You want to be an entrepreneur.
You possess the greatest sense of passion than most people you know, a drive and will power that is second to none, and a deep down inside you hold the keys to a world changing idea that is so exceptional that even the great Leonardo da Vinci would tip his hat to.
You also understand that this is not a venture that you can take on by yourself and that you will require a team to bring this idea to life. Once the journey for startup companies begin, anything looks possible and nothing can stand in the way until the day comes that a disagreement between founders comes to light and everything seems to come to a screeching halt.
Fortunately for yourself and many others, this article was already in the back of your mind when creating the agreement between you and your founder(s).
I was once asked during a presentation at the University of Pennsylvania that was not an easy question to answer, despite how many times it comes up during talks about startup companies.
“How should the relationship look between a CEO and a CTO in an early stage startup company?”
If you sit back for a moment and try to come to a quick and concise answer, you will realize that this is not an easy question to answer because in every business there are different people with different roles and different personalities that require unique solutions.
One would then deduce that because every situation has distinctly different circumstances, there would be no way to answer this question with one generalized statement to satisfy all startup founders, correct?
It can be difficult to provide advice that satisfies all circumstances, but the are several questions that I like to use that provide direction and transparency for startup founders to help them develop a partnership agreement.
Through my experiences in working for startup companies and forming my own, I have found that communication and transparency are vital to the success of any partnership.
Questions for Founders and their Business Partners:
Here are my guiding questions when providing advice on business relationships. Please note: This is NOT legal advice, but rather business advice. Consult an attorney during this process as well.
Below are some questions that I often ask startup founders when they come to me seeking advice on how to form the relationship between themselves and their cofounder. Please understand that I am not providing legal advice but simply business advice. I highly recommend consulting the lawyers for legal advice when creating a founder relationship. (they get paid the big bucks for a reason!)
Most importantly, if you are the CEO make SURE you answer these questions as well. It is equally (if not more) important that you can answer them clearly. Your team will appreciate you, and you’ll have clearer direction yourself.
As CEO these are questions that you should always be able to answer. The answers to these questions will provide you with a clear direction and ensure that your team understand the value of your role to the success of the company.
Here we go!
1. What responsibilities do I have each day?
What are the actionable items that your role will complete and how will measure them? How will I determine success or failure? Am I worth it?
CEO’s — Don’t fall victim to the answer “Well my job is to create sales so I can’t always predict what will happen and I can’t always measure the outcome of my actions”
CTO’s — Your job doesn’t stop when the product goes live. Your company will flourish if you establish a process with a team that can support your product and/or customers. And very importantly how will you update your product throughout its life cycle?
Unsure if your responsibilities are reasonable? Ask on the Entrepreneurship sub-reddit.
2. What are my day-to-day hours commitment?
Most new startups don’t have enough revenue to provide a steady level of income so you may have to pick up a side job like driving for Lyft. So how many hours will you be driving for Lyft and how many hours will you spend on your startup?
CEO’s —Understand that if your team is working for no compensation at the moment, their time is limited in what they can commit to the startup so you must prioritize what can be accomplished in that time. They need to make some money to support themselves too!
CTO’s — Always be very clear and concise on the estimates for how many hours are required to complete tasks. This will protect you and allow you to forecast projections for the upcoming months.
This goes for everyone!- If you are dedicating yourself to your startup full time, be sure that you have the finances to support yourself while your startup gets up and running. Don’t put yourself into a position where you run out of money and your company dies as a result. Too many companies have fallen off the radar after funds dried up because nobody planned for the scenario where the company takes longer to really take off.
3. How long will your partnership last?
Building a company on your own will take at least twice as long and cost at least twice as much as you expect. You haven’t ever taken on a venture like this before! Always be prepared for the inevitable and plan ahead to forecast how you and your partner will work together for the next several years. Few companies produce anything noteworthy within their first year.
Established companies, particularly agencies, have the experience and expertise to be able to estimate close to exact time scopes so these are an exception.
Remember this important bit; there is Time, Quality, and Cost. You can only have two of them.
4. What will I pay myself for my skills, commitment and other value that I provide to the startup?
It can be easy to say how much you think another person should get paid such as your partner, but determining your compensation can be difficult.
What I like to recommend for partnerships is that both parties sit down together and find a middle ground that each person can agree on. If an agreement can’t be easily made, an unbiased third party can help to facilitate and mediate a discussion about compensation. I reccomend providing a valuation on the several factors inlcuding but not limited to:
5. What happens AFTER that commitment?
With most stock option agreement, smart owners will create a vesting schedule with a cliff that determines when a person will receive stock options and how soon they can begin to exercise their options. The cliff is the minimum time that must pass before stock options can be exercised. This prevents people from quitting soon after joining the business and making off with stock options that they didn’t necessarily earn.
NOTE: This is my personal recommendation and is NOT legal advice. You should always consult an attorney.
And attempt to agree on a fair valuation for everything. It may be a hard conversation, and it’s definitely a negotiation. In the end if you can’t agree; perhaps agree on a 3rd (neutral) party to help moderate the conversation.
6. Last but not least, maintain transparency!
Always, ALWAYS, be transparent with your team member. You do not ever want to give misinformation about the business that could be misleading or give the wrong impression. You want to maintain a high level of trust between your team members and one of the best ways this is accomplished is through honesty and transparency.
That’s all folks!
The questions outlined above are the ones I recommend starting with when putting together your startup agreements. It can be useful to review and answer them either before or during the time you meet with your attourney. (Did I mention to always consult with an attorney when creating any sort of partnership agreement??) Some attorneys specialize in startups but there are also services like LegalZoom that can assist you.
Finally, you will notice that I did not mention features, deadlines, products, or the number of clients into your partnership agreement because the expectations should mostly focus on time commitments.
Working in the startup industry, you will soon learn (if you haven’t already!) that priorities will sometimes change weekly, so it is best to form a partnership agreement that can account for the flexibility that will be required. It is important to stay agile in your actions and strategies.
I hope this info proves to be useful to anyone reading through it and as always I welcome any additions or contradicting opinions!
I wish you the best of luck in your startup journey!