by • January 10, 2017 • FoundersComments (0)1

What to do when you get screwed

The most common (and emotional) screwing you’ll get in a startup is via your cofounders. A solution at the end. First, some examples:

A buddy of mine had done the hard work of finding two excellent tech cofounders. Unlike the much maligned case of a clueless business guy searching for indentured servants, he delivered real value and had secured a shocking number of customer commitments before the thing was built. Once the team was together, they launched version 1, got some happy customers, raised a round of funding, and then soon realised that the two tech founders had embezzled more than half the round and funnelled it into their real company, which they had been secretly building in Germany the whole time.

Another friend was thrown for a loop when his cofounder not only quit, but then actively poached the entire tech team to work for his new agency.

I had a cofounder leave the company to join our biggest competitor while stealing several key clients and then using our [shoddily rebranded] case studies and sales materials at his new company.

It’s not just cofounders. Partners can break their contracts. Suppliers can fail to deliver. Employees can blackmail or extort you. Investors can delay until you’re desperate and then ratchet the terms. Potential acquirers can enter due diligence to learn your trade secrets and then launch a competing product. In short, there are plenty of ways to end up feeling like you’ve taken a swift kick to the pants.

In such cases, you’ll probably get mad.

You’ll be even madder if you did all you could and it still went to shit. A friend had an amicable breakup with a cofounder who wanted to leave and gave him a full extra year of vested equity as a token of goodwill for all his hard work. Fast forward a few months and the leaving founder’s girlfriend had convinced him to talk to a lawyer. The lawyer convinced him he had a real case (never ask someone who works by the hour whether you’re in need of their services). This eventually forced my buddy to lawyer up as well, and after 6 months of escalating tension (and legal fees), he was ready to burn the whole thing to the ground rather than hand over even one penny more.

The critical moment

Wanting to burn it down is the critical moment. I’ve heard so many people say some variant. “I’d rather shut down the entire company than give that fucker a single dollar.” “I’ll spend every waking hour ensuring they don’t get a scrap if we ever sell the company.” “I’d sooner start over from scratch than let them profit from my hard work.” Etc etc.

In most non-cofounder cases, when you get screwed, the correct response is to complain about it over a beer, avoid working with that person again, and move on.

But because they have equity, cofounder screwings are different. You can’t cleanly cut loose. You’ll occasionally need their signature and will find yourself writing them an eye-wateringly large cheque whenever you pay dividends or sell the company. It can feel like their claws are so deeply stuck in that the only way to be rid of them is to sink the ship. But that’s wrong.

What to do

The answer is to forget about what they get and focus only on what you get. Easy to say, I know. But there’s a way to get around the emotion.

Say you have a 50/50 cofounder on standard 4 year vestingwho does an amazing job helping you get v1 of the product out, and then colossally screws you at the end of year 2. You guys now hate each other, they’re leaving, and they’re taking 25% of your company with them, which they’ll keep forever. The thought of sweating it out for the next however many years only to see them profit just boils your blood.

Two thoughts:

First, they’ve earned that equity. Regardless of how you feel about them now, that 25% was the agreed upon payment for the work they’ve already done. You might have hoped they would stick around longer, but you have no real claim to those extra years. So long as you have vesting set up (heaven help you if you don’t), this deal is as it should be and they’re entitled to walk away with their quarter.

Second, look at where you are now. You’ve launched a version 1. You’ve got some happy early users. You’ve managed to hire a couple good people. You’re now a reasonable candidate for raising the next round of funding. Would you have given away 25% of your company to an investor to get this far? If the answer is yes, then you can just mentally flip the cofounder-you-hate into an investor-you-ignore. They invested their time instead of their cash, but ultimately you ended up in a place you’re happy to arrive at.

But what if you sell the company and they get undeservedly rich!? Except in the most egregious cases (the active embezzlement I mentioned springs to mind), they do deserve it. They helped you start the company, their debt is paid. Secondly, who cares if they get rich? You’ll be even richer. It’s the dumbest thing I’ve ever heard to sink the boat you’re on just to drown someone else. I mean, really. Your on the Titanic and it sinks, and you find yourself one of the lucky few in a liferaft. Hooray! But wait–your arch nemesis is in the same liferaft, and they aren’t even rowing!!!! Are you going to sink it? Obviously not. Because the result that matters is yours, not theirs.

I was once made to read a book called Crucial Conversations by a girl I was dating, which I’m sure was some sort of hint. Regardless, the summary is that before you enter an emotionally charged conversation, you should have a quick think about what you want to get out of it, and then focus all your energies on achieving that goal. So many of these conversations degrade into petty bitterness, which is pretty much never our pre-meditated goal (“After this conversation, I want this guy to hate me even more“). Instead, our goal is usually something like being done with the bickering so we can return our focus to the company.

After the team-poaching mentioned earlier, the goal ended up being to keep product development moving while a new tech team was found. The solution? Hire back the poached team as consultants. After all, they knew the product better than anyone. Was this painful? Absolutely. Did it seem unfair? Indeed. Did the scandalous ex-cofounder profit from his wily shenanigans? He did. But did it solve the problem and achieve the goal? Yes. They’re now profitable, have a great team, and doing half a million quid a year in recurring revenue.

The guy whose cofounder lawyered up has recently closed a series B and the company is worth close to $50 million. Will his exporter profit? Sure. Does it matter? Not a wink.

If you sell the company, it doesn’t matter who else gets rich or how much they deserved it (or didn’t). All that matters is what it achieves for you and yours. So after you get screwed, the thing to do is forget about what they get, think about what you want, and give them whatever they need in order for you to get it.

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