Entrepreneurs Ego clash with power game

We are a 7-month old startup, founded by three entrepreneurs with different backgrounds. We do not have any clients yet, but the product is ready and we are already in talks with four clients. One of the clients is looking for a trial. We are planning to build the document, copyright, etc., which means we need company registration. We are planning for a private Ltd company.

Here is the problem: One of the three founders had the idea for a long time but was not able to execute until we met and started together. We (the other two founders) believed in the idea so much that we quit our jobs and started executing.

The guy who came up with the idea is still working at his day job! He is the technology guy and has done a lot of work towards building the product.

The idea guy now says that he wants to do things his way (even though he is still working at his day job) and says that he should have the ability to override any decisions that are made. He agrees with forming a private Ltd company but says that he wants to be the CEO and do things his way.

Now one of the guys thinks that it is not going in the right direction and wants to quit. I feel the entire effort we've made is going to be wasted if we spilt now that we're about to see some fruit, all because of ego problems. Until now we haven't had any problems. Only when we were started discussing power matters did this problem arise and screw things up.

Instead of solving client problems, now we're making our own problems!

You all may be arguing from emotion, and engaging in a dispassionate analysis of everyone's position may be useful.

You need to outline who has the leverage in this situation, and how much a disruption at this point will set everybody back. Even try to assign a dollar amount to this.

If he is the product guy, and can replace you two very easily, then you are going to be negotiating from a weak position.

If you two have all the contacts and ability to sell the product, and he cannot find replacements, then he might as well not have a product - and you will be negotiating from a position of power.

I think the point of "we quit our jobs, he did not" is irrelevant. For all we know, he has a family and serious obligations, and you and the other founder are single with no obligations and decent savings. Yes, this can be a measure of "dedication" to the start-up, but it is very context sensitive.

Honestly, in most cases I would say you WANT the product guy to be the CEO - but this does not necessarily mean he gets to "overrule" the other founders. You can setup the rules however you want.

Do you know why he wants to have veto/overrule power? Have you guys had disagreements? Is there a mismatch in your visions for the company?

Perhaps he can be the CEO, but you can all be on the Board - which means you can replace him as CEO. If he is not OK with that, then he just wants to be Dictator for Life.

Well unfortunately you have got to this point before working out the detail ... not uncommon but painful. You need to have a meeting, ideally in a relaxed setting like a dinner or something and go through each persons perspective.

Start with something like, "while you had the idea both of us have invested heaps and taken a huge risk so we want to know its worth us continuing ..." reword to be more appropriate.

The things you need to cover off are something like the following:
My advice is get an in principal agreement in place before starting, it doesn't have to be huge maybe 1 to 2 pages. It should cover the basics

1. Share split, buy in time (say 2 years to get all of your shares OR key milestones)
2. Who owns what - preexisting IP and customer base is owned by the company and is part of the contribution in return for shares in the company.
3. What happens if someone leaves (do the shares revert to the pool, stay with that person or do they need to be bought out by the other partners). I would suggest anything in the first 6-9 months is a pure revert to the pool, after that first option to buy out from the other parties ... this should be evenly bought if possible.
4. Sweat equity multiplier. If there is a period of no money what is the value of shares or what is the repayment on the time invested (agree on a figure 1 month = $8K or something) and it is paid out once things pick up. OR in your case if 2 are full time and 1 is part time then this should be reflected to cover your risk and early contribution.
5. How do decisions get made? Vote, seek advice but one persons rule, who has decider?

These are the key things I get peoples agreement and signature to before starting then soon afterwards I follow up with a lawyer written form.

When answering the first and key one We typically have a few standard metrics we use to run through how much a share is worth:

1. Idea: 3% - 5% - ideas these days are cheap, everyone is having them its execution that counts.
2. Technical: 15%-35% - all developers (including myself) think its worth more but if you don't have the rest in place then its just a cool thing that sits on the shelf being worthless to everyone. That said you want the developers to have a good stake in the product so they are suitably focused in the end result.
3. Marketing / Sales: 15% - 30% - This is pretty important, if nobody knows about you, your nowhere ... but put KPIs against it - X new customers / sales in a timeframe.
4. Business: 20% - 30% - The leadership and vision, this is typically one or two people and they will make or break the company on its own, set the direction.
5. Finance: the remainder, depending how much they put up, others adjust accordingly.

Everyone should have a 1-2 year "buy-in" period where they have to perform at their role in order to receive the shares ... its only but everyone pulling together that you will get anywhere.

This is a classic case of not putting together a founders agreement ahead of time (as Alain has artfully done with his site). Putting that aside, you need to sort this out before moving forward. Some ideas to consider:

• Find a neural third party that everyone respects and likes. Have them moderate the discussion as to how to move the company forward.
• All three of you need to have an offsite meeting to hammer out the companies direction. The best way to do that is for you to put together a quick one page outline of what issues need to be resolved.
• Have a dialog about the companies direction and the issues that need to be sorted out. Do this in a constructive way that does not lay blame on anyone.

If these things fail to resolve your companies issues, them I'm afraid you might have wasted 7 months of your life. But I'm optimistic that you can resolve this since it does appear that together, the three of you built something that a single person could not build alone. Remember, ideas are useless without execution and even if you part ways, it's unlikely that your would be CEO could make something happen without others. So, I would craft the argument like

"Look how far we have come and how far we can go if we work together" or something like that. The guy with the big ego may not believe that but all you need to do is state the facts of the last 7 months -- that's about all you can do without having a written agreement.