No such thing as a gentleman's agreement
Imagine a sunny summer afternoon, a glass of bubbles in my hand and walking around enjoying the celebratory mood of a closing event with graduating startups of an unnamed accelerator. Stopping by at the various teams, I found it nice to catch up with the founders and also to follow up on the cofounding workshop we had together in the middle of their programme.
In one of those conversations, one unnamed founder told me that he found the concepts theoretically interesting, but does not agree with my emphasis on having a clear, fair, transparent and most preferably written cofounder agreement. The reason is that, according to the founder, they are happy with the ‘gentlemen’s agreement’ they made in the early days. Within one breath this founder also added that it gives himself more flexibility (as the ‘main’ founder - whatever that means in his context) AND that the only significant customer agreement (and revenue source) of the startup was concluded with another company that the founder owns (exclusively). That means that he himself is covered.
And that is exactly it! I could not have wished for a better illustration of my point.
There were three more people in his team - as ‘cofounders’ - working hard over a period of months, creating value, building a business, being invested… based on an oral agreement that they will get some undefined equity stake with undefined conditions at an undefined point in the future. The case of the unnamed founder of this story is a very illustrative one. You might not be surprised if I tell you that only 15 months after the graduation event this startup did not exist.
A little rant about the concept of a gentleman’s agreement...
Starting with definitions…
A gentleman’s agreement is defined as an informal, often unwritten agreement or transaction backed only by the integrity of the counterparty to actually abide by its terms. An agreement such as this is generally informal, made orally, and is not legally binding. ¹
And a historical perspective...
The first references to the term ‘gentleman’s agreement’ are apparently traced to British Parliamentary records from the early 19th century and were used in connection with pricing agreements - what we would nowadays call illegal practices of price collusion. The reason why they were used is that they were extremely difficult to prove or track. And later - exactly for these reasons - their use extended beyond price fixing. For example they were apparently also used to ensure that in certain M&A transactions (in banking) the US competition law would not apply or that African American players were excluded from organized baseball in the US until 1946. ²
So all in all you might wonder if the term deserves the ‘positive’ connotations it is sometimes given by founders. As if by having a gentleman’s agreement would confirm that you are a gentleman? Not sure. Ask yourself - who benefits? In this particular case it was the short term benefit of a rather abusive majority founder. Long term - it is in the interest of all - including majority founders - to have a clear, transparent and written agreement. Otherwise the potential legal cases with minority cofounders can cost him the business and/or his reputation anyway.
What I am sure about is that I have witnessed too many of these stories gone wrong to recommend this as a good practice. Maybe it might work in some cases ... but most of the times - IT DOES NOT. To repeat - there should be no reason not to have a fair, clear, transparent and written agreement with your founders. And if there is a reason - it usually stinks.
¹ Hayes, A. (2019, July 2). Inside Gentlemen's Agreements. Retrieved from https://www.investopedia.com/terms/g/gentlemansagreement.asp. ²