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Avoiding Conflict With a Founder’s Agreement

Hands up if you have had a relationship in your life disintegrate due to a conflict over money! It could be with parents, friends, neighbors, siblings, extended family, or maybe a business partner. I know I can hold up my hand for several relationships where friends borrowed money and never paid back.

When a relationship has money introduced into it, the dynamic shifts. If you are borrowing money from a relative or friend, there can be a feeling of power from the person making the loan and shame or guilt from the borrower. I remember hearing a story about a guy who borrowed money from his parents to buy a car. While he was paying his parents back, every dinner with them was starting to result in arguments about his spending habits. “How can you afford to go out to eat when you owe us money back for the car?” “How are you able to afford a vacation, but can’t pay us back faster?”. The dynamic of the relationship shifted from parent and child to creditor and debtor. Not fun.

‘Financial Issues’ is ranked as one of the top contributing factors to divorce in the US (Huffington Post), with mishandling of money, financial infidelity, and differences in values for spending causing conflict in the home.

One reason businesses fail is that the partners in a business fall out and don’t have a method of moving forward from the disagreement. The result is the business is dissolved and the founders go their separate ways. Financial mismanagement is listed as a top reason for founder disagreement (US Small Business Administration).

Money raises the stakes and often the founders of a business are relying on the success of their business for their own livelihood or they’ve invested a considerable amount of their savings into getting the business going. This can escalate arguments very quickly since the consequences of mistakes may be severe for the individuals.

One way to reduce the risk of broken relationships and conflict is with a Founder’s Agreement. The Founder’s Agreement is a document which lays out the expectations, procedures, and rules for the business. The founders of any business, Simple StartUps included, should complete a document like this before money enters the equation. I like to bring it in after teams have been formed, ideas are flowing, and a Business Snapshot has been completed. At this point the businesses are ready to start putting plans into action and getting the ground rules in place before work commences will reduce the potential for conflict later on.

In the Founder’s Agreement, headings that the founder’s will need to agree upon include:

  • Expectations of contribution in terms of money, time, and other resources.
  • Allocation of profits. When will money be taken out for the founders, and how much is reinvested back into the business for growth?
  • How are the assets of the business divided at the conclusion of the business (Simple StartUp project)?
  • If a conflict arises between the founders, what are the steps to resolution? Will there be a majority rules vote? Will a third party arbitrate and make a decision?
  • If a founder decides they want to exit the business what is the process and how are assets split?
  • If the founders want to remove a founder from the group, what is the process and how is it fairly completed?
  • Any additional concerns.

All founder’s sign and date the agreement and this will act as the standard when conflict arises. As a teacher who has overseen several arguments, the ones who took the time to complete the Founder’s Agreement always resolve the argument faster, or are able to move on quickly from a member leaving/being ousted.

In teaching, a pillar of good classroom management is to set clear expectations for behavior, consequences for violations, and standards for each other to follow. If we handled all our relationships in the same way with up front communication, don’t you think we would dramatically reduce the amount of conflict in our lives?

I’d love for you to share your stories in The Simple StartUp Community or drop me an email at [email protected].

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