Startups · Entrepreneurship

Family member as cofounder… what should I do?

Anonymous

September 13th, 2016

Multiple investors seem to be completely turned off by seeing married couples or just couples as cofounders in a business. I wonder why this is and any tips or guidance you can provide in making sure that things are always professional and that we are able to create a positive environment for investors and other employees.
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Yaniv Sneor Founder, Mid Atlantic Bio Angels; President, Blue Cactus Consulting, Trustee, ILSE

September 14th, 2016

Catherine, 

I have a background in starting, running and turning around companies (including some family businesses), have consulted to several family businesses and I am also a co-founder of an angel group, and this is an issue for me.

Based on what I have personally experienced, here are just a few reasons why I find this to be a real issue: 

First, when a decision has to be made, you want the founders to make the best decision for the business, even when the decision may not favorably affect the relationship.  However, when family members are involved, they will tend to make the decision that favors the relationship over the one that benefits the business.  After all, the family members have to face each other every night across the dinner table, every Thanksgiving, family event, etc.  And, since the life of a business or length of time of involvement therein is considered to be shorter than the term of a parent-child relationship, or marriage, the relationship naturally takes preference over the business.

Second, think of the situation of a non-performing employee/founder.  Now think about that employee being your husband/wife/child/parent/in-law.  It is difficult, if not impossible, to fire that person.  And if you do fire them, think about the next interaction at the next family gathering.

Third, when family members are in a company, it sends a signal to employees that in order to get ahead or be heard you need to be “part of the family”.   Whether you believe it or intend it, the employees will get the sense that you only trust family, and the family naturally creates an “inner circle”.  Everyone else is naturally “out of the circle” and has a glass ceiling over his/her progression within the company.  Furthermore, the employees realize (or perceive) that the path to the CEO’s ear is through the other family member - in other words, they can voice an opinion, but usually the family member’s opinion hold more sway over the CEO (for all of the reasons noted above). The competent employees end up leaving, and it is hard to attract outside talent.

Fourth, if you combine the above two points, it becomes demoralizing to employees who see that a non-performing employee/founder can get away with doing sub-par work.  They then strive for the same sub-par level, and the competent ones leave.

I once consulted to a company where husband (CEO) brought in his wife to be the CFO.  She had barely used an Excel spreadsheet prior to her “appointment”.  Imagine how her subordinates felt.  All were more qualified than her, but the message was clear - family relationships matter more than competence - their opinion, or expertise, obviously did not matter.  The quality of the financial information in the company was poor, to say the least, and so were the ensuing financial decisions and strategies.  But it gets worse.   After a few years, their relationship became strained, and they divorced.  Now a divorcing couple is running a company.  A CEO is running a company without the benefit of a financial information (even though they are paying a large CFO salary).  Can you imagine the tension in the office - the employees being pulled between loyalty to two different, but now divorcing family members? What kind of decisions are being made, and on what basis?  The couple had to deal with the untangling of their relationship (they had kids), untangling of the business partnership (equity), inevitable firing/departure of the CFO (unless the wife gets the company in the divorce), etc.  What a mess.

My advice to relatives who are involved in starting a business is that they need to identify, from the beginning, the person who is going to be responsible for the business, while the other will be there to help (free labor) to get the company off the ground.  The minute the company begins to get some momentum/traction, and no later than the first hire, the other relative must exit the business completely.

I hope this is helpful.

Yaniv

Kym McNicholas TV Host, Tech Jounalist, Director of Extreme Tech Challenge, Host of KDOW Radio's NewFocus On Innovation

September 14th, 2016

My best advice: Look for investors who DO support your format. It CAN work. Look at Eventbrite. Also, check out www.ramed.com - a husband & wife team. Also, Canva.com has at least a boyfriend/girlfriend team. Shoes of Prey is an Ex-husband and Ex-wife. One piece of advice, wife uses maiden name on website and in meetings. At Ra Med. The husband and wife never make it a point to actually bring it up. They don't hide it either. They just don't make it a part of the business if that makes sense. It's really important to have clearly defined roles so employees, partners, clients, investors all know who is responsible for what. Also, never ever let anyone play one against the other. You can't do that in a normal cofounding situation, so don't let them do that here or it WILL get in the way of your marriage as well. And it's really important to not take your wife/husband for granted. Because there is that emotional connection, it's really easy to be disrespectful in business and not realize it. If you end up not liking what they do, you end up being a little more harsh than you normally would. Sounds crazy, but you know what I mean. We all do it and not realize it when it comes to family. A colleague can get on your nerves and you may let it go or ask them politely to stop. If it's a family member, your more apt to letting out a little bit of a growl as you say it

Doug Winter Founder and Director of Isotoma

September 14th, 2016

How much money would you bet on someone else's marriage?

It introduces a massive unknown, and significant, risk.  If you have a track record of many years working together it is different, but if you are just starting out I'd say it is very offputting.

Really I think only the track-record would be convincing - I can't think of anything else that might work.


Anonymous

September 14th, 2016

Hi, Some investors are completely turned off and there is *nothing* you can do, nor should you, to convince them that their pre-conceptions may be invalid. Personally, I think it says a lot about an investor if s/he says, ‘Oh, I could never work with my spouse.’ OK good. We’re all different. Other investors (the minority) do not care and judge the individuals on an individual basis. I say this as someone who has co-founded 3 successful companies with my partner, taken VC, and exited to a Fortune 100 company. We raised two well balanced kids through the highs & lows of startup life. Husband/wife teams are common. Taking investment with that management structure is somewhat uncommon. Investors tend to think of you as ‘one’ - in terms of the cap table and conversations. You’ll have to regularly remind them that you don’t talk about work at home and that you’re two separate individuals at work. It can be done but don’t underestimate the toll it takes on your relationship - I’m tough as nails, and so is my partner & co-founder. I can only say this in hindsight now that we’re doing different & equally challenging jobs. Advice: Be upfront with investors. Excel on your own merits. And always make sure you and your partner are 110% pro’s in the work environment, it is strictly business in the office. All the best, Bernadette Hyland

Rob G

September 14th, 2016

Yaniv hits many good points related to the day to day operational impacts to multiple family members running a business.  You would have to build some pretty complex 'walls' to convince most investors that these aren't real risks.  Just don't start a business with your spouse if you need to take on outside investment.  There is a closely related issue that you also need to consider and although rather backward logic, you could potentially use to defray some investor concerns.  Every married founder puts his/her business at risk via the US family court system wether or not their spouse is involved at all in the business.  From this perspective investors should be worried about investing in any founder who is married.  I realize that is rather backward logic, but it is an argument that might at least give investors a reason to pause and hear your argument.  The unfortunate reality is that in the US our family court system is a complete mess, i.e. unpredictable.  Unpredictability creates risk and investors have enough risk without the complete craps shoot known as family court.  So whether you work with your spouse or not, if the business was started during the marriage,  your spouse will likely end up with 1/2 (or potentially more) of your ownership interest (stock, 401k, IP, options, etc.) in the unfortunate event that you get divorced.   This can have a dramatic effect on control of the company, IP, ongoing operations, M&A, etc. I've seen M&A deals killed after an agreed terms sheet when it was disclosed that a cofounder was going through a divorce (the company was required to disclose "all pending litigation" in the due diligence phase.  So your spouse working in the company dat-to-day imposes very real day-to-day operational risks as Yaniv points out, but there are also very real risks to the ongoing viability of any company if it is started while any of its cofounders is married. I'm surprised that more founder agreements don't address this issue. 

Sheeba Duleep Managing Partner

September 14th, 2016

Hi Bernadette,

I can't agree with you more. I found our company with my husband in 1991 - 25 years now, and it was not easy, after the start-up stage :-) We run two different companies; we are partners and directors in both, but do not get involved in the operations of each other's business.

Regards,

Sheeba



Anonymous

September 14th, 2016

I am co-founder of a start-up with my son, which has less issues around splitting up (I think!), although it throws up other issues around my perceived ability as the older, wiser head to effectively manage one of my own children.

My response to this after 2 years is to now slowly move away towards more of a founding role, i.e. less operational, now that my son is stepping up to the plate. And allowing him to find new co-founders that will play out together as a team more credibly to investors, particularly later stage. No merit in fighting investor perceptions, IMHO. 

Alex Barros Game changer in Travel Tech industry pioneering new markets

September 14th, 2016

Hi Catherine, I believe the main concern is that if you have a couple founding a business and they split up it has a direct impact on the business. Therefore, it would be a wise thing to invest in a business that has such a major risk involved. Couples are great for business when it is self funded, but when you are talking about putting cash, investors want to minimise the risks in the business. Expanding the answer and focussing on extended family members (not in the same household), the key is to really creating limits on what is business and what is personal and for many people that is extremely difficult, but when it works is also a super advantage.

Sidney Sclar SID the SECURITY PRO at sidthesecuritypro.com

September 14th, 2016

I have shared the ownership of five businesses with four different women. Document an exit strategy in the event things go bad.

Rod Abbamonte Co Founder at STARTREK / @startupHunter / @startupWay / @CoFounderFound / @GOcapital / @startupClub / @lastminute

September 15th, 2016

It's better don't do it.