Have you asked your cofounder all the essential questions about their financial values before you became partners? If not, how certain are you that they are ready to take the entrepreneurial detour and weather the storms through the unknown with you?
As with all new business ventures, founders need the right blend of skills to assess and determine if the partners they wish to bring on board are a good fit. One of the most critical assessments is the financial alignment because agreement around issues of money, budgets, spending and related areas of concern is one of the most common areas of dispute between cofounders. For example, are you a stickler for details, good at setting budgets and expect everyone to live well below their means? What if the cofounder you bring on board does not feel entirely bound by budgetary rules and does not want to operate within the parameters you feel comfortable with? How would you handle that potential area of conflict? How would you anticipate your cofounder might feel about the fiscal constraints that you want to set in place?
The best way to handle this potential conflict is to address it upfront. Here are 6 key ways to ensure financial alignment between yourself and a potential cofounder:
If any new venture is to succeed, a certain amount of financial savvy is required from the founding team. Within a startup context, financial savvy does not mean having a CPA certification (although it is incredibly beneficial if a cofounder has the relevant accounting background). Instead, financial savvy means being in financial control and seeing predictable outcomes. You can search online for personal financial budget strategies and find one that meets your needs. Here are a few:
When evaluating a cofounder’s financial savvy, a personal financial budget is a great way to assess a potential candidate. First, a budget will show us their financial diligence and illustrate they are living below their means.Second, it will illuminate their actual expenses, income and debt levels and give us an idea if they are in a healthy or precarious financial situation. Third, sharing a personal financial budget will not only go a long way to help all founders open themselves up to those difficult conversations but begin to establish a baseline of trust among the founding team that misaligned expectations may otherwise tarnish.
Have your budget ready, ask your cofounders for their budgets, share them, and discuss.
In an ideal world, we all want to start a business with a zero debt-to-income ratio. In reality, debt is a normal part of day-to-day living, and if managed properly, debt can be highly beneficial.
Do you know your own DTI (debt to income) ratio? The debt-to-income ratio is a crucial indicator of an individual’s financial health and is critical when assessing if someone can meet their debt obligations.
A candidate’s DTI ratio can be critical when looking for a cofounder because unrealistically high debt levels can lead to founders extending their personal risk exposure to the business. For example, a founder desperate to meet their debt obligations may be inclined to put pressure on the company for higher remuneration or be incentivized to engage in risky behaviour.
Review your and your cofounder’s DTI ratios and consider if anyone on the core team has obligations that may impede their need to commit or redirect their loyalty away from the business’s success.
Now that we have had the opportunity to take a sober look at our financial budgets, debt levels and credit scores, founders can now honestly consider if they can take on a cofounder role that may require them to leave their source of full-time income, a position often with more risk and uncertainty.
Can you leave your source of full-time income behind? For how long? What does your budget tell you about your runway to sustain a prolonged lack of income or a substantially reduced income? What is the personal financial runway for all of the founding team members?
It is one thing to guesstimate what you think you can sustain and quite another what a sober look at your budget, debt-to-income level, and credit score might tell you. Be sure to have those honest conversations with yourself, your family and your potential cofounders before you commit to an obligation that will need your undivided attention.
In general, when evaluating the financial fit of cofounders purely through numbers and statistics, we tend to lean towards low-risk and highly conservative assessments. While this strategy will generally help us keep our assets safe and minimize the risk of failure, it is vital also to step outside of that box and consider alternative perspectives.
While it is tempting to think that “If only everyone budgeted and lived conservatively, all of our problems would be solved,” it is important to remember that to win big, you sometimes must bet big and conservative spending/investment strategies (witzzzh all deference to Warren Buffet and value investors) don’t always get us there.
For example, venture capital firms show us that big investing in big ideas are gambles that often pay dividends many times greater than the bets they made on businesses that fail. While it isn’t fair to say that VC firms are wild risk-takers that take no stock in the consequences of their actions, it probably is fair to say that the Googles, Facebooks and Amazons would not exist without the likes of VC firms willing to make those sorts of big bets.
The point of that anecdote is the following: suppose the entire founding team is highly fiscally conservative and highly risk-averse. In that case, the company may miss opportunities in the marketplace that require those calculated big bets to win big. As Wayne Gretzky said, “You miss one hundred percent of the shots you don’t take.”
Make sure that in your selection process, you select a cofounder that is a fit for your financial values, and sometimes that may mean that you need to make sure you have someone on the team willing to take (and fight for) those calculated shots that others may not be comfortable with.
Suppose this is your first venture, and you have yet to have the opportunity to discover your true financial values in the pressure cooker of a startup. How can you know if a potential cofounder is a good fit for you if you are still developing your financial values?
In that case, knowing if you are listening to your intuition or feeling overly enthusiastic/pessimistic about a potential cofounder may be challenging. This is the situation where it would be beneficial to lean on someone with the breadth and scope of said experience. A good source of insight would be a financial advisor, business coach, mentor or someone with years of startup and business experience. Always remember to rely on more than your own opinions. Often it pays to get second and third opinions. It will give you an understanding of the context and scope of professional opinion on the matter and understand if there is a consensus on the cofounder’s financial alignment that you seek to assess.
The Cofounder’s Hub is located in beautiful British Columbia. Our team, comprised of experts in the entrepreneurial, business and psychological fields, is working to create a space where you can come for all of your cofoundership needs.
Our goal is to help you build a successful business from start to finish. Using curated tools and resources that focus on the interpersonal relationship between cofounders and their company, we aim to teach, guide and advise you through your journey, equipping you to create the business and partnership you desire.
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