Caselet: Possible People Issues in a Founding Team?

Gyan, the business advisor, was talking to Kiran, John and Chetan, who were planning to start a new business. One of the points they spoke about was the money each one would bring into the company and the possible equity structure of the new company. Gyan said, "In the recent past, I have seen many partnerships enduring and also many teams break up. Some partnerships and founding teams can stay through thick and thin; some founding teams break up over the smallest trifles.  I have seen friends start a company and become bitter enemies; on the other hand there are strangers who really bond. Strange?? Well this is a reflection of human nature and the variety of people we see and the equations between people."

(For more in the Caselet series .. check out the earlier post: Are you ready for VC Investment?)

Entrepreneurs need to spend a lot of energy in starting and running a venture, so it would be worth their while to think through the people issues at the founding team level before starting out.

These are some questions that Gyan asks them to think through:

  • How will they decide to allot shares amongst themselves; will it be based on money brought into the venture, time spent in the company, nature of work, experience and qualification of the person coming in or a combination of these?
  • Is there a difference in value add perceived – i.e. who is seen as adding more value in the company – is it the person bring in more money, or the person bring in the business, or the person delivering the solutions? The founders may decide that all are equal partners, but after six months, if one person has got all the business and is involved in delivery and another partner has only been associated with delivery and has not been able to get any business for the company; it is quite likely that there could be some issues. Then again is six months a sufficient time to judge performance? Who decides?
  • If there are different perceptions regarding some key decisions to be made, then who will decide? For example, there may be an opportunity to sell in Europe. One of the founders of the company may want to take this up. Another founder may feel that this is not a good option and may want to concentrate on increasing sales in the existing US markets. He may feel that the same effort and money may get more revenue in US in the short term. The third founder may be undecided. The question: who decides in such a situation? The founders may be equal shareholders in the company and may come with similar experience and qualifications.

Gyan then took Kiran, John and Chetan through a recent issue which he had come across. Sheila and Jenny had started a business. Initially they estimated the requirement for one year at Rs.20 lakhs. The two friends decided to contribute equally to this and take equal stake in the company they were founding. In about two months, they realized that they had underestimated the requirement. They now estimated that an additional Rs.20 lakhs could be required to put the business on track. While Sheila was in a position to bring in half of this requirement, Jenny was not. Jenny wanted to look at other options and wanted to take the money from a third person who was interested in joining this venture. Sheila could afford the extra amount, unlike Jenny, further Sheila’s financial position was such that she could bring in the entire extra funds required and she offered to do so. This lead to a conflict as Jenny wanted to be an equal partner in the business.Summing up, Gyan said that Human egos can be fragile and many times it is a clash of egos which can trigger a problem. Founders should recognise this and try to have realistic expectations of themselves and others. In this case, the three founders should think through and:

  • Plan on roles and responsibilities of team members in terms of execution
  • Plus think through issues of members’ contribution  – in money, in kind and in intangibles

If you were in the situations similar to those mentioned above, what would you do? What would be your plan to deal with these as they came up?

Anjana Vivek
About Anjana Vivek 45 Articles

Anjana Vivek, Director, VentureBean Consulting Private Limited, is a consultant, teacher, writer; CA & visiting faculty at IIM(B). Her specialties are business models, funding strategy, entrepreneurship, M&A and valuation.