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Summary:

I’d like to share my tale of a start-up partnership gone awry in hopes that my experience may be beneficial to other entrepreneurs. Six months ago I conceived a business plan for a new social media site. The idea was to create a platform where consumers […]

I’d like to share my tale of a start-up partnership gone awry in hopes that my experience may be beneficial to other entrepreneurs.

Six months ago I conceived a business plan for a new social media site. The idea was to create a platform where consumers could evaluate and critique the online services they use. I was excited about it, and in my haste to get the project off the ground, I partnered with a former client (I am a PR consultant) whom I had grown to know as a friend, too. My friend recruited another friend of hers, and the three of us got started.

Almost immediately, I sensed trouble. While I was close to my former client (she had attended my wedding), there were some early signs that her loyalties ran deeper with our third partner. Nevertheless, as a demonstration of good faith, I agreed to give each of my partners one-third of the business and the equivalent one-third voting rights on all major business decisions. These deals were sealed with a shareholder agreement forged by the company attorney.

In the six months that followed, our plans for the web site and direction of the company evolved. Unfortunately, too often my ideas differed from those of my two partners, who almost always seemed to be on the same page with one another.

I didn’t need to be a genius to see t where things were headed. This week my “partners” canned me. The official reason is “termination without cause,” which is important only because it ensures that I will receive a substantial number of shares (and small amount of cash) in the company, thanks to an accelerated vesting clause that I insisted be a part of the shareholder agreement we all signed. After I was unceremoniously informed of my termination on a conference call, my partners let me know my firing would happen one day before I was to receive another month of vested shares. Am I bitter? You bet. The original idea for the company was mine. I feel like they hijacked it , and kicked me out my startup.

But I hope there are valuable lessons here for other Found|READ fans about the process by choosing co-founders and, even more importantly, how to structure your partnership. Here are three takeaways:

*1) Tread carefully with agreements that create an odd number of equal partners.* There will always be the potential that two partners in a three-person arrangement will freeze-out the third partner, as happened to me. In retrospect I would have been wise to find a fourth partner, and preferably not one with close ties to the other two. This benefits all involved as it helps to create a potential for balance within the group, while avoiding a situation whereby two partners can gang up on a third.

*2) Strive constantly for honest communication within the group.* This was sorely lacking in my situation, and my partners were only partially to blame. When partner frustration kicks in, it is wise to get a objective, non-partner party involved, immediately. Don’t put this off. Consider your company attorney, who can help to clear-the-air on contractual issues before situations go from bad to worse.

*3) If the idea for the business originated with you, consider keeping a controlling voting interest in the company.* Even folks who seem jibe with you now, may sing a different tune tomorrow. Giving up a voting majority to anyone puts you on a fast-track to losing directional and creative control of your business.

I’d like to say that next time I’ll make smarter decisions based on this experience. I hope that’s true. But starting a web company in Silicon Valley is a seat-of-your-pants kind of thing, or at least it was for me. When you’re frantically trying to start a business it can feel as though there isn’t much time for contemplation, research, assessment and such. Consumer tastes change often, to say nothing of the appetites of venture capitalists, and the very last thing you want is to be beat to market by another company. In the end, many of us opt to move quickly, to just “go with our gut.” Sometimes this if for the better. In my case, it was for the worse. My advice is to pause and pace yourself. Put the things in place that you’ll need to protect your idea. If it is a truly good idea, it will afford you this time.

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  1. #1 & #3 points are really really important to follow, after hearing your experience Kevin.

    As you state, if it was you who coined the idea, it is very very important to keep the controlling voting rights with you (unless you were partnering only with your friend, in which case it was ok to be equal controller). But as a third person enters the equation, who is a 3rd degree apart from you, it was probably best for you to keep the voting interests with yourself.}

  2. Good cautionary tale.

    A buy-sell agreement is a wonderful thing. The best (and simplest) buy-sell agreement that I’ve seen is basically this:

    Party A wants to buy out Party B. The initiator (Party A) has to make a buyout offer. Party B has the OPTION of either accepting the offer or buying the shares of Party A (the initiator) at the offered price.

    I’d also suggest a 3-6 month “test the waters” phase where both parties have a low-cost “out clause”…

    One thing I’d also throw out. As an entrepreneur, you have to surrender some control if you want partners/ co-founders. If you aren’t willing to surrender/share control, be prepared to shell out more money and hire paid employees/contractors (who I’m sure will happily execute on your vision).}

  3. After all is said and done, being able to let go is probably the best thing you can do in situations like this. The more partners-in-crime you have, the more you can have help in taking things to the next level which I think is much better than trying to do things by yourself. But I think if you’re a serial entrepreneur, you’ll eventually experience such a situation, and to be able to let it go will allow you to move on and not let it drive you crazy in frustration for the rest of your life…}

  4. michaelcaton Monday, May 21, 2007

    When ever you start a venture with someone else, you have to consider what the consequences will be. This story reminds me of the 8020 media story I read recently. A well-run business isn’t a democracy, you can encourage and reward innovative thinking, but putting control in the hands of two many people is always risky. Hope you have better luck with your next project.}

  5. ron_topright Tuesday, May 22, 2007

    A very successful entrepreneur once told me that when it comes to business partnerships, he prefers them to be odd-numbered and under three.
    Not possible when you are starting a business but I am sure on your next startup you will think through attracting “partners” while maintaining more control.
    Ron}

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