How to prevent co-founder conflict

2020-07-17 | Jelle Hoekstra

There are many succes stories of startups, but studies show that most new businesses fail in their first years. One of the top reasons for this failure is conflict in startup teams. It is damaging for a startup company when the founders are involved. In this blog we provide you with some topics to discuss with a co-founder, based on a free startup contract template from the University of Pennsylvania Law School.

Startup contract for founders

Hans Klis already wrote an article here at Startupjuncture on how to find the right co-founder. In order to prevent co-founder conflict, it is wise to have a solid agreement. This does not only mean how you split the shares in the company, but also how you wish to collaborate. As founders it is important to see what you agree on, and wise to put this into writing. The free template for a ‘founders agreement’ from the University of Pennsylvania Law School is a useful tool to get started with this, and can be found here.

The template is divided into two parts; a ‘conversation guide’ and a ‘model founders agreement’. The conversation guide lists several topics to discuss before starting a business with a partner. The main topics are:

strategy;
ownership structure; and
management.

The founders agreement covers model clauses on:

transfer of ownership;
ownership structure;
confidentiality;
decision-making and dispute resolution;
representations and warranties; and
choice of law.

Intellectual Property

Another topic to discuss when starting a business is Intellectual Property (IP). It is a quite common situation that a commercial entrepreneur partners with a programmer, who will be responsible for development of a software product as CTO. If the CTO wants to leave at some point with the developed software, this could lead to a difficult break up. In this situation, it helps if you explicitly agreed on the transfer of IP-rights to the company, the exit conditions and the distribution of company shares.

In the same situation it is also possible that there will be much more future work for the sales director / entrepreneur in selling the product than there will be in maintaining the product (for the developer). The type of work of the founding partner is very different, so a fair distribution of shares is difficult. This can be compensated by also putting in some employment fees. With salary, you can compensate for the amount of effort put in. This is in contrast with shares, because shares only relate to the result of the company.

It is our hope that a good agreement will help you prevent conflicts. If they do arise however, you could consider a professional third party to help you negotiate your way out of it. Such a procedure is often cheaper than going to court.