Cofounder Conflict Could Be One of the Biggest Threats to Your New Business
If you asked brand-new entrepreneurs to make a list of everything they think might one day pose a threat to their startup, you'd probably hear a variety of answers with similar themes.
Some might be (rightfully) worried about ultimately developing a product in search of a marketplace. Others may be worried about how they're going to overcome the cash flow issues they'll likely face. Others still might be worried about getting "taken for a ride" by the venture capital people they're putting so much of their faith in.
While all of these are understandable concerns, none of them should be at the top of that list. The fact of the matter is, the number-one threat to your business isn't an external factor at all.
It's the people you've cofounded that business with.
While it's absolutely true that founding a business with at least one other person increases your chances of becoming a success, it's equally true that about 50% of cofounder relationships fail, and most of those failures are ugly.
This is because cofounder conflict is very real and far more common than many people prefer to assume. But by taking the time to learn as much about it as you can, you put yourself (and your colleagues) in the best position to mitigate risk from these issues as much as possible — before it’s too late.
Why Cofounder Conflict Happens
Cofounder conflict can ultimately happen for a myriad of reasons, and not all of them are going to be immediately obvious.
Sometimes when you start a business with someone else, you don't realize just how incompatible your managerial styles are because you've never had the chance to put them on display. But once your startup is up on its feet and real decisions are being made on a daily basis, you might discover that you and your cofounder have two very different working styles.
Other times it comes down to the fact that roles and responsibilities among cofounders are not clearly defined. Who is actually supposed to be doing what? What is your specific job description and how does it overlap with that of your cofounders? What boundaries are in place that give each of you your necessary space, but that also allow you to truly collaborate with one another in the way you need to run a successful business?
Another issue could be the absence of stipulations on how “significant future changes will affect the management and control of the business.” Without a buy-sell agreement and succession plan in place, your business is at risk if any major event — like your partner’s death, divorce, or bankruptcy — may occur.
Finally, one of the biggest causes of cofounder conflict is that entrepreneurs make the mistake of taking any conflict as a warning sign that something sinister is afoot.
The truth is that running a business is hard and there are times where you will have arguments and disagreements with the people around you. This is true regardless of how similar your backgrounds are or how closely your visions align.
If you go through life assuming that conflict is something you can totally avoid, you're in for a number of surprises and almost none of them are good. The key to a successful, long-term relationship with your cofounders involves not running from that conflict but embracing it. Have the argument. Talk about your differences. Hash things out and come to a solution together. Every moment may not be as fun as you'd hoped, but you will absolutely come out better for it.
Mitigating Cofounder Conflict: Breaking Things Down
Here’s the good news: once you've taken steps to learn about what cofounder conflict actually is and why it happens, you put yourself in the best position to avoid it in your own efforts — at least as much as possible.
By far, the key to at least relieving some of this conflict involves first identifying why it is happening with your particular startup. Are you having frequent arguments with your cofounders because of significant personality changes? Is it because your work ethics differ a great deal? Do you come from different backgrounds? Do you have totally contrasting management styles?
When left unchecked, these differences can form a major chasm that can be difficult to overcome. But if you identify them in your early days as an entrepreneur, you may be able to find a way to meet your cofounders "in the middle," so to speak, to avoid bigger issues later on.
Remember that being an entrepreneur and founding a business with someone else ultimately requires a fair amount of give and take. Your startup does not belong exclusively to you and it would be unfair of you to act that way. Therefore, once you start to see conflict develop, don't be afraid to address it head-on... but also understand that you must be willing to make compromises, too. Don't just spend time identifying problems with someone else — offer up solutions of your own.
In terms of mitigating some of these potential risks, a buy-sell agreement can be very effective (and should be viewed as a necessity). This legally-binding document “anticipates the intent and needs of the owners, as well as the potential conflicts that may arise among them if one or more wishes to sell his/her interest in the business or is forced to dispose of such interest.”
Consulting with a tax and accounting professional during the process of negotiating a buy-sell agreement can be very beneficial for all parties involved. Contact our office for more information.
If you acknowledge your startup for what it really is — a collaboration between two or more people — you stand the best possible chance at ending the lion's share of these cofounder conflicts before they've ever had a chance to start. At that point, the proverbial runway will be clear and there really is no limit to what you can accomplish together.
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Frequently Asked Questions
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You can prepare your taxes yourself, especially if your business is simple.
But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.
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Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.
That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.
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Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.
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Possibly, if it was truly for your business and you have proof.
Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.
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Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.
The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.
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