Founder and Investor: dealing with conflicts
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Conflicts and friction between angel investors and founders are inevitable—and they're pretty common. The key is communication: if you're clear about what you need from your investor and how much time they'll need from you, it'll be easier for them to understand their role in the process.
But even then, sometimes things go wrong. And in this week's newsletter, we'll talk about how to handle the situation when that happens:
Collaborate and have an honest conversation
Be better, not bitter
How to back out when it’s just not working :(
First off: don't panic! Conflict is normal, so don't freak out if it happens—just take a deep breath, think about what happened or didn't happen, and come back at it with fresh eyes in the next one.
One of the most famous examples of such founder/funder conflict you MUST have heard of is the story of Ashneer Grover, and him quitting BharatPe. Grover felt cornered and bullied by his investors, whereas the board accused him of misappropriating funds, and a leaked audio clip didn’t help the controversy.
This case was loaded with accusations and very public drama, which was intensively covered in the news.
This isn’t how things typically go down, the conflicts are dealt with much more privately, and we have a few steps written below to avoid a total meltdown.
This may sound cheesy, but it has been found that top-performing teams practice positive reinforcement, as you can see in this Harvard Business Review research.
Start meetings by celebrating successes to build a positive environment.
Collaborate: an open and honest conversation
Both investors and founders have a shared goal. Both have a lot at stake. In such cases, the least they could do is collaborate and agree to disagree.
Both have the same interests in the company’s success as the founders — so act like it. Behave as if you’re on the same team and trying to solve problems together.
Communicate to make sure one understands precisely why it happened so there's no confusion or misunderstanding later on and to make sure that the interests are still aligned.
These conversations are critical to the long-term understanding of the relationship, and there are no set rules for developing a comfort level.
Having an open and honest conversation is very important —it's not just about the investor trying to get more equity or the founder trying to get more money. It's about finding some common ground and working together toward that goal.
Be better, not bitter.
One of the investors’ most important jobs is to give CEOs feedback on how they are doing. And founders should write down the recommendations to ensure a realistic plan of action moving forward.
Founder - Investor Divorce
If this doesn't work out either, and the founder and investor just don't get along - the last option is to back out as an investor.
In some cases, the start-up gets acquired by another company, and investors get big returns + and exit. However, it doesn't always turn out so rosy. The other road taken is: the founder buying out the investor at a high cost.
Backing out of a start-up can be incredibly complicated. Hence it is highly recommended to have a detailed contract that outlines steps to be taken in case the investor decides to back out of the deal because of disagreements with the founder.
If the founder is extremely hard to deal with, then some investors choose to deny any future funding, lose their investment, and write off their convertible debts.
It’s possible that the investors simply accept their losses and move on. The value of the investment goes to zero. After all, the angel simply wants a few big winners to offset the total of business investments that fail. So, maybe nothing will happen.
Read up about some real-life cases of founder/investor conflict regarding unethical behavior here.
What’s new at Sparklehood
Such valuable insights come from experienced investors and founders who’ve had to deal with such conflicts multiple times. However, finding such expert advice can be challenging.
Sparklehood’s Angel Investor Cohort solves this by bringing expert Angel investors and a community of people with similar aspirations.
So if you’re looking to start your Angel investing journey or are an amateur investor looking to make it big - our Angel Investor Cohort 4th edition might be the right place for you.