18 December 2019

4 mistakes to avoid when creating a startup partner pact

You’re there, that’s it… It’s time to contract with your associates. Good news? Yes, because it means your startup is starting to gain traction and it’s time to take the next step! But also, no, because the drafting of a fair, relevant and quality partner pact is much more complex than it seems. You are given the four essential tips to avoid so as not to rush into the wall. 

Startup association error #1 – Lack of communication between partners

Were you waiting for that one? Well yes, communication between founders is the basis of a successful project. And yet, it is not always easy to say things and express one’s doubts, frustrations… 

We have often seen teams whose associates do not talk enough, if at all. The result? when the situation does not suit them, they do not dare to tell others, the situation of discomfort grows on both sides – and the situation degenerates. It is a situation that is all the more complicated because no one is employed, which means that anyone can slam the door at any point.

The basic rule: equity should not be a matter of discord or misunderstanding between partners. If tensions are palpable, it is essential to sit around a table and say things to each other, even if you use a third party to mediate.

#2 – Confounding shares of capital and security

“The attachment of the co-founders to their shares of capital can be harmful, because it gives them a false idea of their status in the company: being a founder certainly means owning a share of the capital of his startup, but the title of CEO (or CTO, or COO…) is a situation assigned to them temporarily, based on the skills needs of the moment. But we have to separate the two: the founders are starting C-something because there is no one else, but in the long run, the ladder and the risk of being caught up in a need for new skills or new profiles in the team is a reality.”

Stéphane Paillard, Head of startup programs, Schoolab

These statutes must be separated from the partner pact: shareholders and executives are two completely different things! Eventually, it is possible to remain a founder and be a shareholder, but to have hired a more experienced CEO for the scale. It is essential for the partners, when forming their pact, to be able to project themselves into this type of situation.

#3 – Surround yourself with medium-profile entrepreneurs and quickly sign partners’ pacts

It is very important, especially in its early days, to bring in only the necessary skills and the very good profiles for the development of its startup. Giving equity to its first employees and encouraging them has become a staple of startup life – but sometimes it’s a mistake. 

The gift of stock given to an employee must be proportional to their commitment and the length of time the management team wishes to keep them in place – giving shares to an average profile, and giving them away is a mistake that has cost some entrepreneurs dearly! For talent, on the other hand, it is necessary to lock as much capital as possible, because they compensate for a complementary skill in the founding team, and quickly become irreplaceable (due to their skills and their level of knowledge of the how the startup works): capital becomes an ideal way to encourage them to stay. 

#4 – Dilute your capital too easily

As an employee, it is normal to apply for equity by joining a startup. However, as a founder, it is not normal to give it to everyone and everything goes. Diluted, a startup’s capital loses value all the time. 

Capital must always be given to individuals who bring real value and who will take the company to another level, which will contribute to its growth. Capital must in this sense be seen as a way to reward the loyalty and talent of its employees (which implies that they have proven themselves upstream). 

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