How to handle Underperforming Co-founder? 1 year ago

There's a saying that 'Two heads are better than one' that is particularly true when starting a business, as it is not easy to function all alone. Unless, of course, you're the sole owner and prefer to work on your own.

'Co-founders' are common in business partnerships and corporations, and while some are lucky with their co-founders, others have conflicts that sometimes jeopardize the entire company. 

One example is when Jack Dorsey, one of the founders of Twitter, was ousted by his co-founder Evan Williams due to his poor management and lack of communication with the board of directors. Jack even had to go public and agree to multiple interviews to discuss that he was the sole inventor of Twitter and the real mind behind the platform because the conflict between the two continued for years. (Source: Twitter’s Founder Feuds, Explained) 

If that can happen to large companies, it is likely to happen even in small firms. But what can you do when your co-founder starts to perform poorly?

1. Review Agreements

Underperforming co-founder is one of the reasons why businesses should establish a founders agreement and shareholder's agreement. 

By defining each of your roles and responsibilities, you can evaluate whether your co-founder can carry out their duties and what events will force them out.

2. Vesting Shares

A standard agreement ‘Share Vesting’ states that shares would typically vest after four years and only if they were able to perform what is expected of them. This prevents a founder from receiving 50% shares and leaving the company with bare minimum contributions.

For instance, a shareholder or co-founder can only receive their 100% shares after four years. If a shareholder or co-founder decides to leave the company in the first year, they are likely to earn nothing or only 25% of their shares, depending on their performance and length of service. 

3. Recognize their economic incentives

An early-stage startup may not have much to offer, especially if you have limited access to funding. But you also have to think from the other person’s point of view and see if they are economically incentivized to perform.

For instance, It might be difficult to expect a co-founder to give their best if you are giving them 5% shares of a company that has no revenue or traction. You might perhaps resolve this by paying them a salary or allowance to serve as their primary source of income or by changing the upside equity percentage subject to certain requirements.

4. Establish Event of Default

When a breach of contract was committed or when one party fails to perform their contractual obligations. In a particular circumstance, the non-defaulting party will have the ability to terminate the terms of the contract. In this case, the person in default must return or sell their shares to the company or other shareholders.

Example cases are:

• Making decisions without the board or shareholders' approval

• Embezzlement or Fraud

• Failure to comply

5. Dispute Resolution

As conflicts are inevitable, dispute resolution should also be in your contracts. These are steps or processes on how conflicts will be resolved. Whatever the problem may be, it must be addressed to avoid affecting your business in a far more significant way.

Dealing with conflicts is a skill that can be learned and before you think of escalating a problem, express your worries with your co-founder in a casual setting. 

If the situation can no longer be resolved, you can seek legal advice and learn how to manage the conflict properly. If you need more startup resources, head on to Digest.ph