At SVASE‘s StartUp-U SFO event last week (Building the Team), a panel member said that a company should not have more than two founders. Although he did not provide additional details or support for his proposition, he got me thinking.
While I have had successful startup clients with up to three founders, four founders often present problems, usually because the founder with the money (the investor) wants more control than the other founders think is reasonable. Some examples:
- It took three tries (preferred shares, 51% of common shares, etc.) before shareholders could devise a scheme that gave the investor a mutually-acceptable level of control and financial return (agreement only being reached after the investor presented the third approach as “take it or leave it”).
- I prepared the operating agreement for a limited liability company (LLC) and presented it to the four members. After two weeks of review and discussion, the members concluded that they could not agree on control issues and stopped forming the business.
- On two separate occasions, four-person groups fell apart – shortly before our initial meeting was scheduled to take place – because of financial conflicts.
Recommendation: The greater the number of founders on your team, the more thoroughly you should examine control and financial issues to make sure you are in agreement before you start building your new business.
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This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.