Hot Seat

Chapter 1. The Virtues of an Early Bankruptcy

One of the ironies of early-stage startups is that every ounce of the founders’ energy is spent on keeping them from collapsing, even as they flirt with disaster in every way imaginable. Perversely, though, the best thing that can happen to most startups is to collapse in disaster, quickly. That’s because most startups instead collapse in disaster slowly, which is the only worse alternative.

This was the most challenging chapter to write. I have heard countless heartbreaking stories. In each case, an honest and early conversation between founders could have avoided a world of hurt.

But I can’t tell you most of them.

I talked to many founders about their painful founder breakups, but almost all of them asked me not to include them in the book. The shame of the founder implosion is a terrible stigma. Founder conflict happens constantly, but it’s a silent killer. Everyone involved feels terrible, and nobody wants to talk about it.

Well, almost nobody.

 Elissa Shevinsky is the cofounder, CEO, and self-described Ladyboss of Glimpse. Glimpse is the grown-up Snapchat: a mobile application that takes ephemeral messaging seriously. Glimpse’s CEO and CTO, at the time of this writing, are a compelling team that have been incredibly effective in growing their company. But that’s a fairly recent development.

For Elissa, the current state of affairs is the culmination of three years of pivoting, failed cofounder relationships, and general chaos. Her first company was Menagerie Networks. She cofounded the company with a Yale data scientist to build scalable algorithm-based social apps. She quickly realized, though, that his passion was more around music than the startup. Their personalities clashed. She spent more time on the project and was frustrated that he was spending 40 hours a week on his music. They got fed up with each other and decided to shut down the company; he was nominated for a Grammy less than a year later.

For her next company, Elissa decided to seek out a Silicon Valley stereotype as CTO and cofounder. She found one. He had gone through the Y Combinator program with a company that ultimately failed. He then turned down a highly coveted job with Google’s top-secret “Google X” division, in charge of futuristic special projects. He was trying his hand at consulting when they met. She convinced him to abandon consulting to cofound MakeOut Labs, a dating startup focusing on Jewish singles. She found that his Valley network was a shot of adrenaline for her and her company, getting her introductions and connections that she couldn’t manage with her first company. But this founder relationship sputtered as well. Her CTO seemed lost and unhappy. He wanted to build a startup, but he wasn’t passionate about this startup. He eventually told her, “I want to find something I’m as passionate about as you are about Jewish dating.”

And then her perfect cofounder came along. He was the CTO of a widely read news site. He was an advisor to Elissa’s company, and she found his advice invaluable. She also genuinely enjoyed working with him: he worked hard to help her company, treated her with respect, and genuinely believed in her and her vision from the very beginning.

It was the South by Southwest festival, and things were strange from the very beginning. Her soon-to-be-ex cofounder backed out of attending just before the festival. They had planned to stay with her cofounder’s friend. With her cofounder gone, she was left staying alone, with a stranger. The stranger turned out to be a creep. Her savior was her advisor, the CTO, who saved the day by finding her a place to crash. 

Most of the business at SXSW happens at the parties, and they made a great team. Elissa used her founder network to get her advisor into one set of events, and her advisor used his press credentials to get Elissa into others.

It was as they sat down in an anonymous bar in downtown Austin, TX, drinking bourbon, waiting for the Y Combinator party to start, that they decided they had to work together. They had been talking about secure messaging as a feature of MakeOut Labs for a year; they finally realized that the two of them could just go and do it. It would be a standalone, highly secure app that would let adults exchange messages and pictures without leaving any digital trail, somewhere between Snapchat and Pretty Good Privacy (PGP). On the spot, they committed to building it as a side project for both of them. They called it Glimpse. 

As the project moved forward, both of them came to believe that Glimpse deserved to be something bigger. After her cofounder dropped the bomb that he wanted out of MakeOut Labs, Elissa decided to move to the new project full time. She talked to her investors, got them on board, and made the change. Her former advisor, now cofounder, said he would leave his CTO job to join Glimpse full time soon; she just didn’t know when he would make the jump.

She did, however, know about his Twitter feed.¹ He posted language that had no place in polite company, going so far as to crack jokes with racial slurs as the punchline. I’d stumbled on his writing before meeting Elissa and concluded that he was a colossal jerk.

Elissa knew about his Twitter outbursts, but explained, “I’d seen a lot of strange things during my time in Silicon Valley, and this was not the strangest. Women who want to work in tech don’t have a lot of room to take issue with misogyny—and I’d been experiencing far worse sexism and misogyny on a regular basis for years. I was aware that his tweets were unusual, but he was actually one of the least sexist people I interacted with.”

She knew him from his actions, not his words, and decided the most important thing was that the Twitter posts were not hurting his ability to function: he was, after all, the CTO of a successful publication. His coworkers followed his Twitter feed. He ran a large technical meetup group. The industry didn’t seem to care, and his kind and considerate actions in person seemed far removed from his online vitriol.

There are many problems in starting a company, and she decided not to worry about that one. In fact, her main worry was when her cofounder would finally leave his executive job to join Glimpse. In the wake of the Snowden revelations, interest in the company started taking off. It was consuming Elissa’s every waking moment, and she needed a full-time CTO. They discussed and set a tentative date, but Elissa wished it would be sooner.

Then some genie with a nasty sense of humor decided to grant her wish.

TechCrunch Disrupt is one of the tech startup world’s biggest conferences. It’s usually accompanied by a hackathon where teams compete to build a product in 24 hours, then share it with the attendees. In 2013, the first presenter was called Titstare. It was as juvenile and inappropriate as the name implied.

When Elissa saw the news splash across the tech press, she was staying in a friend’s apartment in San Francisco. And unsurprisingly, her cofounder was tweeting about it.

Even as she’d overlooked his tweets before, this latest debacle left her feeling like something had changed. She didn’t want to ignore what had happened and get back to work. Something had meaningfully gone wrong, and her cofounder was in the middle of it.

Then he was fired.²

As much as she wanted him to leave, this was not how she wanted it to happen. Her cofounder had lost his job in the most spectacular, embarrassing way possible. It made him and Glimpse look terrible. His tweeting had gone from background noise to an existential crisis for her company.

In the new context of Titstare, she decided she had to leave Glimpse, the company she had founded. Her cofounder was in New York; she got him on the phone from her friend’s apartment in San Francisco. She told him she was going to leave the company. He told her that he was radioactive, and he didn’t blame her.

She felt terrible.

Even in the midst of this disaster, their friendship was intact—they spoke regularly, she offered advice, and the two discussed how the business could recover. Elissa did some consulting, but could never fully disengage from the company she’d started—and never really wanted to. She had long discussions with her cofounder, who desperately wanted her back at the company where he was now full-time interim CEO. 

Three things stood out in her memory.

First, her cofounder worked like mad to close a small financing round, convincing friends and family in his network to put in enough money to get Glimpse out the door. He put his family on the line, and that meant a lot.

Second, he committed to following Elissa’s direction about publicity absolutely. No more Twitter. No more muck-flinging. His job as CTO was to be the CTO and to avoid distracting people from the company and its face, Elissa. If she would come back as CEO—as she put it, “Ladyboss”—he would be the loyal CTO.

But the last moment came on a long, cross-country flight. Both of them had attended Startup School, sponsored by Y Combinator. Both of them were loopy on the aftereffects of the final Mark Zuckerberg talks, which had left them inspired and euphoric, and the half an Ambien, which had left them sleepy.

As the plane approached New York, Elissa woke up and wandered to the front, where she found her cofounder sitting quietly with his iPad. He looked up and said, “I wrote something.” It was an apology.

It took many months to put things back together. They both got back to work, his Twitter account switched from public to private, and Glimpse started taking off. But the company was very nearly destroyed because two cofounders who had deep respect and friendship for each other avoided one area of conflict until it was too late.

While the details are rarely as lurid and public as in this case, these kinds of cofounder disasters are the rule, not the exception—you just don’t hear about them very often.

The other CEO brave enough to have her story told was Sandi Lin. Sandi’s company, Skilljar, was one week into the Techstars Seattle 2013 class when she got a call from out of the blue. Like Elissa, she’d had some concerns about her cofounder but set them aside so they could get to the hard work of building the product. It was the night before a crucial founders retreat when he told her: Skilljar’s technical cofounder was going to leave the company. Not to worry though, he said. He wouldn’t tell anyone and would finish the program so that he could put Techstars on his résumé.

Sandi called up some of her advisors to talk it through. When she reached me, she told me she felt like she had been hit by a ton of bricks. Not only was her team falling apart, but she was in the middle of contemplating a major pivot from Skilljar’s original business strategy. One week into the elite incubator, she felt like she was already a failure at both team and product. She confided that she felt she was letting down her team, the Techstars program, and everyone who believed in her.

Knowing that she had to make a decision quickly or risk a public eruption during the Techstars retreat, Sandi did what she needed to do: sought advice, set aside her fears, and worked through the question of what would be the best outcome for the company.

Sandi sat down with her cofounder the next day. She let him know that while she appreciated his offer to stay through the rest of the program, the company was better off with a team that was fully committed. By noon the next day, Skilljar was down from three cofounders to two: a designer and a CEO. They did not have anyone who wrote code professionally. It was not at all clear that she had made the right decision.

But Sandi had made the call, and she tore back into recruiting with a vengeance. She went back to a former colleague, a senior technologist at Amazon who had been her first choice for a CTO/cofounder but who wasn’t quite ready to make the jump. This time she sold him. Less than a month later, he was contributing to the team. By the end of the program, Skilljar had launched, was booking revenue, and had raised a seven-figure investment round from an outstanding group of investors.

Was Sandi an outlier? Actually, out of the ten other companies in Sandi’s Techstars class, six of them lost cofounders. That percentage is typical for early-stage companies. The repercussions ranged from failed fundraising rounds to bankruptcy. Sandi was simply the first to deal with the problem and, as a result, the first to solve it.

The stakes get higher at every stage of a startup’s life. Founder difficulties never go away. But if you avoid them, you’re taking a gamble: that the problems will be easier to solve later than they are right now. And not only is this gamble usually wrong, but the stakes go way, way up.

The early implosion of a startup is disappointing and frustrating, yet still far, far better than having the same implosion occur later. Early failures kill seed capital, but there are no investors caught up in the collateral damage.³ They may leave the founders floundering, but that’s better than leaving a whole team of employees out of work, wondering why their efforts were for naught. They may lay waste to months of the founders’ lives, but at least they don’t reduce dozens of person-years of effort to bitter feelings and an abandoned code base.

This is why there’s a terrible tension between keeping the company alive and making sure that a death—if inevitable—is quick.

This thought was rattling around my brain a few years ago when I was asked to give a talk at a continuing education series for attorneys. I requested to see the class list. Ontela was working desperately to close a deal with T-Mobile at the time, and I saw one of T-Mobile’s lead attorneys was attending. I figured I could do worse than teaching a class to the lawyer I was negotiating with, so I decided to do it.

I asked the event organizers what they wanted me to talk about, and they helpfully replied, “Startups.” I pressed for more detail. “You mean like generic startup experiences? Legal issues startups face? Advice for attorneys?”

“Yes, exactly like that!” came the enthusiastic but unhelpful reply.

With that direction in hand, I started musing on the early days of Ontela, back to the earliest days of Charles and me brainstorming in my dimly lit basement. Charles and I covered a lot of ground—generating a dozen ideas an hour, each better than the last, on everything from business concepts to core values to better ways to file expense accounts. No matter what came up we either agreed, or quickly resolved our differences. Life was good. We split the equity 50/50.⁴

It wasn’t until six months later, when we’d quit our jobs and committed our savings, that we nearly destroyed the company with our first real argument.⁵

The advice I gave the lawyers was this: “The most common cause of startup death is founders who can’t resolve their differences. Nobody hears about it; they just pack up and go home before the company ever had a chance. If there’s one thing you can do to help your clients—really help them—it’s to get the hard questions on the table early and help them work through the answers.”⁶

The painful tension of the founding era of a startup is this: on the one hand, you must do everything you can to keep your company alive. On the other hand, if it’s doomed to die, you need to figure that out as quickly as possible so you can move on.

The rest of Part I will be about the problems that will destroy your company—the cancers lurking deep inside that could demolish what you’re working to build. It will also give you the prescription for the radical decisions and interventions that you, as the CEO, must make to excise the malignancy. They may accelerate your company’s demise, but with luck and skill, operating quickly will clear the way for a long and successful business endeavor.

¹ I’ve omitted some details to keep the focus of this story on Elissa rather than this character’s shocking behavior–if you don’t mind some abhorrent language, more detail is available online.

² Some sources indicate he was forced to resign rather than fired–it’s unclear exactly how he left, but it’s clear it wasn’t his idea.

³ Investors do expect to lose their money on many startups, but the more often it happens, the less money is available to fund new companies.

⁴ More on equity splits, and why this was not a good idea, in Chapter 4.

⁵ An argument about division of responsibility—see Chapter 33 for the whole story.

⁶ The T-Mobile lawyer came up afterward and raved about the talk. I don’t know if it helped, but we closed the deal a few months later.