Why Three Founders Is Better Than Two

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Handshake 400x223 Why Three Founders Is Better Than TwoCreating a company with a good friend or like-minded business partner is common, and allows you to both call the shots and make decisions that have a direct impact on your startup’s future.

Unfortunately, a startup founded by two people can be a tough sell. It opens the door for disagreements and ultimately legal issues that could threaten to disrupt and even close the doors of your company for good.

This is why having a third founder is preferable to many startups that want to keep things equal between the two primary partners, but have an objective third party to resolve disagreements and help keep things smooth and civil.

Imagine a startup where two owners split the company’s assets in half and everything worked 50/50. This sounds like a great deal, but business is rarely a platform for constant agreement. One founder may decide that things would work better one way while the other prefers a different method. This makes an impasse difficult to avoid, and could ultimately lead to legal disagreements between parties for more critical decisions such as a sale of the company or in matters of the startup’s direction.

How it Works
Enter the third founder. This individual would ideally bring something to the table in terms of experience and level headedness. This third founder doesn’t have to receive a significant portion of the startup’s assets. Rather, you could split the business in a number of different ways to accommodate the contributions of this third person. Here are some examples.

Minor Partnership

  • Party A: 45%
  • Party B: 45%
  • Party C: 10%

A 10% stake in a startup is usually not a significant boost in that partner’s income, and it will also limit the amount of personal investment required on this partner’s part. In many ways, this division does little more than offer the third partner a deciding vote should the two primary members of the partnership disagree.

One area where something like this would come into play is a co-ownership of a restaurant in which the head chef (typically the person in charge of purchasing and management of the kitchen) is given the third piece of the partnership in exchange for a long-term commitment to the restaurant.

You could also split a startup this way should it be decided that the third partner is willing and capable of pulling 1/3 of the weight.

Equal Partnership

  • Party A: 33.33%
  • Party B: 33.33%
  • Party C: 33.33%

There is no magic number to these types of divisions, either. You could have a mixed partnership where one founder has a larger percentage than the other two, or a division that grants an even smaller division to the third partner than 10%.

It’s up to the business owners to organize it in such a way that any two members of the partnership have the ability to agree on something and make it happen.

Things to Remember
If the two original founders often disagree, the minor third partner actually wields a lot of power within the company. You wouldn’t want to bring in someone that is inclined to take one side over another on most issues. An objective third party is often best for these types of situations, and that means choosing someone that doesn’t have a previous allegiance.

By giving them enough of the company to reap the benefits of good decision making, you’re also giving them a very good reason to make the best decisions they can regarding the company’s future. This third founder is often handed to the person the partners are most likely to turn to for advice anyway.

There are ways to work clauses into the contract that require a 100% or 75% majority decision for some things. For example, choosing to sell the company or liquidate its assets is a major decision that shouldn’t be made without the two most invested partners agreeing on. By saying that a more significant majority has to agree to make these major decisions, you’re safeguarding yourselves from emotional destruction, a common problem that startups with roots in tight friendships and families face.

From your experience, do you think 3 founders is better than 2? Let us know in the comments!

5 replies
  1. Peter Chee
    Peter Chee says:

    It would be very interesting to hear from people how they found their co-founders if they have more than two. From my view of what’s going on in the startup space, it seems like many times when there’s more than two co-founders, it’s because the teams are formed that way because its people that have worked together before. They already know what it’s like to work with the others which is why they want to push forward and work together again with each other.

    I know you’re just giving examples of how equity might be distributed, but, I think that equity is best divided based on a weighted scale based on what the co-founder brings to the table, how much they are going to be invested in it, what they are putting at risk. I think even distribution of equity is not the right answer.

    I like what you bring up regarding making sure the third person doesn’t take sides. That’s probably something that would be necessary in order to keep things healthy. I also like the idea of having multiple co-founders in case one of the co-founder wigs out and leaves. While losing one of three co-founders is going to create a speed bump, losing one of two co-founders can pretty much kill the startup.

    Reply
  2. Burtb0
    Burtb0 says:

    Well thought out Idea.

    What caused you to think about this situation, Kelly? Personal experience? Something you saw in the news? The “Facebook” movie?

    Reply
  3. Sharon rodney-Hall
    Sharon rodney-Hall says:

    I have a situation here, I offered my business partner 33.33% of my business. It was started in 2010 but i had a fire also i did terribly in terms of accounting practices but the business was a viable one. I closed in 2012 and I’m about to re-open. I didn’t have the working capital so I asked someone to put up $Jamaican $500,000.00, I have all equipment, management skills and furniture to restart the business and I’ve learned from my mistakes, now that we’re near opening she want more in the company and twice she mentioned she wants to take over the business and i work for her. This business has created a name for itself and is valued at about $4,500,000.00 Jamaican Dollar, was I unfair to offer her, my husband and I have 33.33% each share, Please tell me if I’m being unfair. I await your response.

    Reply

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