Monthly Archives: December 2010

Startup thought No. 124: How to divide the cadaver

How do you a startup has died (at least one that is pre-funding)? When the co-founders begin to argue about how to divide the assets of the once promising venture. It amuses me to see how vigorously they fight over the cadaver. If they invested as much passion in actually executing on their vision as they have invested on the backend I wonder what might have happened. Of course this isn’t always the case. Sometimes, say for example in the case of Facebook, one of the co-founders continues to invest in the vision and eventually it paid off for him (and everyone else).

In most cases, however, entrepreneurs are not willing to keep working on their startup given the ‘contingent liability’ that their co-founders represent – i.e. “why should I do all of the work and let my former co-founders get rich?” Of course, like Mark Zuckerberg, there are some developers who don’t even realize sort of risk they are taking. In Mark’s case it didn’t matter because there were billions to spread around. But for most developers who ‘take’ the code they developed at their former startup and use it are setting themselves up for trouble. Sometimes their former co-founders will take immediate action and shut down the developer who has misappropriated their assets. In these cases no one wins because the assets are likely worthless and the potential litigants are broke. In other cases former co-founders will sit quietly on the sidelines and watch their former co-founder build value. They will show up just before a funding event or exit event forcing a settlement. The sad truth is that most of these ‘re-starts’ fail. Without any opposition the original developer will likely lose interest and at the end of the day he has wasted his time for a pay off that he would have had to share anyway.

So to answer the original question, “How do you divide the cadaver?” My simple advice is to NOT divide the cadaver – everyone should move on together or not at all. Of course my advice would be completely different if you have received outside funding – that is what vesting and buy-sell agreements are for.