Unspoken, yet lethal: dysfunctional Co-founders’ relationships

by Yael Daniely, a startup and co-founders psychologist

Many entrepreneurs embark on the journey to build a startup. These partners, or co-founders, share the thrills, excitement, hardships, and struggles through the birth and growth of their creation.

The relationship between these founders often becomes their most intense, important, and close relationship, providing support through the extreme emotional ups and downs and sharing in the business’s successes and failures.

Unfortunately, a significant portion of founders, particularly early-stage, first-time founders, underestimate the importance of relationships in this journey. They fail to invest the necessary effort in selecting the right co-founders and do not exert the attention and effort to manage the relationships carefully and regularly to ensure their success.

Once micro-conflicts and disagreements between co-founders are ignored, escalate, and remain unresolved, they can become more significant issues that create a noticeable gap or “elephant in the room” between them.

This can lead to resentment, mistrust, and disrespect, further deteriorating the relationship between them. Over time, this may negatively impact the quality of the vision and strategy of the company, the level of agreement on the product directions and go-to-market focuses, and lack of alignment on priorities. Ultimately, this results in the founders being unable to secure funding, leading to the company’s demise.

Professor Noam Wasserman wrote in his bestseller The Founder’s Dilemma (Anticipating and Avoiding the Pitfalls That Can Sink a Startup), that 65% of high-potential startups fail due to unresolved tensions and conflicts among co-founders.

The psychological drivers and inhibitors that impact startup success

Between 2019 and 2021, I conducted a study involving in-depth interviews with more than 400 startup founders. They were at different startup life cycle stages and across various verticals and industries.

Following the initial research, I have continued to deepen and enhance the findings through my ongoing work as a co-founders therapist, working with founders in my clinic. This body of work provided a comprehensive examination of the various factors that contribute to conflicts among co-founders and the impact these conflicts have on startup success.

By combining qualitative and quantitative data, this exploration aims to provide a holistic understanding of the visible structural reasons for conflicts and a window into the underlying psychological drivers causing the conflicts. By examining the visible and the underlying factors contributing to co-founders’ conflicts, the study provides insights and recommendations for entrepreneurs to proactively address and manage their partnership and these conflicts to enable business growth and startup scale-up and success.

7 leading visible reasons for co-founders’ conflicts

The study found 7 leading visible reasons for co-founder conflicts. This article explains these seven reasons and some initial thoughts on how to avoid or manage them. My next article will reveal the underlying psychological forces and reasons behind these.

1. Building the company’s hierarchy

The primary reason (25%) is conflict among co-founders on the leadership role, the company’s CEO at the top. The co-founders who started the company together as equal partners and worked extremely hard together find adjusting to the emergence of a hierarchical structure challenging. This fight often results in power (ego) struggles and disagreements to accept roles, responsibilities, and strategic decisions. Resisting to align with the CEO’s priorities and focus ultimately harms the startup.

This involves reporting to a founding CEO, accepting the CEO’s integrative decisions, and final accountability for the company’s growth in front of the board of directors. At the same time, the founding CEO must grow into the role of the company leader and develop the required skills and capabilities.

The CEO must be sensitive to this conflict and create space where the co-founders can collaborate, brainstorm, debate key issues, and make joint decisions about key strategic aspects of the business. The CEO must act out of self-awareness and empathy to engage the co-founders and deal with their resistance. This requires maturity by the co-founders to embrace the duality and complexity of the relationship between them. They need to embrace partnership while accepting the hierarchical structure; be comfortable with being a CTO or CPO who receives directions, priorities, and decisions from the CEO while being partners.

Successful startups have strong founding teams capable of navigating complex relationships with emotional regulation while keeping the company’s best interests in mind.

2. Decision making

Decision-making is the second primary reason for conflict among co-founders (20%). Co-founders struggle to agree on how decisions should be made in their startups. They cannot establish an effective, fast, and collaborative decision-making process, resulting in disagreements, attacking and undermining each other’s decisions.

Many founding teams will take extreme positions in conflicted and split situations, stepping into the “polarities zone.” As they experience the argument and conflict in survival mode and unconsciously take the fight or flight mode: siloed decision-making, controlled and centric processes, reacting in avoidance or via direct fight to diminish the other side’s opinion. They are stuck in the loop and need an external professional expert to help them listen to each other, bridging the “conflict dance” between them.

Moreover, the content of the decisions is often not the true issue. I call it a “hanger” because it’s the visible reason for the conflict, which hides deeper psychological drivers that trigger the dynamic between the founders. The real problem, the essence of the conflict, is a lack of trust and not accepting each other’s expertise, capabilities, and knowledge.

Founding teams should embrace the opportunity to be in dialogue and collaborative thinking because they acknowledge their differences and perceive different perspectives and opinions as leverage, not a threat.

Co-founders that disagree on how to reach an agreement and make the needed decisions to drive the company forward often do the opposite and bring the company to stagnation. This happens due to critical, time-sensitive decisions not being made or as a result of the leaders not speaking in the same voice and spreading conflicting / misaligned directions and messages in the organization, creating tensions between different functions.

At this stage, an intervention led by a professional or by one of the co-founders should facilitate a process to ensure that each co-founder listens to the others and at the same time, strongly feels that his voice is heard and appreciated. They then should agree upon an organizing framework and mechanism for decision-making. Many models delineate between decisions that fall under a specific functional area and can be decided by a specific founder and strategic or principle decisions that need to be made together. Other models define when members have a veto right over decisions, whether this is exercised or not. These frameworks should consider all parameters: role and responsibilities, expertise, perspectives, market, and customer data.

3 . Divergent views

The third root cause of conflicts among co-founders is their divergent views on the product or business strategy and priorities. This was found in 15% of cases. This often stems from differences in their motivations, beliefs, and perceptions of the startup’s future vision and strategy.

Co-founders constantly debate significant business questions such as Exit or IPO strategy, Product market fit, Go-to-market strategy, and smaller weekly priorities in the product roadmap and R&D plan. In such conflicts and disagreements, co-founders tend to approach discussions with a personal motivation to win the debate rather than engage in quality dialogue. They rely on their intuitions, self-perceptions, and agendas rather than considering data, signals from the market, and user or customer requests. They become enamored with their ideas and seek hypotheses to strengthen and prove them rather than engaging in inside-out critical thinking.

The product roadmap and prioritized plan are often a central magnet for tension between the co-founders. The Product is a critical junction for startup growth. Working smoothly requires healthy collaboration and alignment between Sales, R&D, and Product units. Navigating between ad-hoc requests, tech debt, new infrastructure for scalability, or new features for growth and being able to find a way of balance is not an easy task. Many changes, surprises, disappointments, stress, and pressure make handling difficult. I often see tension and disagreement spreading beyond the co-founders to the management level and even the different departments, impacting the company’s velocity, time-to-market, and, eventually, revenue.

4 . One of the co-founders is not scalable

The fourth, and often one of the most challenging and painful reasons for founding team tension, occurs when one of the co-founders is not scalable and doesn’t grow rapidly to meet the business requirements. This occurs in approximately 15% of cases. This usually happens as the company scales and the business becomes more complex with higher expectations from employees, customers and investors. In this case, one of the co-founders or the founding CEO lacks the necessary skills, performance, and capabilities to lead the company forward in a senior leadership role effectively.

As a result, it may be inevitable to bring in a new leader with proven skills to drive the company forward and replace the unscalable founder.

Here we experience the founder’s dilemma of being a king or rich person – power vs. success/money. Does the founder want to keep the leadership position driven by status and control or let go based on self-awareness and let someone else take the company to a higher level?

In many cases, the unscalable founder may refuse to accept the reality of the situation, feeling humiliated and excluded, leading to further complications and resistance.

This often happens when feedback is not provided to the unscalable founder and there is not enough genuine conversation among the co-founders. Avoiding uncomfortable conversations because of fear of hurting/offending the other partner can exacerbate the situation and make resolving it more challenging. This can result in pain and surprise for all parties, particularly when the message involves questioning the founder’s ability to stay in a leadership role.

I worked with several founding teams that couldn’t manage this conflict by themselves and involved the board behind the back of the unscalable founder. This was perceived as a betrayal and made it almost impossible to maintain the partnership through trustworthy dialogue, finally leading to the ‘co-founders’ divorce,” a situation that I will explain further at the end of this article.

When the situation is managed with emotional intelligence, quality dialogue, and transparency, the unscalable founder will likely stay in the company in a different role that maximizes his/her talent and potential without feeling demoted or fired.

5. Equity split and finance

The fifth reason for co-founder conflict is equity split and financial management (10%). For a couple of reasons, deciding how to allocate equity (at the founders’ agreement) significantly contributes to the founders’ conflict.

Firstly, dissatisfaction with the equity split among founders tends to magnify by a factor of 2.5 as the startup grows and matures, leading to an uncomfortable discussion that many founders don’t know how to handle.

Secondly, unequal equity distribution can lead to class divisions in daily life and create a sense of hierarchy among the founders, where those with more equity feel they have greater value and decision-making power. In comparison, those with less equity are seen as having weaker and less valuable ideas.

Experienced founders and investors recommend that early-stage founders split the equity equally to avoid fights over informal leveling and personal hierarchy. Still, this recommendation can’t prevent this subject from being a key reason for the co-founders’ conflict. We each have our relationship with money. Conversations surrounding money, salary, funding, and budget can often be influenced by people’s deep-seated feelings, memories, and personal experiences with money from their upbringing and families.

What we hear and experience with our parents and home impacts and shape our beliefs and perceptions on money: “Money is dirty”; “Money destroys families and friendships”; “Never let anyone decide and control your money”; “Save your money, don’t spend it on luxury” and more.

These different subconscious triggers and memories rooted in each founder’s belief system can potentially lead to conflicts during discussions around money. In this case, co-founders get into a negative, conflicted cycle. For example, one is perceived as cheap, and the second is perceived as a spender, or in another example, one is categorized as wanting to get preferential treatment, and the second feels that equal treatment should prevail.

Approaching dialogues and decision-making processes on financial topics with a self-awareness of their perceptions and patterns towards money can make the outcome more effective for the founders. By acknowledging and understanding their own biases and triggers, and sensitivity to others, founders can communicate more clearly and make decisions that are in the company’s best interest.

After several years during which the startup ecosystem was blooming, the current global business reality puts many founding teams in a real challenge to raise funding and scale their businesses. Lack of funding, decisions around layoffs, calculation of burn rate, and counting the # of months of runway pushes many co-founders to tough conversations and decisions that need to be managed carefully and with a high level of interpersonal communication and awareness, and accountability to the business status and implications.

6. Mismatched personalities

The sixth reason for co-founder conflict is interpersonal misfits or mismatched personalities (10% of cases). This factor relates to instances where co-founders don’t share the same values, motivations, and drivers. It also occurs when the co-founders don’t share the same level of commitment to the company or do not meet each other’s personal and behavioral expectations.

This usually transpires because most founders search for and match their co-founders only based on professional skills and experience without deeply exploring their relational resume.

A relational resume is the history of our relationships, our dynamics in relationships, and how we interact and communicate with others. In co-founder matching, it is essential to clearly understand your co-founder’s communication style, approach to trusting others, work dynamics, conflict resolution skills, ability to handle stress and uncertainty, and self-regulation in difficult emotional situations involving disagreements and disagreements disappointments. Furthermore, it is crucial to embed the psychological contract elements in the founders’ agreement once the company establishes.

The mismatch of personalities doesn’t occur only with early-stage co-founders but also between growth and scale-up founders. Imagine three co-founders that start their company when they are in their late 20s.; CEO, CTO & COO who were great friends from the university, where they met, bonded, and succeeded in graduating with great results based on their complementary skills in learning, working together, and having fun.

They built their startup together, dedicated their life to their joint “baby,” and drove the business to its B round. A few months after the round’s closing, one of them celebrated the birth of his first son, a milestone in his personal life, becoming a dad. Unfortunately, things start to shake with his co-founders: the need to be at home early, difficulty traveling abroad, and the commitment to his wife and baby causes conflict with his commitment to their joint venture. Things escalate, and tension arises due to blame, guilt, and measurement of who is doing more.

The co-founders experience burnout, personal changes, health issues, kids, divorce, financial problems, marriage, mental issues, and more throughout the startup’s lifecycle. These events impact the psychological contract between the co-founders that need to be discussed and reframed over and over as time goes by.

A negative cycle or negative dance between co-founders occurs when the interpersonal dynamic is stuck in a loop. The default behaviors trigger each other and echos into escalations. For example, a CEO whose natural, preferred work method is to process information, consider options and make decisions on his own, with few interactions or consultations with others.

This triggers his CTO co-founder, who feels left out and ignored. This feeling that she was not consulted on important decisions caused the CTO to speak out critically and vocally. The vocal criticism by the CTO causes the CEO to close off even more and avoid communication and collaboration. And so, the negative cycle escalates.

In situations of interpersonal misfit, we will observe tense interaction, sometimes toxic, between the co-founders that will infiltrate the leadership team and the company culture, leading to an unhealthy and unproductive environment and potential business failure.

7. Relocation

The seventh cause of co-founder conflict is the relocation of one of the founders. (5% of cases) Relocation abroad usually represents growth, expansion, and readiness to scale. Expansion abroad, across regions, and into new geographies is a very meaningful and exciting event in the startup’s lifecycle. It means there is growth in the number of clients in revenue. Building a new site and expanding the global ecosystem is thrilling.

We all know that long-distance relationships can be challenging to manage. The physical distance, compounded by the time zone differences, makes it much more difficult to stay connected and maintain strong alignment and reliable communication.

Minor misunderstandings or disagreements that could be resolved easily during lunch or coffee in the office may become larger issues. When interaction is limited to digital channels, it can be easier to misinterpret each other’s intentions or jump to conclusions and develop the wrong assumptions about each other.

When one of the co-founders relocates abroad, it can alter the psychological contract between them, necessitating the creation of new communication norms and working methods. It’s crucial to recognize and appreciate that maintaining a strong relationship will require twice the effort, which will contribute to the company’s strength.

Closing thoughts

This first research combines qualitative data and statistics and defines the seven key reasons for the co-founders’ conflicts. Each of these conflicts can be addressed and resolved before becoming a huge unmitigated risk for the relationships and the continuity of the startup. Most founders, unfortunately, don’t have the awareness or the openness to take care of their partnership once they start experiencing tension, vocal arguments, or silent treatment.

This research and article are meant to help founders of all genders, ages, cultures and industries (because there are no differences) to make sure they invest in this growth engine and take care of their relationship with the same priority and attention that they take care of their business strategy. To ensure they embrace conflicts and disagreements as a source for brainstorming and collaborative thinking – they must learn how to do it right.

As I stated in the opening of this article, 65% of startup failures are due to toxic co-founder relationships and end with co-founder “divorce.” 10 percent of co-founders end their relationship within a year of starting a business, and an additional 45 percent breakup within four years.

The co-founders’ divorce is similar to a couple deciding to break up their marriage. It has similar emotional, financial, and mental implications. And just like couples in a divorce process, co-founders must also consider how to keep their “baby” healthy and cared for, ensuring their split won’t destroy the startup’s potential to stay alive, grow, and flourish.

As a co-founder therapist who works with many founding teams, I have experienced the depth and magnitude of emotion when conflicts evolve. Co-founders find it inevitable to break up their agreement and, in this process, kill their startup: anger, frustration, envy, personality attack, blame, rage and fear, and loss of many elements in each identity are manifested and leading to failure of their joint venture.

My next article will explain the hidden psychological reasons for the co-founders’ fight. Stay tuned.

Yael Daniely is a startup and co-founders’ psychologist. Organizational psychologist, group analyst and facilitator, executive coach, and couple therapist.