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Phenomenon of the Forgetgful Founder

November 8, 2012

Alexander,  ED /2012,November 7th/ Phenomenon of the Forgetful Founder/Retrieved November 8th 2012 /http://www.orlandobusinesslawyer.com/blog/ /11/8/2012

 

A honeymoon is a wonderful thing. A time when the pressures of real life don’t matter and when possibilities are endless.

In addition to marriages, honeymoons happen in startups.

A honeymoon can be a dangerous thing. Whether it’s over exuberance, believing your own propaganda or failing to ask the tough questions, a honeymoon in a startup can cause founders to bake into the company big problems that are difficult to remove.

According to Steve Blank, author of Startup Owner’s Manual, between 25% and 33% of startups fail because of problems among the founders. Noam Wasserman, professor at the Harvard Business School and author of The Founder’s Dilemmas, states that approximately two thirds of startups fail because of people problems.

In short, taking the time to deal with these issues is worth it.

Over the past 19 years representing technology startups, I’ve found the scenario typically plays out like this:

Bob, Raj and Mary, all technologists, decide to form a company. Each agrees to take on the technical aspects of the product germane to their area of expertise. They also split up the perceived business functions. Because the business can’t pay them, they continue working in their current jobs.

All is going well until Bob gets an unsolicited job offer for his dream job. He’s torn because he really wants to be a founder, but this has been his dream job forever.

Bob decides to take the job, but promises Raj and Mary that he’ll continue to work nights and weekends to finish his deliverables for their startup. And he does for a week or two.

By the third week something happens. Bob can’t do it all. And, because his new job pays the bills, he has to focus more time there and less on the startup. Deadlines slip. Deliverables become shoddy and full of problems.

The founders meet to talk about what’s going on. Bob tells of the big project at work that has to get done right away. “But as soon as that’s done, I’ll get back on track,” he says.

Only it never happens. Bob spends less and less time working on the startup. Eventually, very little is coming from Bob and the other founders have to pick up the slack.

They meet again. Bob finally admits he can’t devote the time. Raj and Mary ask him to give up some of his stock because they’re now having to do Bob’s allotted work. Bob isn’t willing to do it. He feels he’s worked hard and only didn’t complete a small portion of his work. Therefore, he believes, he shouldn’t have to give up any stock.

“We agreed to be equal partners and I’m not willing to change that,” Bob says, forgetting his agreement to do his portion of the work.

Raj and Mary are not happy and want to force Bob to give up his stock. Unfortunately, without a contract allowing them to get Bob’s stock back in this situation, they’re stuck.

The problem was baked into the startup at the beginning.

During the honeymoon of the startup, all of the founders thought each would do what they promised to do. Rather than put it in writing – with a remedy if a founder ‘forgot’ to do as promised.

Of course, that written agreement must be detailed, with objective evaluation of whether tasks are complete and timelines met.

While this is a typical scenario, it’s not the only one. Other issues that founders need to discuss and get into a written agreement include:

  • Exit Strategy. What do the founders want this to look like when it’s done?
  • Financing. Will this be angel/venture backed or funded organically?
  • Management. What roles and responsibilities will the founders have vis-a-vie management and operations? Management by committee is a straight line to failure.
  • Employment. Are the founders expecting to be employed by the startup? If so, when, at what salary and under what performance standards?
  • Founder Departure. What happens if a founder wants to go on to other challenges? Can the company buy that founder’s stock? Is it required to do so? At what price?

There are many other issues to be dealt with among founders at the honeymoon stage before problems are baked into the startup causing it to fail.

________________________________________

This is a big week for entrepreneurship in Central Florida.

Tomorrow is the B.I.G. Summit (Business Innovation and Growth) at Full Sail in Winter Park. The event has a great list of speakers and, as has been the case for the past couple of years, is sold out.

Starting Friday night and continuing through Sunday early evening, this weekend is Startup Weekend here in downtown Orlando. Entrepreneurship Law Firm is a sponsor and I’ll be there as a mentor throughout the weekend.

Startup Weekend participants create a startup – typically with a working prototype – in 54 hours over three days. It’s worthwhile to come by and meet other people in the Orlando startup community, if nothing else. You can still register.

I hope to see you at both events.

Ed

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