When Rosie Nguyen resigned from her startup Fanhouse in July, she felt like she was losing a child. Nguyen wasn’t ready to leave, but she wasn’t on board with where the company was headed, either.
When Fanhouse’s board, which consisted of her co-founder and an investor, decided to sell the company and pivot to AI, she knew she needed to resign; she started the company to help creators, not ride industry trends to make the most money.
“It was definitely a very painful process,” Nguyen told TechCrunch+ about leaving the startup, which connected creators with their fans. “Fanhouse was a baby to me, a company that I really, really cared about and started about my own needs. I used it myself to provide for my family. Not having the company anymore meant losing not just my income and job but also this part of my creator identity.”
Founders exiting, or founding teams breaking up, is not an uncommon occurrence in startup land. Many separations are painless, like when a founder decides they want to build something else or take a different job. But sometimes they can be messy, involving lawyers and resulting in people feeling burned.
In a market where capital is harder to come by — and startups have largely already cut all the burn they can — 2024 is looking tough for founders. Some companies that are waiting until next year to raise could still find that they can’t. Many founders could face pressure from their investors or with hard choices concerning where their company should go next. Founders aren’t always going to agree, and complicated breakups might become more common.
“Even in good market conditions, we also had a co-founder breakup,” Nguyen said. “It is just so hard, and something that is so high stakes. You are making decisions with millions of dollars and having disagreements on that and decisions on people’s lives and income. When there is any extra stress that is added on [top of] that, it is going to make those relationships even more tenuous.”
In an ideal world, founders would have a plan in place from the start, outlining what they would do if things went sour, someone wanted to leave, or if they disagreed on a major decision down the road. But coming out of a market where things were flying up and to the right, most founders didn’t.
There’s never a wrong time to prepare
Even if things are still going well, founders can do this now, ahead of any potential bad times. A little planning can go a long way, said Matt Harris, the former founder of Bloom Credit who’s now an executive coach for founders.
“I think one of the things that is a huge thing to do is get clear on your goals and what success looks like very early and don’t have it be implied,” Harris told TechCrunch+. “Being really clear on what success looks like for collective goals, it creates objective measures.”
Nguyen said that she should have taken the time to have those conversations with her co-founder. It would have meant less of the outcome was left up to trusting that everyone was on the same page; she found out too late that they weren’t.
“We should have sat down and asked those hard questions,” Nguyen said. “‘If there is a recession, and we aren’t growing, what would you guys want to do? Would we stick by or sell it?’ If we really were honest early on, maybe I wouldn’t have founded [with the same people].”
It’s not just important for founders to prepare to avoid a potential costly legal mess down the line; not doing so could hurt them in other ways, too. If a co-founder leaves and is able to maintain a large chunk of equity, many investors will see that shareholding as dead weight and a negative when they go out to fundraise in the future, said Jenny Fielding, co-founder and managing partner at Everywhere Ventures.
VCs often try to get ahead of these potential issues before they even invest, she said.
“There is a role for early-stage investors to point to things [founders] might not be thinking of,” Fielding said. “Founders are optimists and investors have to be pessimists in some way and think about what could go wrong.” She said she’s had multiple founder breakups in her portfolio this year.
But while VCs like Fielding are happy to help try to mitigate some of the issues before things arise, most issues happen after it’s too late for VCs to be able to do too much. Still, she said, if there seems to be growing disagreements between founders, VCs can mediate or help find an executive or relationship coach.
At the end of the day, though, Fielding said that VCs have to remember their role as investors that have a fiduciary duty to their LPs.
“When it is too late, there is going to be a founder split, when things get really tricky, you have a fiduciary to a company, it’s hard to pick sides,” she said. “Often that’s when you have to be a bit careful you’re doing everything that is best for the company, not the individual you have the closest relationship with.”
If 2024 does end up driving more founder breakups, founders can help other founders by being transparent and talk about their experiences. Nguyen was vocal on Twitter about the process and the fallout, but that’s not even remotely the norm. She said she wanted to get her side of the story straight but she also understands why others are hesitant to speak out. VC is a reputation game.
“A lot of people are afraid of consequences in VC, and I get it, everyone talks,” Nguyen said. “If you get the reputation that this person isn’t easy to work with or isn’t chasing the $1 billion outcome, maybe I’m hindering my own chances of raising in the future.”
But many founders, especially those who started companies since the pandemic, are much more isolated than founders in the past. If a co-founder goes through a breakup, they might not realize that there are others out there going through the same thing.
“A really undercover issue of the COVID-19 era, of the 2021 boom, is how many people that founded businesses don’t have strong founder communities,” Harris said. “The majority of my founders don’t. [In my era] we all know each other, we all hang out; it’s not as true [with] this next generation. They need to realize they are not so lonely.”
Because the reality is, many founding teams break up and then go on to launch individual companies, some of which end up being really successful. Founders shouldn’t lose hope if they find themselves in this position next year. But even if they think that could never be them, they should start planning for it today, just in case.