Moral and Legal Aspects of Trust Among Founders
As a startup founder, the question often arises regarding the level of trust you can or should place in your co-founders. Conversely, one might wonder if fundamental doubt or even strategic mistrust and disloyal behavior could be legitimate for personal benefit. This topic touches upon both moral and philosophical principles, such as fairness, loyalty, and honesty.
It also involves practical considerations in everyday business life and legal obligations among co-founders. Further insights into formal agreements are often essential for startups, even in trust-based relationships. In the following, we will first outline various philosophical positions on trust versus mistrust.
Then, we will examine the practical significance of loyalty and fairness in daily startup life. This will be followed by an exploration of the legal foundations, particularly the fiduciary duties under company law and information duties among co-founders. Finally, practical examples will illustrate how trust can either be abused or rewarded.
Moreover, in my work as a consultant and founder, I have often observed that the issue of trust between co-founders is crucial. Trust not only forms the foundation of successful collaboration but also significantly influences the corporate culture. This, in turn, impacts the long-term development of a startup. From a moral point of view, the key question is whether fairness, loyalty, and honesty are absolute values, or if strategic considerations and personal advantage should take precedence in certain situations.
In my own experience, I have found that trust and fairness are both morally imperative and practically superior in the long term. At the same time, I know from numerous cases that a minimum level of control and safeguarding is always advisable. This helps to prevent possible abuse and disloyalty.
Philosophical and Moral Perspectives on Trust Among Founders
Utilitarian Perspective: Shared Benefit Through Trust
From a utilitarian perspective, which aims for the greatest overall benefit, there is strong support for trusting co-founders and collaborating fairly. Trust promotes cooperation and open collaboration, which generally increases a startup's chances of success. This ultimately benefits everyone involved.
When all founders act honestly and loyally, synergies are created. Information is shared freely, decisions are made for the good of the company, and conflicts are minimized. The consequences are often positive, such as higher motivation, better performance, and a stable team. In a utilitarian sense, this increases the common good, leading to company growth, job security, and team satisfaction.
Conversely, mistrust and selfish tactics can poison the working atmosphere and make the failure of the startup more likely, benefiting no one. Benefit-oriented ethics would therefore only justify disloyal behavior if it leads to better overall consequences. In practice, however, breaches of trust among founders usually result in rifts and destruction of value, leading to negative overall consequences.
Deontological Perspective: Duties of Honesty and Fairness
From a deontological perspective, an ethics of duty often associated with Immanuel Kant, trust, loyalty, and honesty are morally required in themselves, regardless of the outcome. Founders implicitly enter into a joint pact to build a company, incurring mutual obligations.
From a Kantian viewpoint, each co-founder is to be treated as an end in itself, not merely as a means to one's own advantage. Disloyal behavior, such as deliberately betraying a partner, violates this principle by instrumentalizing the other party. Promises, like agreements in a social contract or informal pledges of loyalty, should be kept because truthfulness and contractual fidelity are moral duties.
Even if mistrust or deceit could bring short-term individual benefits, such actions should be rejected on principle. They are incompatible with basic moral rules like the golden rule: "treat others as you would have them treat you." Fairness and honesty are considered intrinsically right in duty ethics. A founder who lies or cheats would be acting morally wrong, even if the startup does not suffer any immediate damage as a result.
Machiavellian Perspective: Success and Power Instead of Morality
This contrasts sharply with a Machiavellian or radically egoistic perspective that views trust among co-founders with skepticism. Following Niccolò Machiavelli's example in "Il Principe", one might argue that in the harsh business environment, power and success take precedence over moral principles.
A Machiavellian would advise maintaining the appearance of loyalty and fairness, but being prepared to break promises and act to one's own advantage when opportune. Machiavelli emphasized that a ruler, applied to founders, should not hesitate to ignore moral rules when the preservation of power or benefit is at stake. His cynical advice that a prince would always find good reasons to break a promise is famous.
This approach justifies strategic mistrust, assuming others are seeking their advantage and attempting to stay ahead. In startup practice, this would involve withholding important information, securing hidden exit opportunities, or outbidding a partner for personal gain. From a Machiavellian perspective, such behavior is legitimate as long as it leads to success and one can avoid repercussions.
However, it should be noted that Machiavelli primarily focused on the stability of his own power. Applied to co-founders, disloyal behavior risks tearing the company apart internally. Nevertheless, proponents of pure power ethics would argue that moral scruples should not prevent tough decisions for one's own benefit if it ensures the survival or victory of the company or one's own share in it.
Weighing Up: These three positions reveal a tension. While utilitarianism and duty ethics view trust and fairness as morally right and long-term beneficial, the Machiavellian view warns against trusting naively. In the reality of founding teams, a certain balance is likely sensible. Blind idealism can be exploited, but pure cynicism destroys any basis for collaboration. The next section examines how trust and mistrust actually play out in the day-to-day running of a startup.
Loyalty and Fairness in Everyday Startup Life
In the everyday life of a startup founder, loyalty and trust are not abstract ideals but often the basis for mutual success. Co-founders usually work closely together under high pressure, comparable to a partnership or even a marriage. It is often said that a startup team must function like a "well-established team" or a family.
Trust makes it possible to delegate tasks effectively, discuss problems openly, and stick together during crises. When this basis of trust is intact, founders can benefit from each other. Everyone contributes their strengths, knowledge is shared freely, and decisions are made through open dialogue rather than behind each other's backs. Values such as honesty, transparency, and fairness also promote motivation. Founders who are treated fairly feel more committed to the startup and are willing to go the extra mile.
On the other hand, mistrust within the founding team can have devastating practical consequences. If everyone suspects the other has bad intentions, duplicate structures arise, endless checks, or communication blockages. In the worst case, breaches of trust lead to open conflict or break-ups.
This can result in:
- Founder teams falling out.
- Company shares needing to be split or bought back at great expense.
- Projects being left unfinished.
At the same time, a certain degree of protection is common and sensible in practice, reflecting the saying: "Trust is good, control is better." For example, many founders conclude term sheets and MoUs which are often binding for startups that regulate all eventualities. Such contractual clauses reflect a healthy mistrust. They define what should happen in the event of conflicts, allowing for fair separation.
Instruments such as vesting clauses, which link shares to staying, or non-compete clauses in startup contracts, also demonstrate that people trust each other but still take precautions against disloyal behavior. However, these precautions are primarily preventative. Open communication and mutual support remain crucial in everyday operations. Some successful founders recommend regular discussions about expectations, concerns, and mutual feedback to build and maintain trust.
Practical Significance of Trust and Loyalty
Case Study: When Trust is Abused – The Facebook Example
A well-known example of abused trust among co-founders is the story of Facebook. Mark Zuckerberg founded Facebook together with Eduardo Saverin. As Facebook grew rapidly, Zuckerberg sought to consolidate investor and new partner relationships, planning to force Saverin out of the company.
Despite their initial agreements, Saverin's stake was ultimately massively diluted by a dilutive financing round without his timely realization. Zuckerberg acted strategically disloyal here to gain full control of the company. Internal chats from that time show that Zuckerberg deliberately sought "dirty tricks" to outmaneuver Saverin. In an email to his lawyer, Zuckerberg even inquired if Saverin's dilution could be executed in a way that wouldn't be "painfully obvious" to him.
However, his own lawyer warned him that since only Saverin would be disadvantaged, there was a "substantial risk" that Saverin would challenge this as a breach of fiduciary duty. Indeed, Eduardo Saverin later sued Facebook. The conflict ended in a settlement where Saverin received a large financial payment and official recognition as a co-founder. This example illustrates how a founder, Zuckerberg, gained short-term power through disloyal behavior, but at the cost of severe legal and reputational consequences. The breach of trust led to a high-profile dispute and nearly tore the company apart in its early stages.
Example: Fairness and Loyalty Pay Off
There are also positive counterexamples where mutual trust has been rewarded. Many of the most successful tech companies were founded by teams that worked closely together for years without internal friction. Google founders Larry Page and Sergey Brin, for instance, always remained loyal to each other despite differing views on certain issues, sharing power fairly. This resulted in Google's sustained success.
Similarly, Bill Hewlett and Dave Packard (HP) founded their company on the basis of mutual respect. The concept of the "HP Way" corporate culture, grounded in trust and partnership-based decision-making from the outset, is well known. The two founders remained equal partners and overcame crises, such as World War II, through honest cooperation. The reward was decades of corporate success and a corporate culture still regarded as exemplary today.
Generally speaking, when co-founders treat each other fairly, for example, by sharing profits equitably, supporting each other in difficult times, and celebrating successes together, the company's stability increases. Loyalty establishes the foundation for enduring setbacks together and building long-term trust with employees, customers, and investors. Of course, contracts and clear agreements are also important in such cases. If they are adhered to, this strengthens the founders' reputation. As a result, founding teams that uphold loyalty and fair play often achieve greater success together, avoiding the destructive rifts that disloyal behavior can cause.
Legal Aspects: Fiduciary Duties and Obligations Among Co-Founders
In German company law, there are clear expectations of loyalty among shareholders. These apply particularly in small, personal companies such as typical startups. Although the law itself, for example, in the GmbH Act or the German Civil Code, does not expressly regulate every aspect, case law has developed the so-called duty of loyalty under company law.
This duty of loyalty is a cardinal duty in the relationship between co-shareholders and towards the company. It requires that each shareholder protects the common interests and does not jeopardize the continuation of the company through self-interest. The Federal Court of Justice (BGH) formulated the fundamental principle as early as 1981 that in a GmbH "the interests of the company must always be paramount" and that every shareholder is obliged to put the interests of the company above their own. This also applies to legal structuring options for employee participation in startups, ensuring alignment of interests. The duty of loyalty "aims above all at trust and the protection of the common interests of the shareholders and the company." In practical terms, this means that a co-founder may not abuse their position to enrich themselves at the expense of the company or partners. Personal interests must be set aside if they conflict with the company's common good.
Specifically, several duties of conduct arise from the duty of loyalty:
- Shareholders must refrain from anything detrimental to the company's purpose.
- Conversely, they must support measures necessary for the company's survival in case of doubt.
Important forms of the duty of loyalty include the non-competition clause and the duty to take advantage of business opportunities. For instance, partners in a partnership, such as an OHG or GbR, are legally prohibited from competing in the same sector on their own initiative without the consent of their co-shareholders (see Section 112 HGB for OHG). As a rule, a non-competition clause is also imposed on GmbH shareholders via the duty of loyalty.
This means that no co-founder may exploit the company's business opportunities for themselves or establish a secondary company that draws customers or resources away from the startup, similar to considerations for protecting business ideas and concepts. If they do so, the company can demand that they hand over the advantage gained or pay compensation. There is also a duty of confidentiality towards outsiders, meaning internal information may not be disclosed to the detriment of the company.
At the same time, co-founders owe each other information and clarification. Important developments or risks must be openly discussed so that all shareholders can make informed decisions. Anyone who conceals relevant facts or deliberately leaves others in the dark, for example, about the true financial situation or parallel negotiations, breaches the duty of consideration under Section 242 BGB (good faith). The principles of culpa in contrahendo, pre-contractual duty of disclosure, apply even before the company is founded. If one founder brings another on board, they must provide information about known problems or legal obstacles; otherwise, the partnership agreement could be voidable due to fraudulent misrepresentation. Overall, these obligations are intended to legally ensure a basic climate of fairness: Each co-founder should be able to rely on the fact that no one in the partnership is seeking their own advantages at the expense of the community without the knowledge of the others.
Case law has specified the duty of loyalty in numerous rulings. In addition to the aforementioned BGH ruling from 2016, decisions on the exclusion of shareholders should also be mentioned. A co-shareholder cannot be arbitrarily forced out. This requires an important reason, such as a gross breach of duty. If there is no such reason, an expulsion would be unlawful and would violate the duty of loyalty towards the partner concerned. Similarly, in the so-called Girmes ruling (2009) and other cases, the BGH emphasized that shareholders in a crisis must either agree to a rescue measure or withdraw; a simple refusal without consequences is inadmissible.
In summary, German company law clearly sanctions strategic disloyal behavior. Co-founders are allowed to trust each other. More than that, they have to to a certain extent, as the law obliges them to show mutual consideration. Anyone who grossly violates these obligations, be it through fraud, competition with their own startup, or refusal to cooperate, must expect legal consequences. These range from dismissal as managing director to claims for damages and, in extreme cases, dissolution of the company.
Conclusion
Can or should you trust your co-founders? It is clear from the above considerations that both moral reasoning, practical success, and the law speak strongly in favor of trust, loyalty, and fairness among founders. From a philosophical and ethical perspective, trust is justified by utilitarian and deontological arguments, as it creates mutual benefit and aligns with fundamental moral duties. A totally Machiavellian course may seem tempting in the short term, but it is morally dubious and usually self-sabotaging.
Everyday practice in startups shows that disloyal behavior often has a destructive effect. Founder disputes can destroy a promising company, whereas mutual loyalty can navigate a startup through difficult times. Finally, from a legal perspective, it is clear that disloyalty among co-shareholders is not a legitimate strategy. Instead, it violates recognized legal principles, such as the duty of loyalty and disclosure, and can lead to significant legal consequences.
Of course, trust does not mean naivety. Smart founders combine trust with clear agreements and mechanisms for conflict resolution. Ultimately, however, basic trust forms the indispensable foundation of every startup partnership. Without trust, there can be no successful collaboration. Doubts and control mechanisms may be humanly and entrepreneurially appropriate, but they should never overshadow honesty and a shared vision. A startup whose founders treat each other fairly has a far better chance of achieving sustainable success, in accordance with moral values and within the framework of applicable law.
Sources: The principles of fiduciary duty under company law developed in case law are particularly relevant (e.g. BGH, Urt. v. 29.06.1981, II ZR 178/80 ( Treuepflichten eines GmbH-Gesellschafters); BGH, Urt. v. 12.04.2016, II ZR 275/14(The duty of loyalty under company law – BGH, judgment of 12.04.2016 -) as well as Sections 242 BGB, 112 HGB. On the significance of founder conflicts, see Wasserman (Harvard study)(Startup horror stories: When co-founders fall out). The Facebook case study is based on information that has become public about the Zuckerberg/Saverin dispute(How Mark Zuckerberg Booted His Co-Founder Out of the Company – Business Insider). Philosophical suggestions: Kant (Groundwork for the Metaphysics of Morals), Machiavelli(Il Principe(QUOTES BY NICCOLO MACHIAVELLI )), et al.