Founder and investor insights

Sources of Founder Conflicts Beyond Equity Split

Founder conflicts are a significant reason for startup failures, accounting for 65% of high-potential ventures failing due to such issues. These conflicts often arise from various sources beyond just equity division:

• Unequal Contribution Perception: One founder may feel they are contributing more or doing all the "heavy lifting," while the other is not pulling their weight.
• Importance of Role/Skill: A founder might believe their skill set or role is more critical to the company's success, devaluing the other's contribution.
• Turf Wars: Disputes over defined roles and responsibilities, where one founder "steps on the turf" of another (e.g., sales and marketing vs. engineering).
• "I Know Better" Syndrome: One founder asserting superior knowledge or expertise.
• Feeling Marginalized: A co-founder feeling excluded, not consulted, or that their views are not heard or respected. This can lead to a sense of not being a "true" co-founder.
• Direction Disagreements: Founders disagreeing on the strategic direction or vision of the company.
• Attention Imbalance: One founder receiving disproportionate public or media attention, making the other feel sidelined.

These conflicts can be categorized into "The Three Rs" and team issues:

1. Rewards: Primarily referring to equity split, which is a major source of contention beyond just salaries.
2. Roles: How responsibilities are divided, who holds what position, and who makes decisions. An example is the early conflict between Steve Jobs and Steve Wozniak at Apple, where Jobs, despite his sales background, wanted a say in product development, leading to a souring of their friendship.
3. Relationships: The impact of personal relationships (family, friends, colleagues) on professional conduct. While many companies are founded by people with close ties, these strong relationships can make it harder to have honest conversations about difficult topics like equity and roles. The likelihood of discussing "elephants in the room" decreases as relationship strength increases, while the potential damage if the relationship breaks is highest for close friends and family. Approximately 43% of new tech ventures involve partners who define themselves as friends.

Insights on Equity Split and Founder Dynamics

Naga Prakasam's Perspective:

• Experience with Conflicts: As an investor, Naga Prakasam has mediated numerous co-founder conflicts, even at very early stages before revenue generation.
• Role Clarity: Role ambiguity is a major issue. One founder might feel left behind if another receives more public attention.
• Importance of Trust and Communication: Successful co-founder relationships, like those at Neurosynaptic and Uniform, thrive on constant, transparent communication and mutual validation, ensuring all co-founders feel equally valued, even if their roles differ (e.g., CEO vs. COO). This trust allows flexibility, such as a backend person stepping into a sales role when needed.
• Equity Split: Naga Prakasam advises against equal equity splits, stating that equity should be based on an individual's ability to contribute, as equal division can lead to future problems. However, he acknowledges that many entrepreneurs prefer 50-50 splits for simplicity and perceived initial equality.
• Evolving Roles and Exits: Founders must be ready to adapt and grow with the company's scale. If a founder cannot keep up, a non-acrimonious exit may be necessary, where they receive returns for their investment but step aside from an operational role. The primary goal should always be the venture's success, not individual agendas.
• Proactive Management: CEOs should continuously ensure communication, mutual growth, and be prepared to bring in external help or leadership coaches if founders struggle to scale with the company. It's crucial for founders to be honest with themselves and each other.
• Flexibility in Equity: If an unequal split is not made upfront, the option to revisit and adjust equity based on clarity and venture growth should be kept open, potentially with mediation.

Arjun Rao's Perspective:

• No Perfect Formula: There's no single perfect formula for equity splits; it's highly case-by-case.
• Skewed Splits: An extremely skewed split (e.g., 90-10) is seen as ineffective, almost like a solo founder, as the 10% stake may not provide enough incentive for the minority founder to stay committed during tough times or have a voice.
• The Buck Stops Here: It's absolutely crucial to identify a clear CEO early on, as the "buck stops" with that individual for final decision-making, even if founders are friends and initially prefer equal footing. Delaying this conversation can lead to issues.
• Evolving Contributions: While founders may contribute equally at day zero, their roles and criticality evolve as the company grows. A founder taking on more burden or critical responsibilities might feel deserving of more equity later. Some founders learn and adapt faster to scaling challenges than others.
• Constant Re-evaluation: Equity distribution should be constantly re-evaluated to ensure fairness across all phases of the company's life.
• Investor Role: Investors can play a crucial role in initiating tough conversations about equity and roles as the company scales, ensuring the organization's needs are prioritized over individual founder feelings.
• Communication is Key: Constant, honest, and transparent conversations are paramount to nurturing the co-founder relationship, which is like a marriage. Clear demarcation of roles and responsibilities, revisited often, is vital.
• Focus on Venture Success: Founders must continuously remind themselves of the original purpose and alignment for building the venture, preventing personal agendas from derailing collective goals.

Mayank Nagori's Family Business Approach (Case Study)

Mayank Nagori's experience with a family-run business provides an alternative perspective on founder dynamics and equity.

• Easy Equity Split: For their family business, the equity split was a straightforward 50-50 between two brothers, rooted in Marwari household traditions.
• Conflict Resolution: Living together and having dinner at the same table, often with parents (acting as "Supreme Court judges"), forced quick resolution of conflicts.
• Clear Role Demarcation: They foster alignment through:
  • Open Office Environment: All team members, including founders, sit together, promoting constant conversation and awareness of each other's work.
  • Shared Expectations: Clear understanding of growth targets and roles prevents mismatches in expectations.
  • Beyond Money: Employees, even interns who became full-time, are aligned with the brand's vision, demonstrating commitment beyond just working hours.
  • Empowerment: Production teams are empowered to improvise and provide solutions, being remunerated for exceeding targets, which drives efficiency.
  • Autopilot Mindset: Mayank emphasizes letting go of micromanagement over time to enable the entrepreneur to focus on strategic growth rather than daily operations.
• Operational Challenges and Learnings:
  • They chose in-house manufacturing for quality control, despite it limiting rapid scaling compared to companies using contract manufacturers.
  • A recent supply chain disruption due to reliance on a single, artisanal gum base supplier from Mexico highlighted the need for diversification and having alternative sources. This forced them to implement process improvements and secure their supply side.