Starting up with a friend

http://danieltenner.com/posts/0005-starting-up-with-a-friend.html

by swombat • 17 years ago

252 59 17 years ago

lionhearted2• 17 years ago

This is gold. Almost everyone new to entrepreneurship makes this mistake (not setting very clear expectations early on in a business), and it sucks. Here's the comment I left on the site:

Very wise advice from someone whose already been there. Three more questions to think about:

1. Expenses: What is and is not an expense? Especially getting clear on business entertainment, business travel, "general life expenses that are also business expenses" like internet access, and so on. Also, what's the max dollar amount someone can spend on an expense without checking with the other person? My default advice is keep business expenses low and stick to the necessary. For a first company, say no to business entertainment, business travel, meals, general life expenses, and any hardware that a person would use for non-business reasons.

2. Profit distribution: When and how will profits be distributed? How much will be reinvested? What will the reserves be? What if one partner wants or needs cash, and the other wants to put it into expanding? This is an important question, and potentially contentious. Especially if your business is growing and money is coming in, but founders are in different places financially. Especially a point of contention if one founder is heavy in unsecured debt, and the other isn't.

3. Hours: When (not if) the hours you're working get unbalanced, how to handle that? Less an issue if it's both of your full time gigs and you're putting in full time effort each. Very important to think about if it's a side project or people have other obligations. The way I've seen work is that you define roles clearly to be completed on a plan to profitability, and once you're profitable, founders draw salary for regular, recurring work they do that's at market rates. If upkeep on the business after it's built successfully takes 15 hours/week, but lends itself to one founders skillset so he's doing 12 hours per week, you're going to have an issue really soon. Instead, that founder can get paid at around market rates, or you can outsource that part of his job.

Those are three I've seen issues with - unclear expectations on hours, profit distribution, and expenses. You've obviously been there Daniel, very nicely written up mate.

swombat2• 17 years ago

Thanks! I've added some of those questions into the list in the article (with link to the comment, but can link elsewhere if you want)

lionhearted2• 17 years ago

Ah, I didn't realize that was your site mate. You're one of my favorite submitters on here - it seems like I'm reading something insightful from you almost every day on here. Glad I was able to contribute a bit, and thanks again for being awesome.

coglethorpe• 17 years ago

I printed the list out and went over it with a friend I'm starting up a company with. He actually loved it and we started going over the questions together. Awesomeness.

gord• 17 years ago

Its an excellent retrospective, given the emotion one must have invested in seeing a startup through to the Ramen profitable phase.

herval• 17 years ago

excelent piece of advise - one thing I find quite hard (impossible?), though, is to have EVERYTHING explicitly spoken/written: there are just so many variables out there, you'd probably lose a lot of time sketching things down - and still not covering the bases that will turn out to be problems...

swombat2• 17 years ago

It's definitely impossible to plan for every eventuality, but that doesn't mean that doing some planning isn't useful. Ultimately, start-ups are very resource-constrained, so you have to do what you think matters most and hope for the best. If you at least have a good stab at answering the questions outlined in the articles (and the comment by Sebastian), you'll be a long way ahead of where you'd be with no planning.

michael_dorfman2• 17 years ago

I'd add (from painful personal experience):

Get a lawyer to draw up a frame agreement for the corporation. No matter how much you trust each other, you need to get some documents in place that protect the individual interests of each party. Don't allow loopholes to exist that permit one party to screw over the other, no matter how convinced you are it would never happen.

Trust me on this.

dbul3• 17 years ago

I have a good friend who I've known for many years. Very smart. So I ask him if he would be interested in coming up with a domain and told him he would be rewarded if we became successful. His response was that he would, but he wanted me to write up a contract. I thought, You've got to be kidding me. So I put on my lawyer hat and spent several hours writing up a contract making sure the language was as sound as could be. He was impressed by the contract (remember, very smart) and wanted just a couple things worded differently. Fine. After all of that effort, he did not come up with an acceptable domain name. Maybe the contract was a smart move, but that kind of thing seems over the top sometimes.

cedsav2• 17 years ago

If you promise a reward based on 'success', then your friend was right to get a contract from you.

For such a small contribution though the whole thing sounds rather silly. Better to pay something upfront and/or ask for pro bono.

michael_dorfman2• 17 years ago

Yeah, but consider the alternative: you can have a successful venture for many years, and earn a lot of money, only to have one party find a loophole that allows him to attain and exploit 51% control, and screw the other completely.

AlexTheFounder4• 17 years ago

My old school friend went to continue the business with another guy and left our company to die on my hands. I pulled it through on my own and had a steady income for 2 years.

Never trust your feelings and imagination. Plan your startup as a military operation then you should be alright.

rustartup3• 17 years ago

a good thing to remember is that almost everyone out there and here on HN is a egotist first and a hacker (worker, etc) second

rustartup3• 17 years ago

downvote it but you cannot change the truth

ovi256• 17 years ago

I would really like to know, if you would not mind explaining, how are we all egotists. I believe myself that HN tends to attract better-than-average, educated, ambitious people. Egotism goes a bit with that. But to all being like that.

chiffonade5• 17 years ago

This is true, and I think the article mentions that explicitly and implicitly. However, that's not the point it's trying to make. The point it's trying to make can be summarized in one sentence:

When starting companies with fellow egotists, do not be passive-aggressive, and do not choose passive-aggressive partners.

vaksel• 17 years ago

Doing a startup with a friend is similar to renting an apartment together. You are almost guaranteed huge problems that will put a strain on your relationship.

All this talk about putting things in writing is more or less bullshit. Yes you will know who is right based on your preparations...but so what? All this will do is make the final decision easier in a dispute for the winner...but thats it. The other person will still feel wronged. Your relationship will still suffer, because you had to put your foot down.

AlexTheFounder4• 17 years ago

This is basically how family works. Every party should have a right to be 'right' in the agreed range of situations (my wife is always right in the house, no matter what).

So, the founders should split the territory and then follow to the agreement.

chiffonade5• 17 years ago

What? This is the formula for building a marriage in which you resent your wife 10 years down the line, not any way to build a successful company.

Flemlord• 17 years ago

Excellent article. I wasn't seeing eye to eye with the cofounder of my first startup, and didn't realize it until a couple years in. He wanted a comfortable business that allowed him to take Fridays off and spend more time out of the office. I had visions of being the next Microsoft and wanted to pump every dime back into the business.

It led to him quitting after the first couple years, and me driving the company to a lucrative acquisition. We hadn't issued our initial shares with an ESOP, so he got his full percentage, even though he didn't do most of the work. But the biggest problem was early on, when he wasn't working a 40 hour week and distracting everybody else from being a hard core startup.

forkqueue• 17 years ago

Best business advice I've been given: always make sure there are an odd number of founders so you can always get a resolution to any disagreements.

sho2• 17 years ago

I heard something similar, but with a slight twist - when any decision is to be made, make sure you have a prime number of deciders, otherwise there is the possibility of deadlock. I think that's from the founder of Sony? He had a lot of cool ideas like that.

Not too many companies have 9 founders, though, so I guess your version works well enough for startups.

smanek2• 17 years ago

That's stupid. Two is prime - which does allow for deadlock. And for odd primes, why are they better than just odds?

c3o• 17 years ago

...until it turns out two of the three founders tend to agree on most issues, and the third is constantly overruled, feels left out and angrily quits. I don't think it really makes that much of a difference: there are pros and cons to both 2 and 3 founders.

tptacek2• 17 years ago

I was hired in 1997 at Secure Networks by Alfred Huger, who I had known online since I was in high school. We were friends outside the company, but nobody in the world would say the work relationship was friendly. Al was like Matthew Broderick's character in "Glory"; whatever terms you were on with him before the company --- and Al and I were peers --- at SNI, Al was in charge. I got yelled at a lot. I have to stop to consider whether he was the best boss I've had, or just in the top 2.

I started Sonicity in '99 with two friends, which didn't work out for some of the same reasons here, but also for other reasons, like fairness concerns, no clear lines of communication, lots of overlap, and (of course) a cratering market. We might not have ended so badly had we not taken money, but whatever flimsy rapport we had before the startup didn't survive the strain of having a board and several new vectors of company politics (a CEO, a competing management faction, etc).

(I'm on good terms with both my cofounders there, and almost went to work with one of them at Bloomberg years later --- he's since started and sold a digital music player company).

Incidentally, the "working with friends" problem also occurs outside the founders team. We hired lots of our friends at Sonicity, and that was a problem too. If you aren't totally clear about your expectations (and we never were), friends expect a particular kind of management that is hard to maintain. Ironically, the best performer we hired at Sonicity is someone I almost got in a bar fight with the year before we started the company.

I started Matasano with Jeremy in 2005; Jeremy and I go back to 1995. One of the things I think we did right, right off the bat, was to bring on a third person (also a good friend) as our boss. Neither Jeremy nor I have little thought bubbles coming out of our head saying "I'm the CEO". I'm Karl Rove, Jeremy is Condoleeza Rice, and neither of us want to be the Commander in Chief.

We've had conflicts, but the simple tactic of surrendering final say in the company has defused them; I'd be fired before drama I started wrecked the company, which is actually a really comforting thought.

robteix• 17 years ago

Great advice. A few years back a couple of friends and I decided to start a new company. Both were (and continue to be) really good friends to me, but just before we formally created the company, I decided to back down. The reason -- and I told both of them that -- was that I was afraid that the company would eventually destroy the friendship.

We all decided to go our own ways and thus the friendship survived. I often wonder if we could have pulled it out, but I really don't regret the decision.

known• 17 years ago

Transparency Begets Trust.

A-Merchant• 17 years ago

Great advice. I wish I had some of this prior to going in on a business venture with a good friend of mine. The biggest problem we faced was that my partner had just gotten into a relationship which requires almost as much time as a new venture. So while I was envisioning 10 hour work days, he was envisioning days filled with several breaks to catch up with his girlfriend and/or his work hours were based around her schedule. This made it extremely hard for me to focus and set time for us to work together.

With that said, I would add to the list of questions - What other outside relationships will you need to spend significant time on and how will this affect our work days/schedule?

chiffonade5• 17 years ago

> The biggest problem we faced was that my partner had just gotten into a relationship which requires almost as much time as a new venture.

This is when you start giving people ultimatums. Sounds dramatic, but it isn't. It's what's required to run a successful business - having a girlfriend isn't business, it's charity.

bpm140• 17 years ago

Great article, and the "friend" part is superfluous. All of Daniel's lessons apply whether you're starting something with a friend you've known for two decades (my previous startup) or with someone you met at the partner pitch (my current startup).

donw• 17 years ago

This is a great post. I am starting a company with a good friend of mine, and it's amazing how much time it takes to make sure we're both going down the same path, not just code-wise, but also in terms of marketing, pricing, hell, even the logo has required a lot of back-and-forth.

The one thing that I can add to this, is that make sure you go into business with somebody you can both win and lose an argument with. Plans change, markets change, and most importantly, people working together need to compromise. I'm lucky, in that my co-founder is a really reasonable guy -- hopefully he'd say the same about me.

To borrow a concept from PG: Make sure neither partner looks at the business as part of their identity.

Having done decently-sized projects (that never made money) on my own, I can definitely testify that the two-man-route is much, much harder.

alain94040• 17 years ago

Yes it's tough and takes a lot of work to stay in sync, but it's also very healthy. I share the same experience.

chiffonade5• 17 years ago

In other words, make sure you aren't both a couple of passive-aggressive powderpuffs that will steam roll each other into oblivion.

eddylu• 17 years ago

Great article! From my experiences with starting ventures with friends, I would also add:

1. Make sure they have A+ work ethic. I partnered with an A+ friend with a B- work ethic, and things definitely did not go well. I've also partnered with B- friends with A+ work ethic, and now they're still business partners and some of my best friends.

2. Operate as a meritocracy. This was touched upon, but most of the time your partners will have other obligations. Every week, we set goals that each person must meet before the week's end. We have a policy where if anyone misses his or her weekly goals over a certain threshold, that person is relieved from his or her position. This happened once in my case, but the person accepted it and totally understood because he had other obligations to deal with.

jon-voights-pen• 17 years ago

I did a cntrl+f on this page for the word 'incorporate' and didn't find one reference.

Incorporation solves most of these problems: - it forces you to write everything down - it forces you to assign roles - it forces you to establish a board of directors - it forces you to pay out only in dividends at times agreed on by the board of directors

no more problems! one partner wants out? buy his shares!

scotth3• 17 years ago

i've never quite understood this (although i haven't looked too hard). what happens if (s)he wants to leave and you don't buy the shares?

nav• 17 years ago

Though the common sentiment here is not to start a company with a friend; I respect the general opinions in the article and comment threads, thought I must add that 'trust' is key. Typically those you trust are friends or family; unf. a Catch 22. I've started a few companies with friends and have learned a few things along the way. They are as follows:

1). Legitimize the business. Get the paper work done and a lawyer and advisor on board. The ability to have an unaffiliated third party arbitrator it key.

2). Definition of mutual goals. Know why all parties involved are even considering being a part of the venture, make it transparent and relate possible exits to that.

3). Define roles and respect them. If you co-founder is a designer trust his judgement; likely-hood is that he/she will do the same.

4). Define bailout plans. I you or your co-founder decides to bail; have a plan and make sure everyone involved knows of the plan. Hopefully the team 'trusts' each other to execute it incase they decided to seek greener pastures.

@lionhearted has some great points as well. Great thread and article.

zandorg• 17 years ago

I have a friend who works for a bank, and I needed some help with a complex SQL query. Instead of paying in stock, I just said "Here's so-and-so per hour" and it took 2 hours, and I paid him, then did the same a couple of weeks later.

Another guy did me an Installshield script on Elance.

I paid a lawyer for a non-disclosure agreement.

The lesson for me is, paying in stock is just like an urban legend, and actually, if you've got the lion's share of development done yourself, the edge cases can be got rid of cheaply for little more than the rent.

Also, if you haven't got friends who want to partner in a company, don't let it stop you developing a product.

zafarali• 17 years ago

This is interesting. Great article. I've seen many start ups fail with the help of friends. I've seen few succeed with friends. I've seen wayyy too many fails with only one person working in the start up. So be safe. Go get a friend

dingobingo• 17 years ago

wow. thanks for the info :)

Starting up with a friend

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