Conflict management in startups - how to deal with internal and external conflicts?

Start-up founders face many challenges that go far beyond the realisation of the actual business idea. One of them? Dealing with internal and external conflict situations. How can this be achieved - are legal means the solution?

Even building the team is a challenge. Who will receive what shareholding, remuneration or role in the future company? When it comes down to it, it often turns out that the founders' ideas about their company and the roles within it are not as concrete as necessary - and do not necessarily coincide with co-founders and potential team members.

Impending conflicts also lie dormant in the relationship with investors, not only when negotiating the financing conditions for the initial investment. Even if the process of negotiating the financing documents has hopefully survived reasonably unscathed, there is the threat of new trouble if milestones and targets are not met (which often happens in the initial phase), follow-up financing is required or strategic decisions need to be made. Disputes can arise not only between founders and investors, but also between the investors themselves, especially between early-stage business angels and later institutional investors.

And, of course, a start-up is not spared the usual discussions with suppliers, customers or service providers that every company has, which can degenerate into a legal dispute.

The situation is particularly dangerous for start-ups in such conflicts: thanks to fewer resources, a basic dispute can very quickly jeopardise the existence of start-ups. Sad cases from everyday practice include disputes within the founding team, conflicts between founders and investors or even between investors themselves, which often lead to crises and even insolvency.

What can founders do?

Firstly, it is important to realise that the success of the start-up also depends on the team's ability to deal with internal and external conflicts appropriately. It doesn't have to be a mediator training programme for all founders. However, there are various coaching and support programmes available. They are particularly recommended for founders who take on internal management tasks and represent the start-up externally to investors and other contractual partners.

Resolving conflicts in teams through early mediation

If there is a threat of conflict within the team, it has proven to be a good idea to involve neutral third parties as genuine or informal mediators as early as possible before things escalate. It does not always have to be the trained mediator; it can also be a friend of the founder from another team, the coach at the start-up centre, the professor at the chair or even a lawyer with relevant experience as a mediator. It is important that this person is given the necessary trust from all sides. This usually prevents an escalation spiral with nasty or inappropriate words that make it more difficult to get out of the crisis and objectifies the conflict. Startups should therefore not wait until the parties have nothing more to say before calling in a mediator. The earlier the better.

Communication with investors avoids trouble

If you look at the many conflicts that arise in connection with investors, the problem is usually not so much that things don't go as hoped or planned. This is everyday business in the venture sector. Rather, investors are annoyed by the fact that the founders are only informed piecemeal or too late when difficulties arise. This is usually done in the hope that the founders can get the problem under control in order to avoid unpleasant communication. Who likes to announce bad news? However, this is a mistake: by waiting, the solution space is almost always reduced, investors can no longer intervene to help and often only take note of the damage. The criticism levelled at the team is then: Why am I only finding out about this now? This costs trust in both the start-up and, in particular, the management team, which puts a strain on future collaboration. To protect themselves, investors often respond with (even) tighter controls, mistrust and bureaucracy. In the worst case scenario, individual founders are separated and the management team is replaced.

Is the best way to avoid conflict a good contract?

Yes and no. A good written contract documents what the parties wanted, especially with regard to the main mutual obligations. It also helps to discuss issues before the contract is concluded, as a kind of work list, and to ensure that everything has been thought of as far as possible. Good contracts are therefore an essential foundation, especially when it comes to long-term collaboration and the exchange of services.

However, a contract is never absolutely watertight because, according to the law, it is not only the written text that is decisive, but also the actual intention of the parties when the contract is concluded. This can deviate from the written text. There can therefore be no such thing as an absolutely binding written contract. Whether a dispute arises later on the basis of a contract therefore depends very much on the contractual partner and how the parties deal with each other.

Moreover, most legal relationships are not based on complex written contracts, but on simple exchanges of services and verbal agreements. Start-ups in particular do not go to a lawyer for every contract due to a lack of time and budget. Fortunately, our civil law ensures that a set of contractual rules automatically applies in the background.

So are written contracts superfluous?

The question of whether a written contract is worthwhile depends on the complexity and importance of the subject matter of the contract and on the business partners. In the case of existential issues that go to the heart of the start-up, such as research and development cooperation, very long terms and contracts with high volumes or increased risk, you should not shy away from the expense of written contracts. But even with a written contract, the following still applies: without trust and constructive, appreciative mutual cooperation, it is not possible, not only in long-term business relationships, but in general; you almost always see two sides in (business) life.

A good contractual relationship is characterised by the fact that the written contract is not constantly pulled out of the drawer, but that the parties always try to find solutions that are acceptable and fair for both sides in the respective situation, often in deviation from the original idea or contractual agreement. Those who always insist on their formal rights will almost certainly run into problems in the long run.

And how can a lawyer help me with conflicts?

Lawyers can be helpful in the run-up to conflicts. They can sensitise founders to risks and, as a neutral third party, make a decisive contribution to conflict-free communication. 

However, those who only want to know from their lawyer how a certain clause in the contract is actually to be understood or what the legal situation is, unfortunately usually call too late. Pragmatic communication at working level between the contracting parties has usually already failed and the conflict escalates. The only option is often to continue the legal dispute until court proceedings. Not a bad deal for the lawyer, but usually a loss for the company. This is because legal disputes cost money and nerves, put a strain on the people involved and keep them away from their actual tasks, damage business relationships and cause reputational damage.

Resolving open conflicts through (extra-)judicial mediation

And what should you do if the conflict has escalated despite all your efforts? Even if the dispute has almost escalated to court, there are still ways to de-escalate it. Mediation is available both in and out of court. All the parties to the dispute have to do is agree on this procedure and an impartial mediator who will try to work out a possible solution to the conflict together. Even though the mediation process is purely voluntary and non-binding and neither party can be forced to compromise, it is astonishing how high the success rate of mediation is.

Conflicts and crises are part and parcel of entrepreneurship. Successful entrepreneurs and founders are characterised by the fact that they deal with them appropriately.

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