When a founder decides to take outside funding for their startup, they have a responsibility to their investor to do all they can to build a successful company that eventually returns that money and more back to the investor.
Sometimes startups fail even though their founders do all they can to carry out their responsibility. When things clearly aren’t working out, investors need to be reasonable, take the write-off, and encourage the founders to pursue another opportunity. Although the investors may continue to have a financial interest in the startup, there comes a point in time when this financial interest is outweighed by the founders’ opportunity cost from continuing to work on a startup that isn’t going anywhere. In this case, investors have the responsibility to support the founders’ decision to wind down the company and do something else.
In other cases, the startup is very successful and develops into a company with proper management and systems in place such that it is no longer reliant on the founders. The founders have done their job, exercised their responsibility towards their investors, and want to work on something new. Investors should support founders in this case.
However, what about the middle case? What if the startup isn’t failing, isn’t a clear success, still carries a lot of potential, and needs the founder in order to have the best chance of realizing that potential?
If founders haven’t taken outside money, they have no responsibility to anyone but themselves. They’re therefore free to act as they wish.
If founders have taken outside money, there might be legal clauses like vesting schedules and non-compete agreements that limit the founders’ ability to work on something else.
But, even if these legal clauses are absent or have expired, founders have a moral responsibility to their investors to continue to work full-time on the business. As long as the business has a good chance of producing a good outcome for both the founders and investors, it’s the founders’ responsibility to continue to do all they can to generate that outcome. That’s what it means to take outside money.
Taking an investor’s money and jumping ship when the ship could reach greener pastures if you continued to serve as its captain is an abdication of a founder’s responsibility.
Also published on Medium.