Just do it. Wrench yourself away from the venture you funded

Experts would tell you that start-ups are all about bearing risk, persevering and having immense faith in the idea. However, within that community of experts are investors, who believe that the most important ingredient is the founding team.

Founders are the first building blocks of any business and it is their ability that is amplified through a start-up’s growing years. Founders set the culture in a start-up and it is their zeal that is replicated all through.

But what happens when the founders, or at least one of them, decides he is no more invested in the start-up? That he wants out? If such a situation does arise, there are steps that must be taken to ensure that things don’t go lopsided or bitter after the break-up.

“Though this separation can never be pleasant, the degree of unpleasantness varies based on the pre-existing understanding as well as the personalities of the people involved,” says Ajeet Khurana, angel investor and mentor to start-ups.

It does go bad

Founding members are like married couples and just like typical married couples that argue 321 times a year, founders are also bound to have their fights. Experts say that 62 percent of all start-ups fail due to conflicts between the founders and that conflicts are bound to happen when you think about the situation-two or more ambitious people from different backgrounds working under significant pressure. “I have seen one in every 20 start-ups fail due to conflicts between founders. Most of the founders realize that they have jumped the gun just a few weeks after starting up,” says Khurana.

Make an agreement

One of the most common early-stage mistakes made by start-up founders is failing to formalize the business partnership early on, including establishing a founder agreement. The first step to avoiding co-founder conflicts is to define a good founder agreement.

“Most founders that I have seen are friends, batch mates or brothers. They come from similar backgrounds and hence they tend to ignore the need for a formal agreement. Despite investors and other business advisors suggesting it, most founders deliberately pay no heed to the importance of the agreement,” says Khurana.

The founder agreement must typically include details on division of shares, what action to be taken if a member quits, the situations in which founders can be relieved of their responsibilities, personal goals, primary roles, etc.-much like a pre-nuptial agreement.

Take Nothing

According to Khurana, if an agreement is not in place, then the founding member who quits within the first six or 12 months of starting up must not take any cash, share of profits or revenues. “Most founders quit within this time and it is unfair to demand for any type of repayment because the firm hasn’t generated any value. Also there has to be some incentive for the risk undertaken by the other founder,” states Khurana.

He says that at most times, the founder is looking to receive the initial capital invested, but that terms of the capital to be returned in future must be decided upon early, preferably in that founder agreement.

Need for hand-holding

Most founders have varied experience, skill sets and knowledge. However, in some cases one of the founders may have skills crucial to the business, such that the business will die in the absence of that founder.

Citing an example of a premium ice-cream start-up that he mentored, Khurana says, “The technical founder with all the knowledge about the flavours, processes and product was quitting. The founder who was leaving had to ensure that he had documented all the knowledge about the business he had, found a replacement for himself, trained the person for a month and then left.” In such cases, it is important to ensure that all knowledge important to the business is kept in place for future use and adequate steps to equip the person who has been succeeded is taken.

Avoid the courts

Sometimes disagreements get really sour and situations are out of control. In such cases the founders take the legal route for settlements. “I think that even in an extreme case, founders must avoid taking the step of going to court. Instead, there must be a third party, usually a mentor or business advisor, who can look into the matter,” says Khurana.

There is a very remote chance of a start-up surviving if a co-founder quits early on, says Khurana. “No founding member quits after the business is settled, because by then the business has stabilised, maturity sets in, the initial tough days go by and returns begin to trickle,” adds Khurana.

(This article first appeared in the Entrepreneur magazine in March 2014)