New data shows the number of co-founders establishing ‘prenups’ has increased by 500% over the last year. Ifty Nasir, founder and CEO of Vestd which carried out the research, said: “Too many people jump into business with a co-founder and don’t tie future rewards to performance, delivery or milestones, like the length of time with a company. This initial optimism can cause intense problems down the line, especially as the business develops monetary value. A handshake really isn’t enough.
“Co-founder prenups are formal agreements that govern the release of equity in a proportionate and fair manner, when certain goals and milestones are reached. We’ve had consistent and steady interest in the co-founder prenup plans since we launched them, but in October of last year, we saw a huge spike in numbers.
“I certainly think the turmoil we have seen over the last year and ongoing uncertainty is driving the uptick. People are becoming more aware of getting their ducks in a row, and any time of crisis or negativity will see an increase in people getting everything in order.”
Over recent months, Vestd has seen a number of founders approach its team with horror stories about how their relationships with co-founders deteriorated over time. One co-founder, who cannot be named for legal reasons, felt that starting a business with a good friend was a “no-brainer” but they didn’t have any formal agreements in place. They said: “We set things up with the best of intentions but there weren’t founder or shareholder agreements. Business was great for many years, it was super successful and we had some great wins.
“Over time people’s motivations change. My business partner decided he only wanted to work part time, but actually he wanted to withdraw the same amount. I just found it very demotivating and it pushed me too far, which then saw me want to move off.
“I left the business in a good shape, handing over the keys to my co-founder. He put the business into insolvency. He didn’t inform me, but I was informed by an employee. I had to hand over my life savings to get out of the loan that was attributed to the business. There is no relationship now.”
Nearly two-thirds of startups fail due to co-founder fallouts
Noam Wasserman, author of The Founder’s Dilemma, states that 65% of startups fail due to co-founder conflict. Similarly, an estimated 20% of startups fail in the first 9-12 months of entering the Y Combinator accelerator programme because of founder issues.
Even those who are successful see ‘business divorces’ occur with alarming frequency. Venture Capital firm Icehouse recently reported for example, that 35% of the startups they’ve funded have seen a founder depart. Additionally, a recent study by the University of Pennsylvania showed that a two person team is nearly twice as likely to dissolve their business as a solo entrepreneur.
“When the stakes are high, people can fall out,” said Nasir. “So it has always made perfect sense to us, given this business truism, that founders should protect their futures with fair agreements from the start. And in any case, by linking future rewards to performance – for example ‘you’ll get 40% of future profits if you grow our international sales by X%’ – you’ll be motivating your co-founder to smash their end of the bargain.”
Giancarlo Erra, founder of Words.tel built his team of eight co-founders using conditional equity in this way. He said the arrangement “motivated everybody to work. You’re all in it together and if things go well, they go well for everyone.”
Ben Bennett, co-founder of Second Voice Pro agrees: “If you’re incentivised and everyone’s going in that same direction, it makes a huge difference to behaviours, motivations, and ultimately the outcomes. From a selfish perspective, the business is succeeding because everybody gets to win.”