How to Navigate a Dispute with a Co-founder

Nowadays, most start-ups are not solo endeavours, they are the result of multiple founders bringing their talents to the table. Start-ups are a labour of love and start with dedication, passion and commitment. However, not all partnerships are smooth sailing. Inevitably, all ventures go through rough patches – so let us help you navigate the best course of action for any co-founder conflict.

Co-founders have different personalities, strengths and talents – harnessing diverse backgrounds creates a strong co-founder relationship. That said, ego, power and authority can lead to strain and conflicts. Start-ups must know how and when to tackle these conflicts to avoid toxic outcomes. Left unattended, they can lead to a business’s downfall. Experts have determined that 65% of start-ups fail due to co-founder conflicts going sour. At Lazarus Legal we can show you the best steps to not only avoid conflict, but also provide options for conflict management and dispute resolution.

Embrace Conflict

The aim will not only be to minimise conflict when they occur, but also help to create productive outcomes. Successful start-ups have recognised and creatively worked through their conflicts to move ahead and achieve their goals. When entrepreneurs have different roles it is beneficial to not micromanage each other and let each member be the captain of their role. It is important to have a set of processes in place that help you embrace the conflict and move beyond it.

A Plan of Action

A plan of action means having a founder’s agreement in place. A founder’s agreement outlines the roles and responsibilities of the founders. This agreement also entails the specifics of rewards distribution. It also outlines clauses regarding conflict management and dispute resolution so you can exercise them when a conflict arises.

Address Conflicts, Instead of Avoiding  

When a conflict arises, you might want to wait until the storm blows over. Instead, an efficient and positive response means that co-founders need to identify and address the conflict and problem as soon as possible. Conflicts should be managed behind closed doors and dealt with directly – including only the people involved. Only involving the people who are relevant to the conflict means avoiding demoralizing employees.

Listen to Each Other

Co-founders may have different points of view, but they are all committed to the success of the business. The co-founders are likely to bring different talents and experiences to the table. The best course of action is to step away from the point of contention and listen objectively to all the views. This exercise can help achieve common ground for the founders to agree upon and come up with a solution.

Seek External Help

If the co-founders are unable to solve the conflict internally and among themselves, it may be best to resort to professional help to help solve the dilemma. Executive coaches can prove to be successful interventionists. Coaches help entrepreneurs and businesses by offering an objective opinion and resolution to the conflict.

Hiring corporate trainers and conduct training groups for the founders and employees remains an option too. These training groups share knowledge and tools to recognise, embrace and manage conflict. Corporate trainers can help tailor solutions for your leadership and team dynamics. 

Seek Legal Help

If all else fails, then disputes may have to be resolved through legal action. Dissolving a partnership is the last resort. This is the least desirable outcome and most founders would rightfully want to avoid it at all costs.

Avoiding litigation means resolving conflicts through mediation or arbitration. We want to ensure that you avoid wasting resources and time in the litigation process. Not only is it harmful to internal team dynamics, but also litigation can cause extensive reputational damage to the business.

Mediation and Negotiation

Negotiation remains a very useful dispute resolution tactic outlined in the Founder’s Agreement for cases where co-founders reach a deadlock. Negotiation involves the co-founders agreeing to participate in a mediation with the honest objective of achieving a resolution. The partners sit with a mediator who serves to facilitate a discussion between the opposing parties to try and come to a solution. In most cases, the mediators are identified beforehand and are included in the governing document. Identifying what the next step will be if the mediation does not bear fruit remains necessary too.

Third-Party Vote or Arbitration

Arbitration is yet another alternative dispute resolution method. In this situation, each party presents their case and argument to an independent arbitrator who will then have the authority to make a legally binding decision.

A neutral and objective third party can also be entrusted to make a vote in case of a ‘tie’. Importantly, this third-party arbitrator does not become a member of the organisation or the decision-making team as a result of casting the vote.

In both cases, the arbitrator and the third-party voter can be identified and named in the governing documents. If no person is named you can identify the criteria or the process through which the person will be chosen. There may be a condition that arbitration or a third-party vote can only take place after the mediation requirement has been met.

Key Takeaways

  • Co-founder conflicts are inevitable as all founders are likely to bring their perspectives and ambitions to the table.
  • Recognising and embracing the conflict is important to avoid going down the path of failure.
  • The Founder’s Agreement should have conflict management plans and detailed dispute resolution methods described to help manage any jarring conflicts.
  • Both legal and non-legal options should be exercised to eliminate the conflict and avoid dissolution.

Consult an Expert

A well-crafted founder’s agreement can minimise the chances of serious conflicts arising in the business. However, they are inevitable and you might need external counsel to manage them carefully and without causing harm to your business endeavours.

Expert dispute resolution lawyers can help you in both these cases. If you’re a start-up, it is best to involve legal experts from the get-go so you do not run into any trouble later. If you are looking to draft your founder’s agreement on deciding on conflict management processes, connect with our experts. They are highly experienced in dealing with issues plaguing start-ups and can assist you in identifying the best solutions to suit your business.

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Picture of Mark Lazarus

Mark Lazarus

Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

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How to Navigate a Dispute with a Co-founder