Before raising venture capital, co-founders should agree — in writing — on at least three things: how equity is split and why, how it vests over time, and how major decisions get made when they disagree. Noam Wasserman’s research at Harvard Business School found that 65% of high-potential startups fail because of co-founder conflict — not product, not market, not funding — and most of that conflict traces back to questions that were never formally answered. Startup and venture capital attorney Jake Denham, writing at the Denham Dispatch, argues that a term sheet doesn’t create these problems; it reveals the ones that were already there.
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I. The Reframe
Raising money doesn’t create co-founder problems.
Rather, it shines a light on unfinished business between them. The pressure of fundraising exposes issues that were waiting around the corner.
II. The Scene
Two founders sit across from an investor.
The investor is walking through the term sheet he just put on the table. He looks up and asks a routine question.
“What are your equity splits?”
Both founders answer at the same time. One says 50/50. The other says 60/40.
Neither had written it down.
Negotiations between the founders start right there.
The investor thinks, “I don’t have time for this,” and walks away.
That wasn’t a fundraising failure. It was an unfinished conversation, happening at the worst possible time.
III. Why the Term Sheet Is a Deadline, Not a Starting Line
The term sheet doesn’t mark the start of the hard part of building a company and raising money. It shows the hard step in the process that many founders never address.
When capital arrives, every avoided question surfaces at once: equity, vesting, control, board composition. These are not “deal with them later” issues. They’re foundational questions, and most people intuitively know this. Founders often postpone discussing them out of discomfort, not because they’re unimportant.
Investors also know that these conversations get skipped. When they ask a routine question about your cap table (the spreadsheet showing who owns what percentage of the company), they aren’t just collecting information; they’re also gathering below-the-surface data. They’re watching for alignment between the Founders. Do the two or more people across from them sound like they’ve already had this conversation, or is the investor the first person in the room to force it? [For more on how to evaluate and work with the person sitting on your side of that table, see Finding Counsel.]
There is an obvious tell. Co-founders who start negotiating with each other, in front of someone who does this for a living, have revealed themselves.
What follows is predictable. The deal changes. The investor walks. The co-founder relationship fractures. Often in that order.
The biggest threat to the company might not be outside the room, but rather sitting next to you.
The good news? Almost all of it is avoidable.
Here are a few of the core conversations every founding team needs to have, and what should be on the table for each.
IV. The Equity Conversation
Two of the most important equity topics are: how you split the equity, and how vesting will work.
Most co-founders know their split. Fewer can articulate the reasoning behind it. Being able to discuss this reasoning is a huge green flag for investors.
The number matters, but the reasoning matters more. Investors want to hear the structure behind the percentage: What was contributed, who took what risk, what roles and commitments persist going forward. If you can’t explain the logic, you’re not ready to raise.
In practice, it signals a reluctance to address the hard question: Who is doing what, and what is that worth?
The point is to have clarity versus just “keeping the peace.”
Vesting. Vesting is the mechanism by which equity is earned over time rather than granted outright on day one. The standard is four years with a one-year cliff, which aligns the co-founder’s and the company’s incentives. If a co-founder leaves early, they shouldn’t take a disproportionate share.
If an investor asks about vesting and you cannot articulate your schedule or why you don’t have it, it signals that you haven’t thought through what happens when plans change.
Equity feels easy until money shows up.
V. The Control Conversation
Control issues are deferred more often than equity splits, and carry a much higher legal price when mishandled. [The most expensive money a founder ever takes almost never looks expensive on the term sheet — it shows up later in the form of control provisions. More on that in The Most Expensive Money Doesn’t Look Expensive.]
Three of the most important control topics: how you break ties, how your board is composed, and the degree of control investors have.
Control is not just voting rights. It’s the system of decision-making. Who decides what, what thresholds trigger consent, and who holds a veto? These are questions of power, not just policy and procedure.
Tie-breaking and thresholds. For two founders: how do you break a deadlock? For three or more: what percentage moves a major decision? Is there a veto? These start as alignment issues and can later become messy legal ones. Address them before they’re written into the company’s operating system.
Board composition. Who do you want at the table, and why? Technical expertise, operator experience, capital access? Investors will have opinions. You want yours formed before that conversation starts. A well-constructed board accelerates good companies and drags bad ones.
Investor control provisions. Protective provisions and consent rights (rights that let investors block certain company decisions even without majority ownership), along with board seats, all get negotiated. Knowing your position before the negotiation starts is the difference between negotiating from strength and already starting at a disadvantage.
Aligned co-founders are a positive signal. Disorganized teams become a red flag that investors will notice.
VI. A Note to Solo Founders
No co-founder doesn’t mean no alignment conversation. It means the conversation happens with yourself. The answers still need to be ready before you walk into the room.
The investor is evaluating how you think, not just what you’ve built. Solo founders who have worked through these questions in advance stand out in the room. They aren’t reacting. They’re deciding.
Again, in the room, you want to decide rather than react.
VII. The Skeptic’s Argument
Here’s a common objection I hear: founder conflict isn’t a sign of a failed setup. It’s inevitable. Interests diverge as companies scale. Roles shift. Seed-stage alignments become Series A battle-lines. Skeptics say that you can’t pre-conversation your way out of human nature.
That argument is right. It’s just not the argument being made here.
Structural conflict under pressure is one thing. Discovering you disagree on your own equity split only after a term sheet arrives is another.
The first is part of running a new venture. The second is a choice.
Research on preventative founder agreements consistently shows that putting the structure in writing meaningfully reduces the risk of the worst co-founder disputes. Not eliminate — reduce. That’s not a guarantee, but it is an edge in a game with a high failure rate.
VIII. When to Have These Conversations
Simply: before things go badly.
Founders avoid these conversations because they feel premature, or uncomfortable, or like the kind of thing you shouldn’t have to say out loud when everyone still likes each other. That’s precisely when to have them. Hard conversations are easier when the people in them are happy.
This is founder work, not just legal work. It shapes everything, from how the legal work unfolds to ultimately, how your company is built and owned.
The Denham Dispatch covers the structural decisions underneath venture fundraising — the ones that don’t show up on a pitch deck but shape the outcome anyway. If that’s useful, subscribe.
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