When discussing co-founding a company with someone, what is absolutely crucial you both discuss and agree on early in the process?
These answers are provided by Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most successful young entrepreneurs. YEC members represent nearly every industry, generate billions of dollars in revenue each year and have created tens of thousands of jobs. Learn more at yec.co.
1. Who Owns the IP
It should be clear from the start that the business owns intellectual property contributed by the founders. If the founders retain ownership of ideas they develop, the business is in a risky position. A disgruntled founder can wreak havoc if they decide to press their claims over IP that the business’s products depend on.
2. The Responsibilities of Each Founder
Founder agreements should specify the responsibilities of each founder for two reasons. First, if a founder isn’t committed and productive, there should be an agreed upon framework with which to compare their actual performance. Second, collective decision-making only goes so far. The buck has to stop somewhere, and it should be clear who has the final call in specific areas of responsibility.
3. Long-Term Goals
Co-founders can agree on many things but still have very different ideas for the future. If you plan to run your company for many years, make sure you don’t partner with someone who’s looking to sell the company as fast as possible. It’s also a good idea to discuss possible scenarios where one of you has to exit the company for reasons beyond your control. Consider as many “what ifs” as possible.
4. Agree to Always Put the Company First
When you have multiple founders (we have three), it is essential that you agree to always put the company first. Decisions must be made based on what’s best for the company, not the founders. If founder roles have to change for the company’s benefit, it’s easier for all if priorities are discussed from the beginning.
Agreeing on business decisions when things are hunky dory is the easy part, but contingency planning in case things go wrong is absolutely critical. You must discuss and agree upon what would happen in case of a possible split, like how do you divide the assets? Upfront discussion about what happens to the company shares in case one founder passes away or becomes disabled must be addressed early on.
6. Mission and Culture
It is vital to agree 100% on the company’s mission and culture as this is the heart of any business and is what everything else flows through. If you are both aligned with the company’s mission and culture, all of the smaller, downstream decisions should be in unison. On the other hand, if there is conflict about either the mission or culture it can be a sign of a potentially contentious relationship.
7. Shared Values
When discussing co-founding a company with someone, you first need to discuss your values. You and your co-founder should share similar values because you’ll need to be on the same page when it comes to the company’s values and those you want to instill in your employees. Shared company values will make your business stronger and will help to create a stronger brand and company culture.
8. Target Market
You need to discuss your target market early on in the process. You probably know what product or service you’re going to offer, but don’t forget to discuss who your target market is going to be because it can’t be everyone. You and your co-founder should know exactly who your target audience is and how you’ll communicate with and reach them in order to effectively market and sell to them.
9. Strengths and Weaknesses
You and your co-founder need to discuss each other’s strengths and weaknesses. By determining the strengths and weaknesses of each party, you’ll be able to pick up the slack where your co-founder is lacking and vice versa. That way your company is as strong as possible and you’ll be able to focus on what you’re great at, put out your best work and enjoy what you’re doing as well.
10. How You Measure Success
If your idea of success for your company is reaching a certain level of revenue while your co-founder measures success in a different way, you’re going to have issues. Make sure you measure success in the same way so that you’re both working toward the same goals and outcomes so that once you’ve reached the level of success you’re after, you can decide your next step together.
11. Personal Lives
A lot of people fail to assess their co-founder’s personal life and how something like being financially strapped in the near future, or future choices like having kids, could get in the way of focusing on a company. I’ve had several early stage products or companies fall apart from something as simple as a co-founder getting a girlfriend and not making time for the project outside of his 9 to 5.
12. Working Styles
Something easily overlooked but extremely important for potential co-founders to talk through are each party’s working styles. To avoid problems down the road, it is imperative to establish early on whether your working styles are compatible or if they will become the source of conflict. You need to agree not only on what each person will be working on, but on how they will be working.
13. Equity Split
When co-founding a company, you want to make sure you and your partner are in agreement when it comes to splitting equity. Most start-ups operate on a vesting schedule so you don’t own, say, 40% of the company all at once. Instead, it’s spread out over a vesting schedule of 4 years. The first year, you would get 10%, and so on. This protects you against a potential bad partner.