before you Start UP...

By Team Invester India Alliance

14 Jun 2023

If you are reading this, chances are you have recently founded your startup or are contemplating the idea of starting one. In our first blog post, we delve into the common challenges faced by early-stage startups.

Let's begin by considering how most startups are born. Founders, who could be friends, colleagues, or batch-mates, often find themselves dreaming about "running their own business one day" or "achieving the kind of success that companies like Flipkart have achieved." These discussions frequently take place over chai, coffee, or even a few beers. It's an exciting phase to be in, filled with constant brainstorming, restlessness, and an unyielding obsession with that brilliant idea.

Finally, the day arrives when you collectively decide, "Enough talk, let's make it happen!"

Congratulations on taking that first crucial step towards becoming an entrepreneur. In many ways, it's akin to falling in love. You feel an immense sense of pride, and those around you gaze at you with admiration. (Especially if you've been an engineering student in a previous life, as someone who has a girlfriend and someone who starts their own business are likely to receive equal amounts of respect!)

However, my friend, starting up is merely the first step. Unless you navigate the pitfalls that lie ahead, you may be destined to fail. In this blog post, we won't delve into whether your idea has merit, competitive advantage, scalability, and other factors. We'll save those topics for subsequent blogs. The primary theme of this blog is to ensure that you take care of a few fundamental aspects that may come back to haunt you later.

Keeping the Founding Team Together!

This is often more challenging than it sounds and is one of the most common issues faced by startups. As mentioned earlier, most startups are founded by a group of friends who share a strong rapport and vision. However, as you progress along your journey, things can become more complicated.

Have you discussed the financial commitments required? Will each founder be investing their own money in the venture? Have you discussed how much capital each partner is comfortable contributing?

Furthermore, have you thoroughly discussed the roles and responsibilities within the team? Often, technology development, sales/marketing, and operations are divided among the founders. However, have you discussed who will assume the role of CEO? Who will represent the face of the company? If you participate in events or competitions and emerge victorious, the media may approach you. The person representing your company in the media spotlight receives recognition and becomes known. Have you considered the potential repercussions this may have on your camaraderie?

Ego often comes into play when it comes to media attention and public recognition. You may be lifelong friends, but in this position, clashes of ego are almost inevitable. Have you thought about how you will navigate these challenges?

Money Matters – Equity, Understanding, and More!

Let's say your startup has three co-founders, resulting in a total of four partners. During a casual conversation over a few beers or coffees, you might decide, "Let's all be equal partners." On one hand, you didn't want to upset your friends who have been involved in the discussions from the beginning, but on the other hand, you're unsure about their contribution to the venture.

You may have inadvertently made a significant mistake that could harm both your company and your friendship.

It is crucial to have open and honest discussions about what each founder brings to the table and the value they contribute. We understand that it's easier said than done, but we have a few points that can help you navigate this aspect.

Additionally, it's important to remember that different stages of business may require varying levels of involvement from different partners. For instance, during the initial stages, your sales/marketing partner may have fewer responsibilities.

 Therefore, it's essential to have a clear understanding of these stages and identify when each founder needs to step up and contribute.

Once you have allocated percentages to all co-founders, make peace with the decision and promise yourself that you won't second-guess it later. Many conflicts and arguments arise from this very issue. The founder (the de-facto leader of the pack) often regrets giving away more equity or assigning too much to an "undeserving" partner. This is detrimental to the health of your startup. Once a decision is made, stick to it.

But there are ways to avoid these challenges!

Planning for Eventual Success or Failure

Let's be honest – there's a chance that this venture may fail, leading you to learn from the experience and embark on a new journey that eventually yields success.

To ensure a smooth transition in such scenarios, it is imperative to have a robust founders' agreement. Establish a clear understanding of investment, effort, sweat equity, and timelines for each founder. Incorporate exit clauses into your agreement. How will you handle a situation where a co-founder wants to leave or when others believe the partnership isn't working out?

Conversely, when you do achieve success, how do you plan to handle it? Have you determined how equity will be diluted among founders? Will all founders experience the same level of dilution? Once investors come on board, how will your designations be impacted? If investors have reservations about one or more co-founders, what is your plan for handling that situation?

We have discussed some of the issues that may arise from conflicts between founders and how they can potentially damage both your friendship and your company irreversibly.

Most of these issues can be resolved relatively easily on the day you decide to start your startup. It may feel a bit awkward to address these matters with your friends, and you might think, "I can sort this out later in no time."

Trust us when we say this – leaving this crucial discussion pending for a later day rarely leads to a positive outcome. Besides, if you postpone these discussions until one of you secures funding or until you're on the verge of shutting down, it will never result in a favorable outcome.