Defoundering

How to Avoid Being Pushed Out of the Company You Founded

The relationship between startup cofounders is not unlike a marriage. And like marriage, many end in divorce.
dens naveen italian vogue picyou How to Avoid Being Pushed Out of the Company You Founded

Mr. Crowley and Mr. Selvadurai at a photo shoot for Italian Vogue. (Based on a photo by flickr.com/dpstyles)

Until recently, Foursquare cofounders Dennis Crowley and Naveen Selvadurai—let’s call them Denveen—were social media’s celebrity couple.

The pair stepped together into the spotlight when Foursquare won best-in-show at the South By Southwest Internet tradeshow in 2009 in Austin. After that, they appeared everywhere together. They traded off for media interviews and the presentation of prizes at Foursquare-sponsored events. They finished each other’s sentences in a spot for the USA network; they posed on a snowy New York street bundled in cardigans for a Gap ad. In a spread for Italian Vogue last year, the sandy-haired Mr. Crowley appears in a black suit, his Indian-born cofounder in beige. Mr. Crowley has his hand on Mr. Selvadurai’s arm and they’re looking at each other with oversize grins—not surprisingly, as Foursquare is now valued at more than $600 million.

And yet, a week and a half ago, on the third anniversary of that first SXSW victory, Mr. Selvadurai announced he was leaving the company.

The word came down on a Sunday afternoon, so it took a few days for the tech tabloids to orient themselves. But soon enough, the rumors started. “A source close to Selvadurai tells us the Foursquare cofounder has seemed ‘frustrated’ and ‘lost,’” reported the blog Business Insider; Mr. Selvadurai was “forced out,” according to a followup story. “Dennis and he don’t hate each other—things just changed,” one person told AllThingsD reporter Kara Swisher.

On Saturday, Mr. Crowley took the stage at SXSW, and on Sunday, he and the rest of the Foursquare delegation drank and made merry at the infamous Foursquare shindig, held in a sunken courtyard bar. Last year, Mr. Selvadurai spent most of the party lounging on the top deck with Ashton Kutcher and Demi Moore, or encircled by twenty-somethings on the dance floor. This year, he skipped the conference entirely.

What makes cofounders fall out of love? According to sources, the rift at Foursquare started months ago. Mr. Selvadurai was repeatedly “reorganized” into different roles as Foursquare grew, bringing in experienced executives at the top and whiz kid developers at the bottom. “He’s been sort of jumping around, like from developer to evangelist, all these different roles,” one person close to the company told Betabeat. “Naveen was a great developer, no doubt about it. But Foursquare is a white-hot company that’s hiring the best developers in the world.”

Meanwhile, Mr. Crowley’s star kept rising. Mr. Selvadurai, while king of his own cult following, has roughly half the Twitter followers of Mr. Crowley, the articulate, smiley CEO infamous for two twin acts of gall: reportedly turned down an acquisition offer from Google, and scoffing publicly when Facebook launched its competing check-in service. Investors adore him.

Or perhaps Denveen were never truly in love. The pair met while working for different companies that shared an office in Union Square, and started casually collaborating two years later. Mr. Selvadurai “was the one guy who knew how to make iPhone stuff,” Mr. Crowley recalled of his cofounder in a recent Business Insider profile.

Mr. Selvadurai coded most of the original iPhone app that brought Foursquare to fame. But Foursquare was Mr. Crowley’s idea, the second coming of his first startup, Dodgeball, which was acquired and shut down by Google. Mr. Crowley has had a bigger share of Foursquare and more power from the beginning as CEO, while Mr. Selvadurai, who also happens to be five years younger than Mr. Crowley, was the “junior cofounder,” sources said.

Mr. Selvadurai will finish out the month as an employee and then serve on Foursquare’s four-person board with Mr. Crowley and investors Albert Wenger and Ben Horowitz. “If it was a total kicked-out, full-on backstabbing, the way you see in the movies, he would have been off the board too,” the person close to Foursquare pointed out.

Suffice to say, Foursquare’s board meetings might be a bit tense for a while. One source close to the situation—and who contacted several journalists about it—said it was Mr. Crowley and the new executives who decided it was time for Mr. Selvadurai to go. “He screwed his cofounder,” the source said. “If I were Dennis, I’d probably be praying to God that this doesn’t get out because it ruins his nice, fun, bro image.”

>> DENS & NAVEEN SPLIT! [SLIDESHOW]

When the news broke, Foursquare issued a very brief statement and handed the mic over to Mr. Selvadurai, who wrote a vague explanation on his personal blog: “after three years, i feel i’ve done all i can do and i’m moving on. dennis and i have been discussing timing for a while, and we decided that now, on this anniversary, it feels right to begin the transition.” In this context, his customary lowercase made him sound cowed and underconfident. (His previous blog post, about the end of Foursquare’s residence at the beloved Village Voice building in January, ended on a cheerier note: “to soho!”) It must sting to feel rejected by the company you literally started around a kitchen table.

Still, it’s hard to feel bad for Mr. Selvadurai, one of the few standouts from New York’s low-wattage tech scene and now a millionaire several times over. The terms of his compensation were not disclosed, but they included liquidating some of his shares. “He’s rich, he could just literally go fuck off for a long time,” the source close to the situation said. “But he won’t do that. He’ll go start something and he’ll be able to raise money off of like, a cotton gin. ‘I built a digital cotton gin. It’s gonna be a hit.’ And he’d get a $100 million valuation, Jack Dorsey-style.”

denveen1 How to Avoid Being Pushed Out of the Company You Founded

Denveen. (Illo: Jessica Roy)

Mr. Crowley also declined to give a comment at the time, but issued a tweet: “After 3 yrs, my @foursquare co-founder is moving onto new projects & big ideas. Can’t wait to see what’s next @naveen!” Foursquare, Mr. Crowley and Mr. Selvadurai declined to comment for this story.

Founder ouster—or defoundering, if you will—is hardly new, and it doesn’t often go smoothly. For instance, Jack Dorsey, cofounder and CEO of Twitter, was reportedly pressured to leave in 2008. Mr. Dorsey and Twitter’s other two cofounders played musical chairs with the executive roles and board seats until Mr. Dorsey resigned himself to chair Twitter’s board and focus on his new company, Square, of which he declared he would be CEO “forevermore.”

The most famous example of defoundering is Steve Jobs, who sidelined his two cofounders at Apple, then got sidelined himself—only to stage a triumphant return. The second-most famous may be in The Social Network, when Eduardo Saverin puts a little too much faith in his Harvard economics concentration and signs some papers without a lawyer, only to see his shares diluted to insignificance. (The dramatization suggests Mr. Saverin’s 24 percent was watered down to .03 percent, though the real-life Mr. Saverin managed to come out of his Facebook dealings a billionaire.)

The best hometown example may be that of the ginger-haired, freckled Brooklyn carpenter Rob Kalin, at the time in his late 20s, who blew investors away with his minimalist presentation about Etsy. The six perfect slides became a minor Silicon Alley legend, and Etsy raised more than $30 million while Mr. Kalin was at the helm. How disheartening it must have been when the same investors decided he wasn’t “scaling the business” efficiently and needed to be replaced.

The board swapped the founder out for COO Maria Thomas, a former NPR executive. Within two years, Mr. Kalin “led a rebellion,” as one person with knowledge of the situation put it, and got himself reinstated. He was defoundered again less than two years later. “As Rob transitions out once again, I want to personally thank him for all of this and more. Etsy is his creation and will always be,” Etsy investor Fred Wilson wrote in a blog post, as if he’d just come from putting an agitated toddler down for a nap in the next room.

Mr. Kalin did not make a statement. If he had, he could have stuck up for Chris Maguire, Haim Schoppik and Jared Tarbell: Etsy actually had four cofounders, which the startup creation myth, which favors singular genuis, had simplified to one. (Mr. Tarbell is the only one left at Etsy, where he is a Flash developer.)

Ironically, it often seems to be the technical cofounders who get left behind. In the beginning of a startup’s life, it’s the technical cofounder who is coveted; but as a company grows, it attracts developers fresh out of school who are steeped in the latest trendy new framework. Mark Zuckerberg built the original Facebook himself. But when he decided he wanted to code a few lines for Facebook Groups, he found he’d lost his touch. “It took him like two hours to do something that would take one of us who’s an engineer like five minutes,” one Facebook engineer told New York magazine.

Nevertheless, nudging out a founder out can seem cruel. “For a while, [Denveen] were going back and forth for a while about whether there was a good fit for [Mr. Selvadurai] and a good way for him to stay at the company,” a second source close to Foursquare told Betabeat. “In the end they both agreed that there wasn’t a place for him. It’s definitely an emotional time. People internally are sad… but I think everyone understands why they decided that was the right move.” Things just changed.

All’s fair in love and business, of course, and cofounder fallout seems to be hardwired into a startup’s development. One New York-based investor and entrepreneur, who didn’t want to give his name because his new company has not launched yet, told us it took 90 days trying to draw up documents that were fair to his junior cofounder and that his investors could sign without marking up. “What I found is that a lot of the kind of hurt feelings and distrust and things that you’re seeing at Foursquare right now are kind of baked into the organizing structure, into the documentation that holds these companies together,” he said.

For his startup, the entrepreneur said the process of negotiating with his own lawyers over the company’s structuring documents has already cost him $26,000, and that’s just for a third of the total bill. 

Buried in those documents are booby traps for founders, the investor-entrepreneur said. He recalled a morbid clause in the standard term sheet. If a cofounder dies, lawyers expect the company will want to recapture the shares rather than let the stake go to the next of kin. The investor-entrepreneur was dubious. “I’m like, wait a minute, let me get this straight. This guy works with me on this company for three years and everything is great, and then he gets killed in traffic, tragically… I’m reserving in these docs the right to give his wife and the rest of his estate nothing? Like, that’s my negotiating posture? I don’t want the right to screw people.”

Lawyers tend to write in every possible downside scenario to cover themselves if the company goes south, as so many startups do. Few bootstrapped 24-year-olds would decide it’s smart to hardline the people who want to give them millions of dollars; most startups take off-the-shelf paperwork with standard terms, make a few tweaks and sign in six weeks.

But perhaps founders should think harder about how to protect themselves on the upside. It was reported that Mr. Selvadurai hired lawyers to try to fight his departure; then again, one always hires a lawyer in these situations. “The culture is antagonistic,” the investor-entrepreneur said. “Again and again you see that often the founding group can be eclipsed by the one guy who ends up being associated with the success. People get pushed and shoved around. Because the mythology about entrepreneurial success doesn’t really include that in the story, people don’t plan for it.”

We consulted with Matt Blumberg, the founder and CEO of Return Path who wrote the “Entrepreneur’s Perspective” section for the widely-circulated book Venture Deals, an introduction to startup dealmaking written by investors Brad Feld and Jason Mendelson. “As an entrepreneur, it’s always a painful thing to hear about when a founder gets pushed out of his or her company,” he wrote in an email.

Mr. Blumberg was surprised to hear that Mr. Selvadurai had left Fourquare. “I don’t know those guys,” he was careful to say, but in his experience, “the job just totally changes as the company gets bigger.” Even Sergey Brin didn’t really scale with his company; while Larry Page runs Google, Mr. Brin tinkers in his own department on special projects.

“I think it’s easy for people to jump to the side of the founder against the big bad investor,” Mr. Blumberg said. “But we’re all grownups and you sign the papers you sign.”

But what about founders’ rights? we asked.

“I’m not sure I feel like there is such a thing,” he wrote. “The most important two things a founder can do to protect himself against being ousted are (a) do a world class job at being CEO, and (b) select great investors and partner effectively with them.”

But surely there must be some way to guard against defoundering, we imagined. Some sort of cofounder prenup, perhaps. We pinged David Sorin of Sorin Royer Cooper, who has been ministering to startups for more than a decade.

“While a founder can protect his or her economic interest with appropriate contracts and provisions, once a company has institutional investors and an independent Board of Directors there is no way to prevent the possibility of a termination or separation,” the attorney wrote back.

In an industry where a company can go from zero to $600 million in three years, it would be naive to expect otherwise.

>> DENS & NAVEEN SPLIT! [SLIDESHOW]

A version of this story appeared in the New York Observer the week of March 14, 2012.

Follow Adrianne Jeffries on Twitter or via RSS. ajeffries@observer.com