As a corporate lawyer working at the intersection of start-up space and social enterprise sectors, I often find myself assisting co-founders in structuring relationships. When it comes to these founder partnerships or the much broader larger organizational arrangements, the conversations are inherently complex. That’s especially true at the formation and termination stages of a social enteprise. Below are two fictional, but not altogether uncommon, scenarios:
Scenario 1: After succeeding in their university’s social business plan competition, three young college students decide to formally launch their entrepreneurial venture ABC Inc. immediately upon graduation, which will provide affordable and tailor-made software applications for the development sector. While two co-founders (who are responsible for execution and operations respectively) are committed to building ABC Inc. from the scratch, the third co-founder (who specializes in technology) wants to pursue a graduate business degree after two years. ABC Inc. also has a term sheet for USD 250,000 seed investment round from certain angel investors, at an attractive valuation, who are worried that ABC Inc. may lose its founder, who also serves as Chief Technology Officer, in a relatively short span of time.
Scenario 2: After two years of running a low cost healthcare start-up XYZ Ltd. targeted at customers earning less than USD 2 a day, the co-founders mutually decide to part ways, citing mutual lack of alignment of intent for the future of their business model and lack of growth opportunities for two of the four initial co-founders. While XYZ Ltd. was performing relatively well compared to its industry peers, two of the co-founders, who are minority shareholders, are not comfortable with the future trajectory of the business, whose revised customer focus is people earning less than USD 10 a day. These two co-founders also do not foresee personal growth for themselves and believe their fellow co-founder and CEO is not the best candidate to scale the business. The seed series investor in XYZ Ltd. also is keen to let go of the founder CEO. However, this investor has neither the contractual rights nor the support of the board of directors of XYZ Ltd. to fire the founder CEO, who incidentally owns a significant majority of XYZ Ltd. along with his “friends and family.”
Based on past experience and insights from helping founders of start-up/early stage social enterprises (and their respective investors) navigate their strategy, below are ten questions questions founders should consider asking themselves and one another that might help manage these two relatively common situtations. I would also advise them to listen closely to their answers through a structured discussion before jointly embarking on a social entrepreneurial venture:
These questions and the ensuing discussion may lead to informed decision making as well as apt structuring of the mutual relationship between the co-founders of a social business enterprise, salient terms of which should ideally be incorporated in an appropriately drafted founders’ agreement.
Any thoughts on any other points that I may have missed? Experiences?
(Since not giving a disclaimer is a professional hazard, the above mentioned scenarios are fictional, and concocted for illustrative purposes only).