There are a lot of opinions about co-founders in the blogosphere – Do you need a co-founder? What are your chances for success as a solo entrepreneur? How do you find a technical co-founder? Are technical co-founders needed? and on and on. One thing that I have not seen discussed though is the importance of the personal finances of your co-founders and/or business partners.
Starting a company is risky and often founders put their personal and family finances at risk by founding a startup. Before deciding to start a business with someone or bringing on a co-founder, you should be aware of their personal finances. Their personal finances should allow them to take adequate risk without becoming a financial burden on the company based on the timeline for execution of the startup and expected revenue or funding.
This does not mean that you should never start a company with someone unless everyone's finances are in tip-top shape. There are numerous examples of successful companies that have been funded on the credit cards and life savings of its founders. And, there are countless stories of people that have been completely wiped out financially using the same method. You should be aware of this risk, assess it, and qualify it as you would with any other risk.
In one of my previous business ventures, a critical business partner ran into severe financial issues as a result of the down turn in real estate unrelated to the business. We had just completed selling our first batch of inventory with the second batch on the way when we found out about his financial struggle. After crunching the numbers, we decided that it was best to wind down the business and let him focus on saving his real estate holdings since that was his sustaining income. If we continued to operate the business, then his personal financial problems may have become a burden on our company and relationship. It was a tough decision to make after investing a little over a year into the company, but it was the right call to make.