DD asks:

A few years ago, a few friends and I started a company. We had worked on the product extensively but things fell apart as we could not work out the financial terms amicably. How can we avoid this in the future?

My take:

DD, first of all sorry to hear that things didn't work out last time.

FWIW, I have to tell you that what you went through is not an exception by no means. I have seen this happening for many first-time entrepreneur teams. I am not saying this in anyway to dilute or discount the pain that you must have gone through because of what happened to you. It is good that you want to take some precautions to ensure that this does not happen again. It is definitely not fun to go through this.

There are several things at play here. Since I don't have the specific details I will talk about a few things in general and I think you may find parts of it applicable to your specific situation.

One of the major sources of problems between co-founders comes from the way people evaluate "sweat equity." There was an extreme case that I came across a few years ago. There were 12 co-founders in that company. They had been working for almost a year and had "almost" built a product without discussing a business arrangement among themselves. When they finally got to discuss the business arrangement, it was too late as three out of the twelve people thought that they should each own 60% of the company because of their contribution. Since the math didn't add up to 100% and repeated negotiations didn't lead anywhere for a few weeks, they abandoned the project. Clearly the case of mismatch in perception of what "sweat equity" meant to each one of them.

The second big thing to consider is the "trust and fairness" equation between the co-founders. Do each one of them trust that everyone will watch out for the concerns of each other? If they don't, there is a current problem or there will future problem.

The third thing to watch out for is the lack of "adult supervision." Birds of the same feather typically flock together but that may not be sufficient to make the right decisions on complicated topics. For example, if four four super-talented technical geeks come together and start building a product, they might succeed on creating a great product but that is not sufficient to make that a company. There is so much more to it to build a company. However, when they are simply building a product, they might think that they can manage the other aspects because they are "smart enough" to do that. Delaying getting "good help" beyond a certain point may lead to a place where even "good help" won't be sufficient to recover from the damage that's already been done.

The fourth thing that each of the co-founder should remember is that relationships span beyond companies. Each co-founder will probably spend more time in the startup (meaning with the other co-founders) than with their respective families. If they view these relationships as a one-company stand, they are doing it wrong. There is a such a big investment that is being made that the returns simply won't justify if you are thinking of a "one-company stand."

Last but not the least, remember the old saying - "There is no greater inequality than the equal treatment of unequals." Co-founders may be very good friends in personal life but that does not mean that they are equals in business.

In summary, please remember another old saying - "it is better to own a small piece of something big rather than a big piece of nothing." When all the co-founders think long-term and want to make this a "true win-win" (not WIN-win) for all parties involved, startup life becomes way simpler than the alternative.

Wish you the very best.

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