Being a founder, not to mention a CEO, can be a very lonely place, carrying loads of stress and requiring to constantly be at peak performance. This often makes it hard to find a balance between one's professional and personal life. Maintaining strong relationships with the co-founders and investors is also not an easy task, where clarity and empathy are not always present. As one of my entrepreneurs says: “It’s not the technological challenge we deal with, it’s the mental one.”
“Throughout my +15 years as a professional, I've always been attracted to the intersection of business and psychology through entrepreneurship - What makes people tick? How do people think and act? And what motivates people in business? What drives me is being there for the amazing entrepreneurs, who are under constant pressure, so that they can make our world a better place. That’s what I’m here for, and this is my podcast – The Human Founder.”
With Adv. Guy Lachmann, Senior Partner, Pearl Cohen Law Firm
This 3-part series will discuss the psychological aspects that are intertwined with the legal aspects of the entrepreneurial journey - and most importantly - the founders' agreement, choosing a lawyer, and the case of separation between partners.
"And after all, despite everything, it’s over"
The “break up” of entrepreneurs happens more than people think. Luckily, in most cases, it doesn’t end in explosive fights, but rather is a relatively friendly parting. The infrastructure of the startup is very influential in this process – if there’s no founders’ agreement, it’s anyone's game– there’s no telling what will happen. When there are contracts that are drafted by an attorney, you can moderate the effect of founders parting ways and allow for the company to still survive. There are cases where such a separation actually pushes a company forward significantly (which also benefits the entrepreneur who left) and cases where separation of founders was on the table but for whatever reason things worked out, the entrepreneur stayed, and the founders overcame the difficult situation. This often leads to the company making a significant leap forward and bringing varied success along with it. When it comes to such separation crises - dealing with the raging egos that unfold takes maturity. As such, there are cases of elegant parting but also cases where everything explodes.
How involved are the entrepreneurs?
I talked with Guy about the "company’s best interest” test that I like to use, inspired by the "child welfare" test that is done when family law is on the table. When I work with entrepreneurs and some disagreements cause quarrels that hinder the ability to act and move, I believe an honest look at the interest of the company helps bridge the gaps and bring the entrepreneurs back to where they came from; to help a company that they care so deeply about grow. We look at the situation with radical honesty as it helps us shed a lot of light on the dilemmas we face. Of course, the responsibility of what will benefit the company rests on the shoulders of a lawyer, but entrepreneurs have a significant part in the ability to allow this to even exist.
Remember that "a gun that appears in the first act of the show, must fire by the end". The same is true for entrepreneurs; sometimes there are signs that things might go south. Guy and I talked about how, after working with hundreds of entrepreneurs, we have adapted a sharp ability to be able to predict such negative things that may develop along the way. We discussed whether it’s right to speak up about them, for example, when you feel that problems arising between entrepreneurs could lead to negative outcomes, or when an entrepreneur comes to the point of leaving the company, but as an attorney or adviser, you saw it coming a long time ago. So, there’s a question of whether to address it because sometimes getting involved and making any sort of statement can actually escalate the problem.
How do we deal with it then? We reflect on what we see, and let it resonate while developing an elegant ability to maintain balance. In principle, the company hires the services of an attorney, not the entrepreneur, and therefore, an attorney should be neutralized from the preference of a specific founder. They should care about the interest of their clients (the company), not per se the entrepreneur. But this doesn't always take place in practice. Officially - it’s very clear who they represent, but in reality - it’s different.
Advocates have rules of ethics and should be very strict when practicing them. They must not be in a state of conflict of interest; they cannot choose a side. Sometimes, precisely because advocates maintained themselves as neutral - they can gain trust and appreciation between both parties and can therefore work well to bridge any gap between them. Advocates are supposed to represent the company and not do 'The Judgment of Solomon'. This is a moral and ethical question, and an attorney cannot advise only one party, let alone based on an agreement that the attorney drafted. This means that in any situation where there is a potential conflict of interest, lawyers are inclined to alert the relevant parties and obtain their written consent on how to proceed, assuming they wish to continue their representation. On the other hand - it’s important not to get stuck and try your best to remain an acceptable figure on both sides, to motivate them toward a common goal.
“Sometimes being an attorney in a mediator’s hat is a slippery slope in a conflict of interest. Sometimes it’s right for each party to have their own lawyers, to let them try to reach agreements in a healthier and more balanced way. But sometimes there’s a "stronger" founder which makes it easy for the lawyer to get confused, or there are lawyers that fortify their position which leads to unwanted procrastination. There must be neutralization of emotions to help the client reach the desired result, rather than and not necessarily to being the winning attorney. In the end, helping the client is to make sure things end amicably while considering the mental costs the legal battle will have on the company."
One must remember that if we bring the company to an irreversible situation, then no one wins. Flexibility and understanding of how the company will win in the end must be the priority and be taken into consideration. It’s best to go out in a way that will maximize the company’s chances of success.
The parting discourse requires a lot of maturities, psychological stability and putting egos into proportions. Sometimes passion/creativity/enthusiasm is what makes an entrepreneur successful, but it is those same qualities that can lead to their dismay when they don’t know how to manage them in a more complex discourse.
An example of this is a startup that was proceeding with a Series A funding round of $20 million and had 3 co-founders. It was during this funding round that the struggle for decision-making began. Then, the CTO resigned. It was catastrophic for the company since he held ⅓ of it. The term sheet was pulled back, one fund ran away, and the other fund agreed to invest in a lower valuation. It was the CTO that blew up the matter.
On the other hand - what happens when there are bad vibes, and an entrepreneur feels he must leave. Should he stay until the funding recruitment ends?
Things are coming to the surface. The tension will be visible to new investors. Sometimes the departure also raises the value of the company because the tension is resolved.
What is most important is that you don't leave by slamming a door. It's childish. Departure should be consensual, with a clear contract and understanding, to produce stability once they leave. We want a departure that will not create a scar; one that won’t prevent the company from raising money; one that doesn't hurt its value; one in which a leaving founder does not create opposition to the company and prevent it from being attractive.
Both parties (the leaving founder and the remaining one) must have a decent, fair, and logical separation. Over-insistence on the terms of departure can sabotage the company. Leaving up to 10-12% equity for the leaving founder makes sense. Make sure the number is not too prominent. On the other hand, don’t give degrading offers, where the founder drops from 50% holdings to 0.5%. A humiliating offer evokes the ego, and problems can arise; the entrepreneur can get up and go and you will need to get a waiver before any investments continue, which obviously complicates matters further.
If there’s an orderly founders’ agreement, then everything - including fallouts- has already been agreed on. A healthy departure is a complete departure– which means they don’t even stay on the Board of Directors. The best way to leave is by also leaving behind the tools for the company to be successful.
It’s important to mentally process the departure - both for the leaving founder and for the remaining ones, to prevent producing a kind of post-trauma in the future. Though there might be a lot of relief, there will also be a lot of upkeep- a founder will be left to deal with continuing the daily tasks, the consequences, the feedback from employees or any loneliness. So, the relief is coupled with an emotional burden. That’s why it’s important to talk about it, unload it, process what happened and move on from there. I often meet entrepreneurs in their second 'round' - who carry post-trauma from the way they were “thrown away”, left or abandoned in their previous startup– it affects their whole relationship in the new venture.
What is the role investors should play in the founder's parting ways?
Investors can play a critical role in a breakup. But it should be remembered that when one side chooses to put pressure on the other side in front of the investors, it is a double-edged sword: it can damage the reputation of the founder and the investor, should they choose to side with him.
However, the investors can also help founders reach understandings but put pressure on them– often much more than mediation can. On the other hand, if investors don’t see eye to eye - this is a recipe for destruction. The position of investors is greatly influenced by the outcome that will protect their investment to the maximum. Sometimes an investor starts on the side of one founder but then switches to the other because he thinks he can bring the company forward. Investors should express their position and not sit on the fence - but they will usually take the economic position, which can be difficult but will produce an outcome that may prevent market failures that the startup may run into.
In conclusion, it’s crucial to have a good lawyer by your side that is attuned to you from the very first moment. And as my late father would say - the sooner the better.
Disclaimer (I am after all still an ex-attorney) - this series will provide knowledge that will help you shed light on the field but reflects our perspective and worldview and is not a substitute for legal advice. Guy and I recommend you consult a lawyer if the topics of the podcast are relevant to you before taking any action. Each case should be examined on its own merits and its individual aspects weighed. The conversation is meant to give you a general impression from the opinion of the speakers only.