Introduction

As a startup founder, the question often arises as to what level of trust you can or should place in your co-founders – and, conversely, whether fundamental doubt or even strategic mistrust and disloyal behavior could be legitimate for your own benefit. This topic touches on both moral and philosophical principles (such as questions of fairness, loyalty and honesty) as well as practical considerations in everyday business life and legal obligations among co-founders. In the following, various philosophical positions on trust vs. mistrust are first outlined. Then the practical significance of loyalty and fairness in everyday startup life is examined, followed by the legal foundations – in particular the fiduciary duties under company law and information duties among co-founders. Finally, practical examples illustrate how trust can either be abused or rewarded.

Furthermore, 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 has a significant influence on the corporate culture and therefore the long-term development of a start-up. From a moral point of view, the crucial question is whether fairness, loyalty and honesty are absolute values or whether 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 to prevent possible abuse and disloyalty.

Philosophical and moral perspectives

Utilitarian perspective: Shared benefit through trust

From a utilitarian perspective (which aims for the greatest overall benefit), there is much to be said for trusting co-founders and working together fairly. Trust promotes cooperation and open collaboration, which generally increases the startup’s chances of success and thus 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 (e.g. growth of the company, job security, team satisfaction). Mistrust and selfish tactics, on the other hand, can poison the working atmosphere and make the failure of the start-up more likely, which ultimately benefits 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 lead to rifts and destruction of value, i.e. negative overall consequences.

Deontological perspective: Duties of honesty and fairness

From a deontological perspective (ethics of duty, according to Immanuel Kant, for example), trust, loyalty and honesty are morally required in themselves – regardless of the outcome. Founders implicitly enter into a joint pact to build a company; they therefore have mutual obligations. From a Kantian perspective, one would say that each co-founder is to be treated as an end in itself and not merely as a means to one’s own advantage. Disloyal behaviour – such as deliberately betraying a partner – violates this principle, as it instrumentalizes the other party. Promises (such as agreements in a social contract or informal promises of loyalty) should be kept because truthfulness and contractual fidelity are moral duties. Even if mistrust or deceit could bring short-term benefits to an individual, such actions should be rejected on principle, as they are incompatible with basic moral rules such as 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 with a Machiavellian or radically egoistic perspective that views trust among co-founders with skepticism. Following the example of Niccolò Machiavelli (author of “Il Principe”, 16th century), it could be argued that in the harsh business environment, power and success take precedence over moral principles. A Machiavellian would advise that while maintaining the appearance of loyalty and fairness, when in doubt, be prepared to break promises and act to one’s own advantage as soon as it seems opportune. Machiavelli emphasized that a ruler – applied to founders – should not hesitate to ignore the rules of morality 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: One assumes that others are seeking their advantage anyway and tries to stay one step ahead of them. In start-up practice, this would be the equivalent of keeping important information to yourself, securing hidden exit opportunities or outbidding your partner as soon as it benefits you. From a Machiavellian perspective, such behavior is legitimate as long as it leads to success and you can get away with it. However, it should be borne in mind that Machiavelli was primarily concerned with the stability of his own power – applied to co-founders, this means that disloyal behavior risks tearing the company apart internally. Nevertheless, proponents of pure power ethics would say that moral scruples should not prevent you from making tough decisions for your own benefit if it ensures the survival or victory of the company (or your own share in it).

Weighing up: These three positions show an area of tension: while utilitarianism and duty ethics view trust and fairness as morally right and beneficial in the long term, the Machiavellian view warns against trusting naively. In the reality of founding teams, a certain balance is likely to make sense – blind idealism can be exploited, but pure cynicism destroys any basis for collaboration. The next section looks at 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 start-up founder, loyalty and trust are not an abstract ideal, but often the basis for mutual success. Co-founders usually work together closely and under high pressure – comparable to a partnership or even a marriage. It is often said that a start-up team must function like a “well-established team” or a family. Trust makes it possible to delegate tasks effectively, talk openly about problems and stick together in crises. If 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 dialog 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 in the founding team can have devastating practical consequences. If everyone assumes the other has bad intentions, duplicate structures arise (because no one lets the other work), endless checks or communication blockages. In the worst case, breaches of trust lead to open conflict or break-ups: Founder teams fall out, company shares have to be split up or bought back at great expense, projects are left unfinished. Studies suggest that disputes within the founding team are actually one of the most common reasons for start-ups to fail. According to a study by Noam Wasserman, around 65% of all startup failures are due to conflicts between the co-founders. A lack of loyalty and team spirit therefore often “kills” the business. The saying goes: “Co-founder conflict can be fatal – at worst, it kills the business.”. These figures make it clear that disloyal or mistrustful behavior is self-destructive in many cases.

At the same time, a certain degree of protection is common and sensible in practice – true to the saying: “Trust is good, control is better.” For example, many founders conclude shareholder agreements with each other that regulate all eventualities (e.g. who holds which shares, how decisions are made, how a withdrawal is handled). Such contractual clauses reflect a healthy mistrust – they set out what should happen in the event of conflicts so that they can part ways fairly. Instruments such as vesting clauses(which link shares to staying) or non-competition clauses also show that people trust each other, but still take precautions in case someone acts disloyally. However, these precautions are more of a preventative measure: open communication and mutual support remain crucial in everyday life. Some successful founders recommend regular discussions about expectations, concerns and mutual feedback in order to build and maintain trust.

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 close ranks with investors and new partners – and made plans to force Saverin out of the company. Despite their initial agreements, Saverin’s stake was ultimately massively diluted by a dilutive financing round without him realizing it in time. Zuckerberg acted strategically disloyal here to gain full control of the company. Internal chats from that time show that Zuckerberg was deliberately looking for “dirty tricks” to outmaneuver Saverin. In an email to his lawyer, Zuckerberg even asked whether Saverin’s dilution could be carried out in such a way that it would not be “painfully obvious” to him what was happening. 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. In fact, Eduardo Saverin later sued Facebook; the conflict ended in a settlement in which Saverin received a large financial settlement and official recognition as a co-founder. – This example illustrates how a founder (Zuckerberg) was able to gain more power in the short term through disloyal behavior, but at the cost of severe legal and reputational consequences. The breach of trust led to a high-profile dispute and almost tore the company apart in the 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 playing each other off against each other. Google founders Larry Page and Sergey Brin, for example, always remained loyal to each other despite differing views on certain issues and shared power in the company fairly – with the result that Google became sustainably successful. Similarly, Bill Hewlett and Dave Packard (HP) founded their company on the basis of mutual respect: the concept of the “HP Way” corporate culture, which was based on trust and partnership-based decision-making from the outset, is well known. The two founders stuck together as equal partners and overcame crises (e.g. the Second World War) through honest cooperation. The reward was decades of corporate success and a corporate culture that is still regarded as exemplary today. Generally speaking, when co-founders treat each other fairly – for example by sharing profits fairly, supporting each other in difficult times and celebrating successes together – the stability of the company increases. Loyalty creates the basis 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, but if they are adhered to, this strengthens the founders’ reputation. As a result, it can be said that founding teams that uphold loyalty and fair play often become more successful together and avoid 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 start-ups. Although the law itself (e.g. 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 the 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. 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 his position in order to enrich himself at the expense of the company or the partners. Personal interests must be put aside as soon as they conflict with the common good of the company.

Specifically, several duties of conduct arise from the duty of loyalty: Shareholders must refrain from doing anything that is detrimental to the purpose of the company and, conversely, in case of doubt, support measures that are necessary for the survival of the company. In 2016, for example, the BGH ruled in a highly regarded judgment (case no. II ZR 275/14) that a shareholder may even be obliged to approve a capital measure out of a duty of loyalty if it is objectively and irrefutably necessary in order to avert significant losses – even if they are personally reluctant to approve it. Conversely, it is a breach of fiduciary duty to block sensible and majority-approved steps to restructure or further develop the company without a legitimate reason. In short: disloyalty is not legally neutral, but can be considered a breach of duty. A co-founder who acts for his own benefit and harms the company or the partner is in breach of his duty of loyalty and is potentially liable for damages or, in extreme cases, can even be expelled from the company (usually only for good cause).

Important forms of the duty of loyalty include the non-competition clause and the duty to take advantage of business opportunities. For example, partners in a partnership (e.g. OHG or GbR) are prohibited by law 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. If they do so, the company can demand that they hand over the advantage they have gained or pay compensation. There is also a duty of confidentiality towards outsiders – 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 put openly on the table so that all shareholders can make informed decisions. Anyone who conceals relevant facts or deliberately leaves others in the dark (e.g. about the true financial situation or parallel negotiations) is in breach of 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, for example, one founder brings the other on board, he 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-foundershould 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, it can be said that 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 – 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 and practical success and the law speak clearly in favor of trust, loyalty and fairness among founders. From a philosophical and ethical perspective, trust can be justified by utilitarian and deontological arguments – it creates mutual benefit and corresponds to fundamental moral duties. A totally Machiavellian course may seem tempting in the short term, but is morally dubious and usually saws at its own branch. Everyday practice in start-ups shows that disloyal behavior often has a destructive effect: founder disputes can destroy a promising company, whereas mutual loyalty can navigate a start-up through difficult times. Finally, from a legal perspective, it is clear that disloyalty among co-shareholders is not a legitimate strategy, but violates recognized legal principles (duty of loyalty, duty of disclosure, etc.) and can have 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 basis of every start-up partnership. Without trust, there can be no successful collaboration. Doubts and control mechanisms may be humanly and entrepreneurially appropriate, but they should never gain the upper hand over 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.