How To Share A Business Between Founders

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Wednesday, 7.25pm

Sheffield, U.K.

One goal of law – as we learn in law school from the first day of contracts – is to deter bad behavior. – Marvin Ammori

It takes skill to work well with other people.

I, for example, like having control over what I’m doing.

I like being able to write and publish this post without really having to involve anyone else.

And that’s fine – but as an old friend said “To go fast, go alone. To go far, go with company.”

And that is true, you will achieve more when you work with other people.

But which other people?

And under what conditions?

This is where a 2013 paper by Thomas Hellmann and Veikko Thiele called Contracting Among Founders may give us some insights.

It’s a fairly symbol heavy treatment of the topic and deals with founders that are equal – in terms of skills and resources – but it brings out some of the main points we need to consider when thinking about working with others.

Let’s start with a team thinking about working together – possible founders all.

They can agree an up front contract where they set out in writing what each one’s shareholding is in the business.

Or they can wait and see how they work together before signing anything – a so called delayed contract.

The ideal situation is that either option results in a “dream team”, a group that works well together and where everyone contributes something essential.

The drawback of an up front contract is that you tie yourself to someone who they doesn’t do any work but is still entitled to a share of everything.

This results in a “dud team” and you have to figure out how to get out of it – which usually means buying the other person out with your money or money you borrow – and people usually don’t like lending you money to do that sort of thing: they want it to go into and grow the business.

The drawback of a delayed contract is that you put all the work in and your partner, who is savvier and more ruthless than you steals what’s there or walks away with the business leaving you with nothing.

In this case you have winners and losers and lots of angst and unhappiness.

Maybe some lawsuits.

Hellmann and Thiele point you to the story of The Social Network.

Now, if you have a dream team then you get an optimal situation – equal shareholdings where everyone is happy.

An alternative option, if you don’t know each other, is to tie the shares to a vesting schedule.

This is something where your share is released as you hit milestones or spend time in the business.

The advantage is that it’s in proportion to the value you bring.

The disadvantage is that the milestones or value cannot always be measured precisely.

After all, were you lucky or skillful when you made that enormous sale and hit all your targets?

The other thing we need to remember, which isn’t really touched on in the paper, is that your shareholding is really a claim on profits – and those profits come from customers.

And they come because you do something of value – these days mostly using your intellectual property or IP.

And the value that you’re trying to hold on to is the asset value of that IP and the cash flows from those customer contracts.

As models go this is probably a fairly good first pass at outlining the issues you will face working with other people.

You can see this working with entrepreneurial teams, intrapreneurial teams or plain office teams – the dynamics of work and reward play out roughly the same way.

One question is whether in a postmodern world where you work with networks some of this ownership angst can be managed through radical openness.

For example, if the first iteration of work you did created all IP under very permissive licenses such as the BSD licenses then you would have the option to split later and have each of the founders take the IP created so far and make what they could of it.

And that would probably help early customers as well.

Later on, when you know the team is working you can arrange a more tied in sort of contract.

These days it often makes sense to live together before getting married.

Then again, if you know, you know and you might as well tie the knot.

Or perhaps you should see lots of people before you settle down.

But the real point is who knows what’s going to work – there is no perfect answer.

It all depends on the situation and opportunity.

And you can’t reduce all that stuff to a formula.

Cheers,

Karthik Suresh

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