bitter dispute between the co-founders at the country’s largest airline continues. As allegations and counter-allegations mount, interesting details at IndiGo are coming to the forefront. Various parties cite various differences.
And for an airline that went from a startup in 2004 to the first flight in 2006 and an IPO in 2015 that was north of $4 billion, there is a lot at stake. To put it in perspective, IndiGo now controls 50 percent of the Indian skies and is generating revenues in excess of $4 billion. It ranks among the world’s most cash-rich airlines with $868 million of unrestricted cash on the balance sheet.
The disputes highlight issues that range from issues of governance to those of ownership and control. Examined closely, the dispute has 7 valuable lessons for startups:
The construct of a contract is as important as the financial terms
In the case of IndiGo, both co-founders have done exceedingly well financially. With a marketcap of $7.4 billion and the co-founders holding 38 percent and 37 percent of the stock, both have made it to the global billionaires league. There is no dispute over the financial terms of the contract. On the contrary, on the financial terms both co-founders seem to be in agreement. The dispute centers on the construct of the contract that provides for one of the co-founders to be able to have effective control over the management and strategy of the company. And this is the bone of contention.
An ideal contract covers for all eventualities
Business is centered on contracts. After all a business creates, captures and disseminates value and contracts are critical to be able to do this. From initial term-sheets to NDAs to IPO filings, an ideal contract covers for all eventualities. But no such contracts exist. Thus the key goal should be for co-founders to think of areas where disputes may arise and cover them via contractual provisions that ensure a timely, cost-effective and binding resolution. In such cases having an extremely pessimistic view that highlights what could go wrong is very valuable. Yet, in a startup one is so driven that pessimistic views are often dismissed and the advice is often to dismiss such views for the success of the startup.
In the case of IndiGo, the initial contract provisions did not account for some items due to the very high level of trust. Thus the eventuality of one co-founder exerting control and the rights of the second one there-in was not covered for.
Always think long term
Part of the challenge with startups is that it places inordinate demands on time and energy. One is so busy fund-raising and getting the product or service to the market that there is very little time to think about the long term. That is, while several startups will aspire to the unicorn status, one also has to think of what happens once you achieve that status. With external funding, public market listings and board-led governance, the founder may himself be asked to leave or be isolated. And this has happened to the best of founders ranging from Steve Jobs to the four co-founders at Twitter. Thinking long-term can help prepare and mitigate such outcomes.
Data shows that co-founder disputes will occur
Co-founders are an interesting phenomena in the startup world. Generally, co-founders are viewed favourably by angel investors and venture capital investors. This is as it balances the team and brings a complementary skill set. Yet it is also the case that in most cases co-founder disputes will arise. There is a whole body of literature on the subject. Noam Wasserman, a professor at Harvard Business School wrote the book “The Founders Dilemma.” For this, he studied 10,000 founders and the data indicated that 65% of high-potential startups failed as a result of conflict among co-founders.
Cofounder conflict is inevitable in a startup. The question is not “if” rather “when.” Thus it is critical that this be catered for.
Control matters – regardless of intent At times co-founders will indicate that they are not interested in control and are there to lend expertise. The equity splits further reinforces this. Where the equity splits are 50-50 or proportional this is further exacerbated. Because the split indicates co-ownership but control is what counts. Additionally, interests change over time and the nature of what is being built changes. For someone who invests time and energy into building a valuable asset, one gets inextricably linked to the outcomes. So for the startup world – the key point is that control matters. And it seems that in the case of Indigo this is the key issue indeed. Strong networks are local Often founders are encouraged to move to the location that is ideal for the business. For instance, if building a media startup around film and music – the chances are compounded if one is in Mumbai or Los Angeles. Similarly, for fintech startups being in New York or London helps. Because for any startup networks are essential. And deep networks are for the most part - local.
IndiGo defied this logic in building the business. One of the co-founders is based in the US while the other one in India. Founded on a bedrock of trust, the team was the envy of many in the industry. Clear boundaries were laid out with areas that each would be leading. Communication was extensive.
Yet geographic presence matters. And by not being present where the business was present, it can be argued that for the person not being present where the business is carried out remains a definite disadvantage.
Developing contrarian views on the future are essential
Legendary investor Peter Thiel often asks the question, “
What important truth does almost nobody agree with you on?” He elaborates on the beauty of the question because if the person answering it agrees with you the answer is technically incorrect.
For startups, asking contrarian questions and developing orthogonal views on the future is critical. Because it helps prepare for possible eventualities – especially those that one cannot even fathom.
In the case of IndiGo what started as a bedrock of trust and communication has devolved into a very public spat. Reading the statements it seems that the questions of what if this eventuality occurs was never considered. Because if was far too contradictory. Yet if it was perhaps the eventuality could have been catered for.
Satyendra Pandey is the former head of strategy at a fast growing airline. Previously, he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds.