Creating 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.
- 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.
- 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!