Much of the value of a startup is in the intangible assets, chiefly the IP and knowhow of the team. But it is also often found in another intangible asset – the founders. The difference between a nice idea and a market-leading product is often measured in the vision and drive of the people with day-to-day responsibility for the company. Viewed from the opposite side of the coin, the wrong people can crash your investment.
The right person to manage one stage of any company’s journey may well not be the right person forever. The genius introvert that built the product may not be well suited to a senior management role that requires hiring, firing and hustling. The 24/7 realities of running a successful business can make some founders want to sell up as quickly as possible. Management working hard in pressurised circumstances often fall out with each other, sometimes very badly. All of which may be understandable on a personal level, but which can also present a real business problem. If the founder are hindering the success of your investment, what can you do to protect its value?
Care is certainly required here. The delicate chemistry that keeps a startup fizzing along is easy to destroy. For businesses built on leveraging the skills and motivation of a small group of people, relationships really matter. When they go wrong, energy can be quickly sucked away from the things that create value and a toxic atmosphere can ensue.
However, the need to tread gently does not make it advisable to do nothing. Nurturing good relationships with your founder teams to anticipate and defuse any disagreements is a fairly uncontroversial example of good practice. If that does not work, you may want to involve lawyers. This does not have to be an outright declaration of war. Disputes lawyers can often develop outcome-appropriate strategies to incentivise founders to change their ways. Processes such as mediation can be an effective means of resolving disputes in ways that allow for productive working relationships going forwards. In many circumstances, a detailed understanding of your legal position is a crucial component to enable you to play your cards in the best possible way.
In some circumstances, it may be necessary to change the management team. The power to remove a founder from acting as director in most English companies will depend on the detail of the shareholders’ agreement and articles of association, as well as the percentage of the shares of the company that the relevant founder owns and the dynamics of the board. There is often a desire to avoid enforcement of strict legal rights in favour of a consensual approach (e.g. persuading the investors that the founder has to go and then persuading the founder that it is best not to stay in bed with hostile investors). That is understandable (and usually sensible). However, if consensus cannot be established it is worth bearing in mind that unresolved founder issues can have serious adverse future implications; for example, on exit legacy problems can be exploited by buyers seeking to drive down price. Sometimes, removing a founder is less the nuclear option and more an unpleasant but necessary procedure that is necessary for the long-term health of the company. If you have reached this point, it is of course sensible to have a detailed legal strategy in place, in conjunction with the commercial strategy for the company’s future management. For all sorts of reasons, this is a very delicate and important area that requires deep consideration. Seeking discreet legal advice at an early stage may help avoid major problems further down the line.
If you found this article interesting, please check out the other one’s in this series:
“Be prepared” a series of practical articles aimed at disputes in a venture capital context
Co-investor disputes: on shareholders agreements and sausages
How a lack of clarity around IP destroys value & what to do about it
Treasure in the wreck: IP, insolvency and yesterday’s next big thing
