Why cofounders fall out and how to avoid it

In 1919 the Brothers Rudi and Adi Dassler founded the athletic shoe manufacturing company Sportfabrik Gebrüder Dassler, or Geda for short. The business was located in Herzogenaurach in Southern Germany, and despite the complex political and economic climate of the 1920s and 1930s Germany, the company was a roaring success. It was not only Germans who were wearing the Dassler brothers' innovative sports shoes. Even American Jesse Owens established his legend at the 1936 Olympics, wearing Geda shoes.

Circumstances changed significantly for the brothers during the Second World War, and by the time the war ended, their partnership was shattered. A schism had occurred between the two founders, and they ended both their professional and personal relationship and split the company. Adi retained the Geda factory by the town's central train station and named his new company Adidas, an abbreviated version of his name. Meanwhile, Rudi set up shop in a factory in the South of the town to establish a rival sports shoe business. Rudi initially named his company Ruda after himself, but soon after decided to call it Puma after the quick and powerful cat.

It was not only the two brothers that fell out. The split divided the whole town. Which company you or your family worked for dictated where you went to school, which restaurants you ate in, whom you would socialise with and even whom you married. This partisanship earned Herzogenaurach the nickname "the town of bent necks", as its inhabitants would constantly be looking down at each other's shoes to check on where their affiliations laid.

Despite the success of Adidas and Puma, companies that went on to establish themselves as two of the world's most dominant sportswear brands, the brothers' conflict was never resolved. Even in death, they would be divided, with the brothers' graves situated at the opposite ends of the main Herzogenaurach cemetery.

The family grave of Adidas, founder Adi Dassler. If you walk to the other end of the cemetery you will find the grave of his brother, former business partner and founder of Puma, Rudi. Even in death, they remain apart.

Why do Founders fall out?

There have been many theories as to why the Dassler brothers fell out, with one suggestion being hostilities and rivalry amongst their wives. However, the main reasons seem to be due to a breakdown in trust (Rudi suspected Adi of getting him conscripted into the German Army, which resulted in temporary imprisonment at the end of the war) and a conflict on their business focus (Adi favoured product development over Rudi's more aggressive emphasis on sales). While not all founder fallouts result in a whole town having to take sides, lack of trust and disagreements around business objectives are two of the most common reasons that conflict occurs between cofounders.

When you start a business with a cofounder, excitement, expectation, and optimism often mean you overlook your differences. It's only when your business is up and running, you find out there's a problem. If you cant solve these issues, you are likely to be left with business failure, broken dreams, and hostility. Noam Wasserman, the author of The Founder's Dilemma, is not kidding when he quotes, 65% of high-potential startups fail due to cofounder fallout.

The most common problem is that founders incorrectly assume that there is complete alignment on what the business stands for and what it is trying to achieve. It is too easy to think that your cofounders are looking at your business through an identical lens. This confidence is likely misjudged as you will probably have a very different combination of motivations, values and style. Before we go pointing fingers, we must remember that we are all wired differently, and our personal circumstances are never the same. Inevitably, we can't be identical. Most founders forget this, and even if they do recognise it, they fail to check where they differ.

In 2014, Mesh Kumar became the cofounder of London Incubator and VC, Pi Labs. He was brought in to build the incubator program and the investor network. Initially, it was great. However, cracks soon started to appear. Mesh told us his story, "I realised that I was a cofounder in name only. I had zero ability to input into the direction and purpose of the business. Things came to a head; we [Mesh and his cofounder] disagreed about how to invest in the companies once their time in our incubator program was completed. I did not feel comfortable putting my name and reputation against what I deemed to be unfriendly founder terms. It was an imbalance of values between my cofounder and me."

Mesh ended up leaving the startup after less than two years, with unvested equity and a few bruises. However, his integrity remained intact, and he had gained a lot of wisdom. Mesh recalled, "'Well, now you've learned,' was the summary from my Techstars mentor. What I had learned was that you should not rush into a cofounder relationship. I badly wanted to be a founder at a startup, which meant I did not do enough due diligence. I just didn't know him that well. I also should have listened more to my mentors and the people around me."

Mesh Kumar, is now using all his experience to build his best cofounder relationship to date.

Parodoxily, in addition to any misalignment on decision making, company values, and personal differences, the other thing which often goes wrong is working with people who are too much like you. Even with his first failed relationship lessons, Mesh's next venture ran into more founder strife. "I learned that you need to work with someone who had similar aspirations, wants and needs, but they also need a skillset which you don't have. In my next startup, my cofounder relationship was solid. However, we were also good at the same things and bad at the same things. Because of this, we could not build our business. My next lesson was to learn that you need complementary and different skill sets to divide and conquer. Every good business needs someone to build the product, revenue, marketing, and think about the process. If you get cofounders who are good at the same thing, it does not work out."

The other source of tension we often see in our discussions with cofounders is that even if you go into business with a good friend, you only really find out what they are like when stress and uncertainty begin to appear. Alas, stress and uncertainly are inevitable at some point in a startup (if not a constant). When we get uncomfortable, we all act in different ways. Some people go on the attack, and others go into their shell. Some prefer to take their time to figure out what to do next, whereas others demand quick and decisive action. So again, we are all different; however, you need to know how your cofounders operate; otherwise, suspicion, frustration, and resentment are soon added to the mix.

How to stop founder fall out and give yourself an unfair advantage.

At Rightfounder, we have categorised the reasons for founders fall out into three main buckets:

  1. Failure to agree on formal structures, e.g., business goals, decision-making processes, and not properly defining roles and responsibilities.

  2. Mismanaging your cofounder relationship. If you forget cofounders are people, it results in issues with trust, ego, style, and chemistry. AKA Personality Clashes.

  3. Having unresolved conflicts, i.e. not dealing with stuff that causes resentment or simply grinds your gears.

Why you need a formal structure

To deal with structural issues, from the get-go, you must agree on who does what in your business, their responsibilities and accountabilities, who calls the shots in what areas, and have processes in place for decision-making and resolving disagreements. It is also critical that you agree on what you are trying to achieve as a business and how you will get there.

We strongly recommend you have a founder's agreement in place that covers all these areas and details what happens if things don't work out. A founder agreement is a binding contract that should also cover equity arrangements if roles change or if a cofounder leaves the business. If you make an effort to do this, everybody knows exactly where they stand.

Seedlegals has a free template accessible with a trial account (we used this for Rightfounder). If you are in North America, check out the list of resources from this great article on Startups.com.

Use understanding and curiosity to manage your cofounder relationship

When founders clash, it tends to stem from misunderstandings of styles, preferences or values. Make sure you spend a lot of time getting to know someone; to learn who they are and how they operate. Please don't get fooled into thinking your cofounder is someone who they are not. You can avoid this by being constantly curious about their outlook and motivations. Also, observe how they deal with stress and disputes.

Using honesty and humility to avoid unresolved conflict

The last piece of the puzzle is to work on your relationship constantly. Don't let molehills become a mountain. Talk to your cofounder about any frustrations or concerns you have, and most of all, be generous and compassionate towards your cofounders. Building a business is hard, be kind and look after each other. In addition to having a Founders Agreement, we spent time agreeing on how we would treat each other and behave. This list has become our Founder's Code, and we use it daily as a manual for how we operate.

Another way is to take time out to discuss how things are going. This is something Mesh now does in his new startup, K&K Ventures, with his cofounder Kane. Mesh told us, "Kane and I have quarterly beers where we discuss what works, what hasn't, where did we succeed, where did we fail, and to receive feedback. We chat through where we sit based on the previous few months."

If you take the time to get to know your cofounder well before you jump in, have a founder's agreement in place to agree on responsibilities and regularly build in time to discuss how things are going and how you feel, you will have a significant advantage over all the businesses where the founding teams don't have your rigour.