I recently heard of two instances of particularly alarming investor behavior. In once instance, a founder was promised a salary increase and equity package for years that never came. Then, the same investor shared sensitive personal details with a member of management in an attempt to turn this team member against the founder. In the other instance, an existing company investor was actually working against a company during a fundraise by actively bad mouthing the company I understand when an investor gives their honest opinion to another, but actively bad mouthing is not okay.
With a lot of capital in the startup ecosystem, financing rounds happen at breakneck speeds. Founders and investors enter into long term relationships in a matter of days. This is particularly dangerous, and I have started to hear more and more stories of bad investor/founder relationships. After writing about how to break up with your co-founder, I heard from friends they were interested in hearing more about another common but not discussed topic in startup life: trouble with key investors in your company.
I’ve asked a number of fellow investors and entrepreneurs on what they’ve seen, and this is our common wisdom.
Step 1 to solving these issues is getting a deeper understanding of the root of the conflict. When practicing conflict resolution, I have done a simple exercise with friends that helps to clarify the root of an issue. I asked a friend to represent the other party and explain their position. Then, we switched roles, and I had to explain their stance back to them. Having to defend the position of your adversary is a great way to understand what they care about and can lead to a good solution. Finally, you want to get a sense of the type of problem—is it personal or strategic? Getting a sense of the root of the problem is key to reevaluating your options.
Now, for a few options. I have ranked them from least to most drastic.
- From Harm To Do No Harm: If an investor is truly detrimental to the company, it’s likely they either don’t know it, and may actually believe the opposite. That said they are usually self aware enough to know that the relationship between them and the founder isn’t working. In this case, I’d recommend focusing on shared interests such asthe value of the business. Be upfront about the fact that the relationship isn’t productive for either of you and that it is bringing down the value of the business. It is important here to recognize that it’s more about the relationship than the investor. This will reduce the chance of them personalizing the interaction. Your goal here is to have the investor become more passive than active.
- Neutralize: Investors may not care about their relationship with you, but is likely they care about theirs with their peers. An effective strategy that I have seen is to recruit an intermediary who the problem investor trusts. Often, this person can speak frankly with the investor and make the case that it is in the best interest of the company to move on to other options.
- Appoint an Independent Board Member: Similar to the above strategy, if the conflict is happening at the board level, finding an independent board member that both of you trust can go a long way in solving conflict.
- New Partner, Same Firm: If the investor is part of a larger firm, I have seen entrepreneurs ask for a different partner at the firm be appointed to the board. It is rumored to be what Travis Kalanick did when he asked Matt Cohler to replace Bill Gurley on the Uber board.
- The Buyout: Buying out an investor can be tricky and is likely one of your last options outside of other legal options. I have seen this option work before. An entrepreneur was raising a round of financing and a well-known investor was upset that they paid a higher price on a convertible debt note than previous investors in an earlier tranche.However, five other investors had paid the same price as him. Even so, this investor was livid and threatened to bad mouth the company. This left the founder in a perilous position for any new financings. The founder solved the problem by getting a courageous and bold new investor to buy the existing investor out. In order to pull this off, you will need to find an investor with strong conviction in you and your business and is willing to disregard the opinion of the insider, even if they have more information than they do. These investors are rare.