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.