Why Co-Founders Are Great — and Where the Pitfalls Are

If possible, it’s often a good idea to have co-founders in a startup. It can be invaluable to have two or more people leading a project, sharing the burden of founder duties, providing multiple perspectives issues, second-guessing one another (in a constructive way). And while such benefits can also be accomplished by outside advisors or coaches, it’s often not the same when the other person is actually “in the trenches” with you as a co-founder.

However, having co-founders also has its pitfalls that should be planned for at the outset. The first is the problem of “too many cooks in the kitchen” — while a team of two or three equal co-founders can work relatively efficiently, when you have a team of four, five, six, or more co-equal founder, it is possible to run into issues of lack of consensus or factionalization, depending on how the company is managed. One suggestion to resolve this issue would be to structure the founding equity into primary and secondary tiers, where input is given by all but the final decisions are made by the primary founder or founders. It may also be necessary for the team to ask itself if all its members truly are founders of the company, or if some of them are in fact the company’s first employees — in such a case, it is perfectly appropriate to use titles such as “founding employee”, but with equity stakes and management structures to match that relationship.

In any event, if the equity or the management power in the company is split in such a way that deadlock is possible, managers should ensure that anti-deadlock provisions are written into the company’s governing documents.

One of the other biggest pitfalls of co-founders is that co-founders sometimes leave the company they helped found. Of course, if a founder leaves and holds a significant chunk of the equity, the company ends up with the problem of dead equity — that significant equity holder is no longer working to build the value of the company. Practically speaking, the company may end up in a situation where the departed founder is needed to vote on an issue, but the founder is obviously no longer up to speed on company activities and may be no longer as emotionally and professionally invested in the company as active founders. Investors and key employees may also tend to avoid companies with a sizable chunk of dead equity. Dead equity can be minimized by a vesting plan, and/or by requiring departing founders to sell their equity to the other founders or back to the company — of course, buyback provisions can be logistically difficult for companies in their first year or two of operations as valuation of the company (and of the departing founder’s share) can be a murky issue, so buyback provisions must have some clear way of determining value.

On a final note, this article is in no way intended to convince solo entrepreneurs to go out and bring on a co-founder simply for the sake of having a co-founder. If you’re elevating an employee beyond what his or her work for the company actually entails, it is better to remain a solo founder. If as a solo founder you wish to bring on a partner, try to do so within at least the first few months of the company’s existence, and only have someone be a co-founder if they are going to contribute the same kind and level of value to the company as you, the founder, do.