Section 1.1: Why Co-Founder Issues Arise During Fundraising

Let me illustrate this with a personal anecdote. While we were in the process of raising initial funding and had just signed a term sheet for $12 million, two of my co-founders, "Randy" and "Ken," insisted that I create an Office of the President. They wanted all significant decisions to be made collectively by the three of us, which I feared would slow our decision-making process significantly.

Randy, the primary instigator, warned that if I did not comply with their demands, they might resign, effectively threatening the stability of our funding. I will share how I navigated this situation later on.

Two years later, while raising another round of funding, "Tommy," our VP of Sales, chose to resign right after we received a new term sheet. His intention was to test whether investors would replace me with him as CEO. Fortunately, that plan backfired.

It’s important to note that many CEOs I interact with have faced similar co-founder issues during fundraising efforts. So, what causes these conflicts?

Section 1.2: Understanding the Root Causes

One could attribute this phenomenon to Murphy's Law—suggesting that problems are destined to arise at the most critical moments. However, that's too simplistic an explanation. The truth is that fundraising represents a high-stakes leverage point. Co-founders, like Randy and Ken in my case, may attempt to exert more control or gain additional resources, knowing that the last thing you want is for them to walk away, potentially jeopardizing funding.

Thus, during fundraising, co-founders often see an opportunity to pressure you into concessions, which explains the frequent drama I’ve experienced during these times.

Section 2.1: How to Avoid Mismanagement of Co-Founder Issues

Two months into our fundraising, after we had received a term sheet, Tommy quit. My immediate reaction was to inform my investors and board about his departure, which was the correct move. However, my existing investors, "Raul" and "Gill," advised me against disclosing this to our potential investors, fearing it would jeopardize the deal.

Initially, I heeded their advice, but I soon realized that withholding this information would damage my credibility and integrity with the new investors.

After several weeks of feeling trapped, I decided to come clean about Tommy's resignation. To my surprise, the new investors responded positively, indicating they had already anticipated issues with him and were relieved to hear he was leaving.

Section 2.2: The Importance of Transparency

The best way to handle negative news—whether it's a co-founder issue or missed targets—is to be proactive. This means informing potential investors and board members about any bad news before they hear it from others. It’s also essential to outline how you intend to resolve the issues at hand.

Reflecting back on the Tommy situation, I should have informed my board and investors right away about his resignation and immediately communicated this to our potential investors, along with my plan for replacing him. Although I eventually did the right thing, delaying the disclosure initially was a significant mistake.

Remember, as a startup CEO, challenges will arise at inconvenient times. Investors are well aware that setbacks are part of the journey. By demonstrating your leadership and integrity during tough moments, you can turn a co-founder’s departure into an opportunity to showcase your resilience.

Ultimately, navigating co-founder challenges can reveal your capacity for trustworthiness and effective leadership, turning potential setbacks into advantages.