Founder Deadlock

My co-founder and I each own 50% and we are deadlocked on everything. We have no investors or anyone else involved. What should we do?

It is likely true that both of you perceive great value in the business to fight so adamantly to a stalemate. However, the resulting paralysis will inevitably destroy the business for both of you. Your options roughly fall into one of four buckets: (1) bring in an outside voice, (2) split the business, (3) pick a winner, or (4) dissolve the business.

Bring in an Outside Voice

If the nature of your disagreements involves business strategy, you might bring in a neutral board or outside investors (unlikely with deadlocked co-founders) and let them decide the future of the business. A different form of outside influence is to have a mediation or arbitrator decide. The best mediators have decades of experience bringing parties together, but can do no more than facilitate a voluntary resolution.

An arbitrator, depending on the nature of your dispute, can actually decide your issues, but arbitration is usually inappropriate for strategy disputes. In case of a real arbitration situation, I recommend you use “baseball arbitration,” meaning each party presents its position with respect to all issues and the arbitrator must pick the single entire position the arbitrator finds fairest, without compromising. Unlike traditional disputes where parties are motivated to ask for extremes to shift the middle, baseball arbitration instead forces parties to the middle immediately and usually spurs a settlement.

Split the Business

If the business has different applications in different fields, geographies, or channels, perhaps you can split the business in two, with each of you receiving a field of license right to operate in your domain. Presumably each of you has some strategy you dearly want, so splitting the business should be possible. If not, take a page from Solomon: one of you divides and the other chooses the half you want.

Pick a Winner

Picking a winner can be done in many ways. First, let the customers decide for you. If you can stop long enough to agree upon metrics of success, each of you can run parallel MVP experiments and see what works best. Put ego aside and let the market pick.

Second, you can initiate a forced buyout scenario. The method I prefer is for each of you to submit a sealed bid to buy the other out. The higher bidder (the one who wants it more) pays the lower bidder’s price (what that bidder said was fair value). There are other buyout scenarios, such as having an appraiser set the value, but you need a mechanism to determine who will buy the other out. Another common term is for one partner to name a price and demand the other pay that price or accept that price for the buyout.

Buyout resolutions will often favor the party with the superior economic power, but the parties can agree to payment schedules or sometimes permit outside investors to finance bids if the business model is strong enough. If there are no non-compete provisions as part of the buyout, you may end up with two competing businesses when the loser decides to go rogue after being bought out.

One can also take a page from international soccer and have a way of picking a winner which is essentially close to random. I would not suggest you take kicks from a penalty mark, but some other skill game, or even outright random chance, might resolve your situation.

It is not necessary to have a full cash buyout in these scenarios. Perhaps the losing party becomes non-voting or agrees to the strategy of the prevailing party, but retains some economics. From a governance standpoint, however, there must be one voice for the future strategy and execution.

Dissolve the Business

If all else fails, dissolve the business and split the assets. If you cannot agree on anything, you will eventually destroy the value anyway, so you might as well take the value you can now.

There are many permutations of the above. One of my ex-colleagues effectively locked his clients in a room for a day and would not even permit them to have lunch delivered until they remembered why they wanted to be partners in the first place and could agree. In the end, try to look at business value objectively and divorce your emotion as much as you can.

See also: 3.103: Founders and Early Talent and 3.104: Best Governance Practices

Related Articles

Responses

Founders Wanted.

Join the best startup learning community now as a founding member. Learn More:


Sign me up for a
Free class and Newsletter!

X