Beware Of Toxic Relationships Between Co-founders

By: David Wohde (Labs Manager, Frankfurt)

6 Tips To Beware Of Toxic Relationships:

How the intimate co-founders’ relationship evolves with the startup organization - and can potentially destroy it if you aren’t prepared.

This article is about the very special relationship between co-founders, how their roles evolve considering their progressing organization and what can go wrong on that way. Finally it provides take-aways to prevent toxic relationships which have the potential to destroy a startup. The author has been a serial entrepreneur for around 8 years, both as a solo-founder and co-founder. In one of his last ventures he’s been in a toxic relationship with his co-founder that almost destroyed the company, but also personally led to heavy emotional challenges.

Research implies that romantic relationships go through different stages. From honeymoon & romance stage to troubling crisis stage, over the very tough working & commitment stage, and finally to the real love & bliss stage. If you manage to not break up.

It might sound cheesy, but the relationship of co-founders is quite similar, you will definitely get into a crisis. And it’s existentially important to be prepared for it. Especially because the emotional price for being an entrepreneur is probably even higher than the romantic one.

I: Intro - The Emotional Price Of Being An Entrepreneur

When founding a venture you put yourself on an emotional roller coaster, most of the time in extreme ups and downs, loops and corkscrews. At least for the first 3 - 5 years of your first venture, the word “routine” is the antipode of your daily reality. Especially at the point of no return, when you’ve incorporated a firm, invested lots of money and/or received external funding, even hired employees. You are taking over huge responsibilities for different stakeholders: investors, clients, suppliers, your team members, their families. And most of the time, as the very last, comes the responsibility for yourself, your mental health and your own financial wellbeing: At the point of no return your financial and psychological stability is usually at relatively high risk as an early-stage entrepreneur. Nasty enough, you do usually not realize in the beginning, but will do so over time.

II: How Startup Organizations Change Over Time

Before I elaborate more on the relationship part, let’s look into the organizational phases of a venture and how the role of a founder changes. Because each stage means a new quality of above mentioned emotional involvement for the founder(s). Jan Miczaika, partner hat Holtzbrinck Ventures, one of Europe's biggest startup investment funds, has derived the following 4 startup stages from his experience:

  • The Family: under 10 employees
  • Teams: 10 to 40 Employees
  • Departments: 40 to 100 Employees
  • The Wide Unknowns: 100+ Employees

1st Stage - The Family: “Happy time!” (under 10 employees)

Everybody is working together in one team, the team members are doing anything that’s necessary to progress, often in a very generalist way. For example: There’s one developer who does everything from backend to frontend, testing to deployment. As a founder you’re fully hands on operations, doing anything from HR, finance, marketing and sales to product management and setup of laptops and printers

Communication and information sharing happens almost organically, “culture” is a diffuse term that is mainly implied by the founders habits and hybris.

“Employees watch the patterns through which the founders operate. Culture solidifies during these early interactions. While it may help to define some key values, most likely the company culture is modeled after how the founders act. In the beginning it is still fairly easy to embed key values like transparency, openness, discussion culture, performance orientation, responsiveness etc.”

2nd Stage - Teams: Structures required (10 to 40 Employees)

In this stage the size automatically leads to the formation of teams, often starting with IT, followed by sales and marketing, finance etc. The formerly organic flow of information is not flowing so well anymore, so communication structures need to be in place as Jan points out.

“As a startup continues to hire, it is essential that structures for information sharing are setup at this point. Silos start to happen, not everyone knows everything anymore. Team leads become gate keepers for information. I would suggest thinking of information sharing sessions like Monday Morning all-hands, product roadmap reviews, cross-functional weeklies etc”

Also these team leads, often the employees who’ve been the longest time in the company, now have to actually lead people. A totally new skill that you’re usually not born with. But not only the team leads role is new, also your role as a founder changes DRAMATICALLY.

“Another very interesting shift that happens between 10–40 is that the CEO starts working on the company and not only ‘in’ the company. Founders are now having to think about who does what a lot more instead of just working themselves. During this shift, founders must become clear leaders and visionaries focused on core activities. Teams will also need to have the authority to complete tasks without running everything past the founder first.”

As a founder you have to take your hands off the operational day to day tasks and thus need to trust your employees and have the right instruments for information flow on hand, so you can effectively lead the progress of the whole organization.

This usually is a hard transition for every founder as it feels contra-productive in the first place, like you’re losing control. You have to evolve from founder to leader. This part will also be crucial for the third chapter.

3rd Stage - Departments: Managing span of control

In recent management theory the span of control describes the direct reports a manager can have. The number differs between 7 and 11. That being said, at a size of 40+ employees, you’ll probably build departments and have something like a middle management - the department heads. They will lead other team leads and therefore require special skills. Skills existing employees probably won’t have just because they’ve been in the organization for a long time. Which can be very tricky. Also, because as a founder you’ll mostly interact with these department heads, while might not interact with other individuals from the organization for days or weeks. Older buddys might feel left behind. People might starting to leave the company or even have to be fired as their skill sets are not applicable anymore. That’s a hard time for you as a founder and can easily lead to bad vibes and misunderstandings within teams. Therefore cultural alignment and leadership styles of your department heads and team leads become majorly important.

“In this phase mechanisms for delegating decision making away from the founders become critical. Systems like Objectives and Key Results (OKRs) help structure priorities and goals across the org.”

4th Stage - The wide unknowns

As the title says, the variables become so manyfold that it’s hard to categorize anymore and I won’t go much deeper into it. But one implication is clear: As a founder you won’t know every employee anymore, generally people stop knowing who is who. As a founder you are now mainly working on the scaling and restructuring of the organization and making decisions only on a high, strategic level. Your role has changed from hands-on startup founder to a C-level manager of a medium sized company. What takes a normal career probably around 15 years, happened to you in 3 to 5 years..

Quotes and more detailed content to be found in the original article by Jan Miczaika in the Medium.

III: Your Co-founder Relationship Is In Danger

Regarding above organizational phases, as a founder you are undergoing a severe process of change in your role, forcing you to quickly develop skills you didn’t even think about before. It’s a tough journey of extreme self-reflection, self-confessions and soul-researching, while being under commercial and emotional pressure from mentioned stakeholders.

Unfortunately, these emotional challenges shared doesn’t mean they’re halved, but more potent by the number of co-founders you have. You do not only have to go through this self-reflecting process yourself, but through your co-founders process as well and you even have to balance it out. Tricky thing: This heavy process doesn’t start in the happy time, the Family Stage. But it starts at the point of no return, where it can be very tricky, even legally impossible to just walk away. You have large responsibilities, the company is growing and now you figure out that business isn’t solely fun, but also means back lashes, tough decision making and crisis management. You have to divide teams and departments between each other while handing off control of day to day tasks and pressure sky rockets and your stress levels does so too. You quickly get into a closed mindset, blaming others for things that are not working out as planned. Almost automatically you will get to the point where one co-founder is blaming the other for not putting enough effort, making wrong decisions etc. Welcome to crisis stage in your relationship. Decision making becomes tougher, trust between the co-founders is chipped easily and productivity starts decreasing.

Your relationship is in danger of becoming toxic. I don’t want to elaborate too much on this, but imagine you cannot sit in the room with your co-founder(s) without going after their throats.

“A toxic relationship is a relationship characterized  by behaviors on the part of the toxic partner that are emotionally and, not infrequently, physically damaging to their partner.“

So you are at the point where both your relationship and also your organization are in danger to be destroyed.

The nasty part: All employees will observe every word, every look, every vibe between the co-founders. The smallest crack in the stability of the leadership team quickly trickles down the organization, destabilizing it.

Don’t take this example too serious, but you can imagine children who are watching fighting parents to decide whom to ask for the highest possibility to get something they’re usually not allowed to get. They know what’s going on and quickly learn to adapt for their personal advantage, by simply playing one parent off against the other.

The organization quickly gets to a point where it’s self-absorbing rather than productively evolving. Like putting all your energy into rotating about your own axis instead of running forward.

Bottomline: You will get into the crisis stage, but make sure it’s not getting toxic.

To get out of the crisis situation requires hard work between the co-founders, already without being toxic yet. As described above, the emotional involvement is exponentially high. Your ego will bleed, I swear. This is the point where most relationships break. This counts for both romantic relationships and co-founder relationships. But if you can get through the stages of crisis and hard work on the relationship, you’ll be prepared for growing your venture to scale - as you’ve grown yourself. Remember: Bliss stage is the final stage.

The bad news: If you have a co-founder, you will get into the crisis situation, probably faster than you realize.

The good news: There are tricks you can use to be prepared and make it smoother.

IV: My 6 Tips To Survive The Crisis Stage

  1. Communication and trust are key, so use any tools that help you to communicate and understand each other better.
  2. Find out and discuss your individually desired culture and leadership styles, even if you have no employees yet. It might seem weird, but imagine a situation where you have 50, 100 or 1000 employees for this discussion.
  3. Sit down during the happy/honeymoon/family stage and write down exactly what you expect from each other regarding your venture and your relationship (time, money, skills, sacrifices etc.). If the outcome is uneven, discuss until you find a compromise all sides are okay with.
  4. Include consequences in case one party is not sticking to agreed expectations, e.g. sit-downs, warnings, leaving the company etc.
  5. Discuss and write down how you will escalate co-founder disputes, e.g.
  • A certain discussion process with other shareholders (investors)
  • Appointing a mediator (should be 100% impartial)
  1. Include exit options for co-founders contractually (notary) e.g. through a vesting of shares clause, exit packages etc.

You should do this as early as possible, definitely before you get into the crisis stage. But if you’re already in, still do it as far as applicable.

V: Why You Should Still Have Co-Founders

To close with a positive note, these are the positive sides of having co-founders:

  • Most investors invest in teams, not in individuals
  • You learn a lot from each other and can fuel each others motivation
  • You can double/triple/quadruple (...)  your power and skills and reach goals you couldn’t reach alone
  • If you get through crisis stage, you’ll have an amazing partner you can share anything with, for the rest of your life

If you're interested in connecting with David Wohde directly, please visit the Mentor Directory on the Member Portal or ask your Labs Manager for assistance.

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