Failing Upward #1: How the wrong relationships almost sunk this founder’s company

Keyvan Firouzi, 

CFA, Director, Valuation Services

Welcome to our new interview series, Failing Upward! We’ll be speaking to experienced startup founders about the lessons they’ve learned along their entrepreneurial journeys, the mistakes they’ve made, and the things they’d do differently if they could start over.

This week, we spoke to a founder about a legal headache he and his co-founder faced when they were finalizing an acquisition. Some identifying details (including the founder's name) have been changed to protect the people involved. Note also that this interview has been edited for length and clarity.

Keyvan Firouzi: Let’s pretend you were talking to yourself from four or five years ago. What would you say?

Anthony Roberts: Well, the number one mistake we made, which is a mistake that so many startups make, was building a product because it’s a cool idea, and not building a product because there’s a certain business case behind it. Our product, Façade, was in essence very similar to Pinterest. But, just like Pinterest, it didn’t make any money for years. It’s a very long shot to build a company that doesn’t make any money in the beginning and then just kinda go like, “We’re just gonna build an audience and then monetize it afterward.”

So that was mistake number one. If I was ever to start a company again, I would not do that because it’s just very hard to convince investors to get involved, even though I’m very convinced of the actual business case behind our company—that’s actually still what I’m working on today, five years later.

KF: Cool. So while you were working on it at first, did you guys at any point say, “Okay, let’s create a company,” or was it mostly still just a project?

AR: It was a project in the beginning, and we worked on the Beta for about a year. But even before that, when this was just an idea, we had the ambition to turn it into a company. Otherwise we wouldn’t have started it. But neither of us really had an architecture background, so we felt we were missing a little bit, which led us to the second mistake which was involving two other people.

KF: Interesting. What went wrong with involving other people?

AR: So, a colleague of Thomas, my co-founder, introduced us to two friends of his who were also thinking about doing something in the architecture space. When we started talking to them, we learned that one of them was an architect himself, as was his mother, while the other one was in marketing. So we thought, “Oh yeah, this makes total sense! I have my background in design, Thomas is the software engineer; we can build the product, while the architecture world person can be the liaison with the architecture world, and the marketing person can do marketing and maybe operations.”

KF: On paper, you guys sound like a good team.

AR: Honestly, it could’ve been a great team. But at this point our product didn’t even have a name yet—it had no name, no design, no code. It was just an idea in our heads that wasn’t even fully developed yet. So in the next seven months we had exactly four meetings. But in those meetings, most of our time ended up being spent fantasizing about all the features we could build. Once you start thinking about all the things you can do, it’s very exciting to think about the infinite myriad of things you can do next. But it’s completely pointless if you don’t even have a prototype. Anyhow.

KF: Right, you guys were thinking what would happen if you were super scale with all these people and all these architects and ideas…

AR: Exactly. But you gotta learn how to walk before you fantasize about your New York marathon. You have to start with the very, very core. What is the central idea, and how will that translate into an MVP that you can hack out in a month or two? Just create a proof of concept, see how people react, and take it from there. Until you have that, all the rest is completely irrelevant.

KF: But this was 2010; nobody was talking about MVPs.

AR: Maybe not with that exact term, but when you start a project like that, it’s obvious you have to start with something. Something simple. By the end of these seven months, I had just started the design, and Thomas had begun setting up the database and that kinda stuff. We were still incredibly far from actually creating a business around the product, so we decided to cut ties with the two other guys, but when we broke the news to them they were pretty upset—understandably! They hadn’t contributed anything substantial at this point, but they had invested some personal time. And because we felt bad and were way too kind, we proposed to pay them $7,000 each for good measure.

In hindsight, that was just really, really naive of us. Then it was silence for two weeks until eventually we get an email. I didn’t know, but one of their brothers was a lawyer, and that email was suspiciously lawyer-esque. It basically stated, “We own 50% of everything you do going forward.”

So we started going back and forth, and somehow they ended up demanding a convertible note of $50,000. On a company that didn’t exist yet, a product that hadn’t been built yet, to which they had contributed, literally, nothing. It was really all kind of absurd.

KF: Had you guys actually created a company at this point, or is it just you guys talking and it’s just a project?

AR: No. Thomas and I were not really in a rush to set up the company, but they were really pushing to set up this company, so we were like, “Fine.” and we gave them green light that they could set up this company. And so they set up Façade LLC.

Later we learned that an LLC is not at all the right structure for a startup like what we were doing, so it was already a mistake on their part, but anyhow, they claimed Façade LLC under one of their names. But the day that we were supposed to meet to go over the paperwork and get our signatures on it, ended up being the day that we told them we wanted to break up. So we never really touched that company. Our names weren’t on it.

We thought we were fine. We talked to some lawyers, and they said more or less, “You’re probably fine, don’t worry too much about it.” We owned the trademark, and we had the domain name, so when they were holding on to their ludicrous demands, we just walked away and forgot about them.

KF: So let’s fast forward a couple years.

AR: Okay—it’s early 2015, so four years later. We were talking to this company that wanted to acquire us, and it was a very, very nice opportunity. We were going through due diligence and everything was going real smooth and fast. But then there was this one question at the very end of the diligence, asking: “Is there anyone who can claim copyright ownership over any of your product or code?” And we were like, “Oh… yeah there’s this little situation but nothing to worry about.” We hadn’t talked to those guys for a really long time—they were just a vague memory.

So I sent our email correspondence with the two guys over to the legal team of the company we were talking to, and it took them three months to go over all of it. They came back with a report that basically said, “We cannot acquire your company until you have settled with these guys.”

So we had to do the dreadful thing of getting back in touch with them. When we met, I was very careful not to lie to them, but of course we didn’t tell them about the acquisition. We just told them the rest of the truth, that we were dead broke and trying to raise money, and this situation was keeping us from getting further funding. We had raised some money from friends and family but that was already long gone; I was living behind a curtain in a tiny apartment with a bunch of roommates. But Thomas was financially more stable, so I said “Listen, we can give you $10,000 of our personal cash. That’s really all we have, take it or leave it, but if we go under you get nothing.” And they’re like, “Fine: $15,000,” and we reluctantly agreed.

So we go back to our acquirer, proud and happy as a clam that we reached an agreement. That’s when I learned—I know so much more about the law now—that not only can’t you lie, you also have to tell the full truth… Because if I didn’t tell them about the potential acquisition that was on the table, they could later refute this contract under willful deceit.

KF: Right.

AR: Another few miserable months had gone by by the time I got back to them and explained that the situation had changed. “Actually, there’s an acquisition offer on the table, so we need you to sign these papers so we can sell the company.” And their reply was, “we want 50%.” So they went from $50,000 to 50%. Just like that. That’s the point where we got a lawyer. Never in my life have I ever been so upset. I was in a really miserable financial position personally and we were up against the wall with the company. We had this really nice solution to all of our problems, and we were just completely blocked by these two people. It was incredibly frustrating. In hindsight it’s all hilarious because everything turned out alright, but at that point…

KF: I was gonna say—I don’t know how you laugh about this stuff.

AR: It still makes my blood boil a bit when I think back of it. But our acquirer was really nice and understanding throughout the ordeal. They gave us a budget of $10,000 to bankroll our legal fees, which ended up being $10,500 in total.

I found this really amazing lawyer who went through all our documents and emails and really did his homework. And when we met him after that, he said, “I wish I could represent the other guys in this case.” Not because we were not right, but because copyright laws in the US are so protective of the alleged copyright holder.

Even though they had nothing on us, it was gonna be very hard to prove we were right. If this were to go to court, we could prove that they had not contributed anything because they literally had not. But the thing is, by the time you proved that, you’re gonna be two years into the process and $200,000 in debt. So we were totally cornered. We had to settle, no matter what.

KF: You gotta push.

AR: Right. Long story short, with some help of our brilliant lawyer, we managed to twist their arm, and somehow got them to fold. We ended up paying them $30,000 altogether, so they each got $15,000 out of this... I still feel kind of upset about it because it was so undeserved. But in the end it was fine, they signed a contract and we got acquired. I have an awesome job, and we’re finally building the business we set out to build 5 years ago. It feels amazing.

KF: So if you were to go back in time and talk to yourself from 5 years ago, you would tell him: A) figure out what is the need and build the product around it and B) know who you’re getting in bed with first, and then document that somewhere?

AR: Absolutely. Especially B) is something not just relevant for building companies, it is really a very important life lesson that most people won’t learn until they run into something like this. For example, my business partner Thomas: we went through really rough times together. We said really mean things to each other, very personal things in both directions. But the thing is, despite all of that, I know that in whatever situation we get ourselves, he will never ever try to stab me in the back. When you’re going to let someone get close to you, both in personal or business relationships, you have to ask yourself, “How would this person react when things turn sour?” This is by far my most important life lesson learned.

KF: What would you say to people who are maybe just not a good judge of character?

AR: Well, whenever you get anyone involved with your company, even if it’s just an idea, as cocky as it looks like, you have to get them to sign an NDA. You have to put your intention on paper and you have to protect your idea and intellectual property. Even if it’s just a stupid idea, or if you think there’s only a small chance you’ll build a business out of it. If we would’ve done that, none of this would’ve ever happened, because we would’ve had a contract and there wouldn’t have been any argument.

And since we’re talking about things I’ve learned: probably our biggest flaw as a company was that both of us were building the product—I was doing all the design and the front end development and Thomas was doing all the back end heavy lifting. I was kind of being the business lead, but the thing is, I didn’t really have time for it. You cannot build a product and run a business at the same time. You need to have someone who’s 100% dedicated to raising money, managing the practical stuff, the legal stuff, operations, biz dev... Basically, everything else that’s not product. If you don’t have someone dedicated to that, you just move too slow.

KF: So you’re saying a non-product CEO would have been helpful.

AR: Yes. And it doesn’t have to be a CEO. Your CEO can be the product person, the vision can be with the product person, that’s fine. As long as you have someone who will set up the business plan, think about how to approach marketing, manage your communication with investors, do the aggressive networking—that kind of stuff.

KF: Got it. So, define roles, maybe use NDAs, and clarify what everyone’s relationship is. Anything else you would do to make co-founder roles clearer?

AR: Yes. This never really blew up to a major problem, but it was the cause of a lot of the struggle between Thomas and I. Both of us were 50/50 owners and there wasn’t a clear leader. The original idea came from Thomas, but I was doing most of the (attempt at) biz dev and leading the actual product thinking. And it often led to an unnecessary struggle where he felt as if I was running away with it. It can be difficult when it’s not clear who’s in charge.

If I were ever to do something like this again, I would either follow someone that I trust 100% and that I want to follow, or will work with someone who wants to follow me. It’s important that someone is in charge and that roles are defined from the get-go.

KF: But in the end, do you think all the mistakes and the failures were worth it?

AR: Ab-so-lute-ly. I had a really interesting, rewarding job for the past five years. I would never want to switch this with anything else. If this wasn’t going to work out, I was simply gonna do what I’m doing now, but for another company. Building technology is incredibly interesting and challenging, and this whole ordeal has enriched my life in unexpected ways. What doesn’t kill you, makes you stronger.

Founders: interested in sharing lessons you've learned and mistakes you've made on your startup journey? Get in touch with us at failingupward@gust.com


This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.