And How to Woo Investors Anyway
There’s nothing quite as romantic as a wedding. There’s also nothing that turns off potential investors as fast as a wedded couple (except for a criminal conviction).
At least once a week I hear a pitch from a husband and wife founding team. And every time, I hear the same reaction from the other investors in the room — sorry, pass.
This reaction seems unfair. Who would make a better founding team than two people who have made vows before god and state (and hundreds of friends and family) to watch each other’s backs through thick and thin? Two people who know each other better than they know themselves? A couple who fill in each other’s gaps better than any college friend? Who would make a better company partner than their life partner? What’s wrong with a husband and wife (or husband-husband, wife-wife) founding team?
The thing to understand about early-stage venture investors (venture capital firms and individual angel investors) is we’re investing in an embryonic business and guessing that this germ of an idea will be worth a billion dollars in ten years’ time.
We may work our spreadsheets of revenues, CAC, EBITDA, and exit multiples, but mostly we rely on rules of thumb for what’s worked before and what’s failed. And we’ve all had at least one experience like these:
The first startup I joined was founded by a husband and wife pair. He was the visionary CEO, the product architect, the big talker; she was the get-shit-done head of product (and everything else). They made a perfect team.
Then in the same story that’s as old as time, scrawled onto cavewomen’s walls, he cheated on her. What started as a small crisis snowballed into catastrophe.
A few months later they split up. In front of the team, they declared themselves to be adults and professionals. Their separation was amicable. They wouldn’t let their private life affect the company. Yeah, right.
We limped along on eggshells until a few months later when he broke the news that his wife would be leaving the company. In one of the most dramatic days of my working career, we said if she was leaving, we were going with her. It was then decided that he would be leaving instead, and she would take over as CEO.
That would’ve been fine, but he still owned 50% of the company’s stock. Which made for very awkward board meetings, because he was happy to see us fail. He demanded millions to buy out his shares.
The next round of funding was impossible. So the company was offered up in a bargain sale that the acquirer didn’t value and promptly destroyed. He got his millions, she did well, and the rest of us remain disappointed in the opportunity we missed due to the internal turmoil. (Our competitor went public a few years later for $3 billion.)
As an angel investor, my most frustrating investment was in a father-daughter combination.
The father was a world renowned scientist. He invented a new technology that solved a major industrial problem. But he was the academic type with no interest in leaving his tenured professorship to battle with customers and competitors.
His daughter, however, was the most impressive startup founder I’ve ever met. She had an engineering background and had been a project manager in this space for 10 years. She knew the customers, and they loved her. She had an experienced team she’d previously worked with. Her pitch wowed our group like nobody else ever has. We couldn’t wait to throw money at her.
And then one day, for no reason ever divulged to investors, she was fired from her role as CEO. By her father. He was chairman of the board, and took over the CEO role himself. While keeping his academic position. WTF?
Could he have discovered some malfeasance by the CEO and taken the difficult responsibility as board chairman to fire her despite her being his daughter? Sure, it’s not impossible, but the details I’ve seen point strongly to a complicated intrafamily feud and investors got caught in the middle.
Since then, it’s been a disaster. Another promising investment that despite having a great product, fizzled into failure. Aargh.
What’s the Problem with Husband and Wife Teams?
If you’ve ever worked at an early-stage startup, you know it’s one of the most frustrating, unsettling experiences imaginable. Every day is a struggle. Founder fights are common, and I’d say necessary, as the company iterates toward product-market fit. If you can’t go home to find solace from your spouse, where else can you turn to?
Early employees, who are often close friends, have to be jettisoned when the company makes a pivot and they no longer fit the company’s needs. Founders split when their competing visions become untenable. One of the founders has to be the CEO with responsibility for making final decisions.
Meanwhile, hours are long, travel is frequent, pay is minimal or zero. If both are working at the startup, who’s paying the mortgage? What happens when the company runs out of cash?
The second hardest thing in life is building a healthy, happy marriage. It takes work, takes flexibility, takes care and patience. And sometimes it takes a bit of space so you’re not in each other’s faces 24 hours a day. Sometimes I wonder how many marriages have been destroyed by work from home.
That’s not to say a spousal founding pair can’t succeed. Every personality is different, every marriage unique. What might destroy one marriage might be exactly what another needs.
But company governance is a problem. Two co-founders on the board isn’t great. A husband and wife on the board means there’s no point in having a board at all, especially if together, they own a majority of the shares.
What happens if the marriage does split up? Who stays and who goes? What happens to the shares of the embittered co-founder? Will the key employees remain loyal to the company or their friend in what often becomes a personal fight? Investors need to know.
What To Do if You’re a Husband and Wife Co-Founding Team?
Your wife is a scientist who’s invented a solution to plastics recycling. You’re a sales executive from the plastics industry. You’re the absolute perfect team. Now you have to convince skeptical investors. What should you do?
The worst thing you can possibly do, and what unfortunately, most founders do, is hide the relationship. Investors will find out in diligence, and any attempts to hide the relationship, or ignore it, only loses credibility. We have to wonder what other critical information you’re hiding.
Like any other red flag, it’s best to get it out in the open and address it. Tell investors you understand it’s a concern, but here’s why it shouldn’t be.
Nepotism is fine. Hiring your spouse for an important role is not a problem. The issue is shared responsibility and ownership. Get rid of those and the problem is gone.
50/50 stock ownership is a problem with any founding team; it’s 10x worse with a married or romantically engaged couple. So accept the business relationship will be unequal. The less stock one partner has, the less of a problem the relationship is.
Re-vesting of shares over a standard 4 year period will go a long way to reassuring investors that a romantic split-up won’t doom the company. It will likely be a requirement from investors anyway, so you might as well offer it up as a solution.
Similarly, lines of responsibility have to be clear. Unlike most marriages where both partners have veto rights over every important decision, in a company there is one and only one CEO. Someone is in charge and makes the hard decisions, after consulting the team. This isn’t a marriage, it’s a company. Show you understand the difference.
Like any other red flag, a husband and wife team isn’t a show stopper. Every early stage startup has at least one red flag. The question is how you address it. Instead of hiding it, or ignoring it, show you’ve thought through the complications and have a plan to ensure the success of the business no matter what misfortunes befall you and your beloved.
Katie Deauville, the founder and CEO of the teleportation startup, SüprDüpr, is in a romantic relationship with Satoshi Nakamoto, the lead investor. Does this affect his judgement? Is he covering up the murder of another employee to save his investment or to keep his girlfriend out of jail? Find out in my Silicon Valley thriller, To Kill a Unicorn.
