investors know you are actively taking care of things, and are trustworthy in your story.
This doesn’t mean you can spin a yarn for your investors about friends in opposite business trenches without actually settling conflicts. Investors likely don’t want to see their startup investment in a state of personality warfare.
On the side of friendship preservation, redefining success means celebrating the success of actually founding a company, and making it as far as you did. Maybe the fit wasn’t right, but what a ride it’s been. Again, this is definitely not easy, but the best thing you can do is remember all the positive moments, weave that into the story for all the folks still part of the vision, and move on.
Remember why you’re doing this
Much of this probably sounds pretty dire. You may be reading this and thinking, “Everyone was right, you really shouldn’t mix business with friendship!”
This couldn’t be farther from the truth. Founding with friends comes with a formidable set of challenges, though all worthwhile things are hard. Being buddies is likely not enough of a reason to start a company together. Sharing the spark of inspiration, and realizing that you may just have the next great idea, that’s a more worthwhile feeling to pursue, whatever may arise down the line.
“There is a glitch in how people think, that they try to reduce risk, but by trying to reduce risk, they make many opportunities impossible,” Matthias says. In other words, being afraid to found a company because it may cost you your friendship may incur an even more substantial loss: never having realized amazing opportunities at all.
