Startup Mistakes: The Partnership Gone Sour

What makes a startup fail? I’ve been collecting startup horror stories, hoping to share some lessons learned.

This week brought a story with three classic elements of a startup “tale from the crypt:” technology, money, and people. This time it was technology (with attendant uncertainty and doubt), money (lack of it), and people (the dark side: their personalities). I hesitate to tell this chilling tale because it’s not over (and may yet have a positive outcome). But hearing it may save readers from a similar fate.

The Story

A charming and enthusiastic entrepreneur called me a few weeks ago. She had very little money and no technology experience, but she had a clever idea, a domain name, and enough moxie to launch a rocket. All she needed was a rocket scientist. That is, she needed to find a technology partner to build her dream. She’d found a potential developer on her own. All she needed was some help in evaluating his experience. In the course of our phone call, and a short follow-up email, I gave her a dozen questions she could use to determine if he was qualified.

Loretta (not her real name) called the next day to thank me. Not only was she satisfied with his answers, her potential developer was so excited about her idea that he wanted to join her as a co-founder, contributing $20,000 of his own money to the startup. Within days, they signed a partnership agreement. Soon, at Loretta’s suggestion, he was calling me to “bounce some ideas.” It became clear he wasn’t asking the kind of questions that would indicate he was well-qualified to launch a web startup. As tactfully as I could, I suggested to Loretta that they’d need some time for her co-founder to get up to speed on current web technologies and development methodologies. He said he was very experienced at building corporate web sites using the Microsoft .NET (“dotnet”) framework. To me, that’s not the ideal background for building a large-scale, consumer-facing Web 2.0 site. But I figured, he’ll be smart, he’ll learn what he needs to know, and he’ll recruit the technology team he needs. Loretta was not following the program I recommend for rapid rollout of a startup. But she’d found a partner who was enthusiastic, which sometimes makes up for lack of experience. With a bit of luck, plus her indomitable moxie, she’d succeed.

Two weeks later I heard from Loretta. She had a falling out with her co-founder. “Mea culpa,” she said, “He seemed so confident and enthusiastic that I didn’t think I needed to ask you to review his qualifications.” Not long after after their first meeting, she’d signed a partnership agreement giving him a 45% share in the company. But soon she began to have doubts. Some of the terms she’d heard about, and thought might be relevant to their project (like “cloud computing”), were unfamiliar to him and he was spending a lot of time doing “research.” At the same time, he was already negotiating with programmers to start coding the new project, without any preparation of mockups and wireframes, or drafting of a specification. There’d been no discussion of platforms or development methodologies. He insisted that she agree to hire a programmer he already knew, resisting her desire to put the project out to bid. No need, he said, he knew what he was doing. Which might have been fine, if he’d been able to demonstrate to Loretta that they were on the right track. But her enthusiasm and faith had given way to doubt and dismay.

She told me she was going to cut him loose and start over. She’d been angry but she was ready to move on. She already knew she would need to get a signed agreement to dissolve the partnership and abrogate any claims he might make.

Today she called again. Her former co-founder wasn’t willing to agree to dissolution of the partnership unless she was willing to pay him for the “research” he’d done for her. She was going to have to use her limited funds to pay either the ex-partner, a lawyer, or both. She understands, correctly, that she will never be able to fund the project with investors’ money if there is any possibility her former co-founder will come forward with a claim he contributed intellectual property. That’s a situation that can block any funding and kill your startup before you take another step.

Lessons Learned

What are the take-aways from this unhappy story?

  • First and foremost, when you accept documented help from someone be sure they’ve released any claim to contribution of intellectual property.
  • Don’t pick a technologist based on their apparent knowledge of a subject you know little about; find someone knowledgeable to help you evaluate their skill.
  • Recognize that there are specialties in technology, like any other discipline. The domain knowledge required to build an investor-funded web business is specialized. Someone who has worked in corporate IT or built a corporate web site or a nonprofit site may be unaware of the best practices that will make a web startup succeed.
  • Hire your technologists as independent contractors without making them shareholders and diluting your equity.
  • When the time comes, use a share of equity as an incentive for someone to stick around, after they demonstrate an ability to make valuable contributions, not as an incentive to get involved at the start.
  • Don’t assume that you need a technology partner; you may be able to hire everyone you need without distributing equity.
  • If you bring in a partner, be aware that it is a marriage, know them well, and don’t create the partnership unless it can be dissolved without encumbrance. Don’t share all your equity at once; establish a vesting schedule that is contingent on recognizable contributions or other milestones.
  • Don’t take investment money from someone you may have to fire.

Recommendations

Here are the steps I recommend. These are recommendations for a single, founding entrepreneur. (If you’ve jointly developed your idea with someone else, you’ve already got a partnership and these suggestions apply to bringing someone else into your association.)

  • Execute a nondisclosure agreement with anyone who collaborates with you and include a release of claim of contribution of intellectual property
  • Prepare a preliminary mockup and development specification before you recruit a developer.
  • Don’t search for a technology partner; instead, find a part-time paid consultant and, with his or her help, hire a lead developer.
  • Don’t give up a share of equity to a CTO or developer; hire a programmer for cash; and if you don’t have cash, try for some form of deferred compensation.
  • Move as quickly as possible to an alpha release and private beta, avoiding partnerships and equity dilution until you’ve established the value of your business.

Just like any horror story with vampires and werewolves, a little sage advice can serve as your garlic and silver bullets.

What would you have done? Any advice for others? Leave a comment.

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5 Responses to Startup Mistakes: The Partnership Gone Sour

  1. […] recently ran across your blog. I found your suggestions in the article “Startup Mistakes: The Partnership Gone Sour” especially […]

  2. Daisy says:

    It is very helpful..I was in a dilemma whether to get a tech partner. Your article helped me to think better. Thank you so much.

  3. MZ says:

    Great article thanks!

  4. NA says:

    I’m in a situation similar to Loretta’s. I’ve made a verbal agreement with my departing would-be partner to pay him for his time in exchange for signing away his interest in the company and IP, an NDA, etc. I need to get the legal documents together, and would like to avoid paying an attorney to draft what is likely pretty boilerplate (I do have an attorney who will review what I draft). Do you know what Loretta ended up using? What is the complete list of agreements (I’m thinking: NDA, release of claim of ownership, release of claim of contribution of intellectual property, non-compete agreement)? Where can I find examples of these documents?

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