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6 steps to making family business work. First lessons from Founders’ Dilemmas class at Harvard Business School.

I am taking the course Founders’ Dilemmas at Harvard Business School this fall. We covered a number of items from equity splits to founders agreements, but the topic that was most insightful for me personally thus far has been ‘doing business with friends and family’.

The book Founder’s Dilemmas by Noam Wasserman suggests you do not go into business with family and friends as they are statistically less successful and more prone to conflict, but I am interested in how to make it work. With 90% of U.S. businesses being family owned, there are success stories. Also having a network of talented family and friends I trust and would love to work with in the future, I was motivated to identify best practices for success. Here are a few I identified:

1. Schedule standing feedback sessions

Standing meetings where you and your family or friend can candidly share what is going well and what can be better is key. Repeatedly in the cases when issues initially arose family members and friends let the tension steadily build over time, skirting major major issues until it was too much to bear. In the ProLab case, the CEO and founder worked with her husband and the tension eroded the working relationship between her and her co-founder and led to the end of their working relationship, marriage, and almost the end of ProLab. Having repeated time set aside to air thoughts and concerns could have helped course correct early on.

2. Establish a clear chain of command

Reflecting back on the ProLab case one major area of tension was that her husband felt he was the co-founders boss, because his wife was the majority shareholder. The tension caused the co-founder, who was critical to the operations, to distance herself from her CEO counterpart which compromised the business. Making clear chains of command and established practices for reporting issues as they arise could have saved some headache.

3. Separate reporting where necessary

The founders of and Smarterer, Sarah Hodges and Dave Balter, joined the class and shared their insight on working together while being in a relationship. They said when both partners are in sync it establishes an powerful and unmatched creative dynamic, but when there is tension at work, it caused repeated challenges personally and professionally. To address this challenge, they make sure they don’t report to one another and give each other autonomy to lead in their respective areas, which has created a successful working dynamic.

4. Create work | life boundaries

This was a tricky topic. Continuing from the conversations with Sarah and Dave, they said it was inevitable that personal and professional conversations overlap. They both loved their work and believed to not share it at home or expect that one area is not going to effect the other is unrealistic. Also the CEO of ProLab, Hillary Mallow, created ‘time’ boundaries for when her and her husband would talk about work and when they would not, but stated that she ‘lost something’ in the transition. When they were in separate jobs work discussions were a key part of their day and sharing in their relationship. Boundaries are important, but change in dynamics is inevitable.

5. Discuss why, when, and how each person would exit

In Smarterer and ProLab one of the spouses eventually left the business before the other. For Smarterer it was a expected and planned. In ProLab, Hillary’s husband was fired (by her). In either case it is natural for people to join or leave a start-up according to the needs of the company, and this should be a topic of discussion early on that will save escalated pain later.

6. Set expectations

When friends and family work together, they need to understand the reality. It is a job. In the Savage Beast case (Pandona), founder Tim Westergren, hired many of his friends to work for him. This was a positive when he was running out of cash to fund the business and people stuck around, but a negative when he had to face the reality that some people needed to be laid off. This tension lead to him being sued and eventually having to lay off many employees when it was far too late. Communicating clear expectations for roles and responsibilities and acknowledging that

start-ups are risky, no matter who they choose to do them with…

comes with the territory.

4 thoughts on “6 tips to doing business with family and friends

  1. Another piece of advice that I would give to complement #6 above is to “know what you’re worth”. I’ve observed that in family businesses, top-performing managers are often underpaid paid while poor-performing managers are overpaid. Knowing what your going market rate is and being willing to ask to be paid as such can help top-performing managers avoid feeling resentment towards other family members. Surprisingly, I’ve found that poor-performing managers are often self-aware enough to know that they’re contributing far less and hence won’t feel resentment towards other family members who are rightly better compensated.

  2. Overall I agree with the guidelines that you wrote. However, I think we should separate starting a business with family in two categories: blood related members or ones that you have grown up with your whole life, and family members bound by law or relatively new members that are considered your family. I think when you make that distinction, there could be different guidelines that could come up. Your relationship with your father and your relationship with your spouse will be very different so couldn’t the guidelines be different when working together?

  3. I think this a great post. It outlines the necessary controls that needs to be in place and is a great summary of the tensions we’ve discussed in class. I think one more concluding point that definitely needs emphasis is that execution and making sure we really implement these controls is what ultimately makes or breaks your business (and relationships). As seen from the Prolab case, more often than not people want to avoid the difficult conversations, supplemented by the thought that “we’ll probably be alright, we have such a close relationship.” It becomes an easy default to think that having that close relationship makes us the exception. These rules are in place for a reason and no rules were ever effective enough without compliance, this seems to be a big reason why many of these family businesses couldn’t solve the inherent tensions they have.

  4. I really enjoyed reading your post. I am also interested in family businesses and thinking through what it takes to make sure they are as successful as any other businesses can be.

    I think that these steps you provide are great to keep in mind and be aware of but I also believe that it is extremely hard to implement some of them.

    I grew up watching my parents run their business and I have to admit that sometimes it was hard to watch. It was virtually impossible for them to leave behind a problem they had at work before coming home and I honestly can’t blame them for that. There is no ON/OFF switch on people and that’s just how it is. This is why I also struggle with step 1. You mention how important it is to give candid feedback to avoid problems from getting out of hand. Although I also believe that feedback is necessary in any work environment, I also think that it can be hard to be on the receiving end especially when this “candid feedback” is coming from a loved one. Feelings can get hurt and egos can be bruised and that sometimes is irreparable. Is it worth going through that with your spouse? Could you avoid being in that situation in the first place by implementing steps 2 and 3? The truth is that there is no one right answer. It will vary from family to family, but it is great to have these steps on the back of our minds to at least try to shape our own experiences in a way that can avoid these big pitfalls.

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