The Case of the Nepo Nightmare

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HEIDI: Welcome to The Startup Solution and “The Case of the Nepo Nightmare.” I’m Heidi Roizen from Threshold Ventures.

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Family is very important to me. And it’s also very important to an entrepreneur I know that we’ll call Simon. So important in fact, that he hired a family member into his startup.

Like me, Simon is the child of immigrants who came to America for a better life. His parents made a lot of sacrifices to put him through Stanford. Immediately after graduation, Simon co-founded an online fashion e-tailer with a fellow grad – let’s call her Lexi. Both Simon and Lexi had been in the program I teach, so I’d come to know them well – which is why Lexi felt comfortable calling me about an awkward situation. 

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LEXI: Hey Heidi, it’s Lexi. Could you give me a call to talk about something, and could you please keep this between us? The situation is that I’m in a bad spot with one of my direct reports. He doesn’t get his work done, he badmouths other employees, and he recently talked about some very confidential stuff to people he really shouldn’t have. And the biggest problem of all is it’s Simon’s big brother, Jimmy. You know Simon, he has a real blind spot about Jimmy, and I don’t even know how to talk to him about it. Advice, please?

HEIDI: Lexi has come to the right place. Because, back in the day, I lived this experience myself. I can think of at least seven people with the last name of Roizen who worked at our startup T/Maker at one point or another – including my brother Peter, who was the co-founder, as well as my mom, who managed the shipping department. Yes, you heard me right; I hired my own mother to run shipping. Mom and my brother were obviously at very different levels, but both experiences taught me some lessons about the pros and cons of working with family. And it sounds like Simon might need to consider those pros and cons, too. 

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To lay the context for my hard-earned lessons, let me start with a few war stories of my own.

It can seem really attractive to work with family when you’re getting a startup off the ground. They’re people you already know and trust, and they’re often willing to work for cheap or even free. In my case, I was the lucky one. My brother Peter created a spreadsheet program for personal computers just as that sector was starting to take off. He loves coding and pretty much hates business – so who better to trust for the business stuff than his little sister with her freshly minted MBA? I already knew he was a brilliant programmer, but when he showed me what he had created, I got big-time religion about bringing such a powerful tool to non-technologists like myself. I was hooked!

Peter didn’t want the CEO job, and so he offered it to me. And I gladly took it. As my first act, I incorporated T/Maker Company and became its first full-time employee. 

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In the early days, we had no money, so we took advantage of the free labor of other Roizens. My brother Ron wrote most of the user manual. My dad helped us negotiate some early licensing agreements. It was exciting for us to work together, and T/Maker quickly became our all-consuming family topic, which was super fun – until it wasn’t.

During the first few months, I was the only full-time employee – everyone else still had their other “real” jobs elsewhere. And to be honest, I got a little pissed off at everyone else interfering in what I considered my areas of control. At one family dinner, after a bunch of topics about T/Maker were brought up and everyone opined on everything, I blew up. My departing words were something to the effect of, “Do any of you have any idea how much I have sacrificed for this company?”

Yes, many decades later, I still remember that line, and not because of the moment itself, but because of what happened the next day. That’s when a floral arrangement showed up at my apartment, the kind you might send to a funeral. The only words written on the card that accompanied it were “Thank you for your sacrifice.” At least my family had a sense of humor!

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Anyway, we got past this episode, continued to work together, and started generating some revenue, which allowed us to hire a few people we weren’t related to. And as one might say, mo people, mo problems. My brother didn’t like a few of the people I hired. He thought the sales guy was ‘too salesy’—I mean, what? And the funniest thing that happened? Well, it was not funny at the time, but I went on a five-day, totally unplugged vacation after six months of nonstop work. And while I was gone, my brother fired two of our five employees. Luckily, when I got back, we fought it out, and I hired them back, but still, that was not fun.

Near the end of T/Maker’s first year as a company, I was shown a prototype of the Macintosh, and I fell in love. As a non-technologist, I was taken by the graphical user interface, the black type on a white background. All this has been commonplace for decades now, but at the time, it was revolutionary. I wanted our company to write software for the Mac. But my brother didn’t. He felt that the IBM PC was a way more powerful computer, and it allowed him more control as a programmer. And anyway, he had his hands full already working on the original T/Maker product.

So, he and I agreed that I could experiment by hiring other people to develop software for the Mac. We did that and, over time, shipped a number of Mac products. And in about a year, our Mac revenues had grown to equal what the original T/Maker product was bringing in.  

I thought my brother would be happy with this success. But he didn’t really care about it. The truth was, his only reason to start a software company was for the joy of problem-solving through code, and all the other stuff was a distraction. In fact, in his eyes, our Mac success was kind of a negative because it took our focus away from the product he loved. Funny, I thought I knew my brother so well, but it had never occurred to me until then that he and I had very different motivations for doing this whole startup thing in the first place.   

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So, about a year after we launched the Mac products, my brother and I agreed to split the company in two, each taking ‘our’ products into our new entities. I still remember during the negotiations that one of my biggest motivations for getting the split done was to STOP the emotional damage that our work relationship was having on our familial relationship as brother and sister. And once we got the split done, not only were we both happier, but he and I still enjoy a very close relationship thirty-some years later.

So, that family work situation ended well, but let me tell you about one that didn’t.

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As I mentioned, my mom was a first-generation immigrant who came to America from Germany when she was 12. She was a hard worker, but with only an eighth-grade education, her employment options had been really limited. Fast forward to our second year in business – T/Maker was growing rapidly, and at that time, software was still something you shipped in boxes. So, I thought it would be a great idea to hire my mom to manage shipping.

Trust me, I could go on forever about the funny and often horrible things that happened because of this. My mom was very headstrong and felt it was totally acceptable to burst into my office and rant about someone shipping something overnight that she thought could have been sent two-day ground instead. The running inside joke was that T/Maker was the only company where shipping reported directly to the CEO.  

I let this go on way longer than it should have, but eventually, for the good of the company and my own sanity, I had to fire my own mother. I talked to my brothers first, who were no longer involved with the company but were still, of course, my mother’s children. They totally understood why I had to do this and agreed to chip in with me to support her out of our pockets from here on so she wouldn’t need to work anymore. Then, I sat my mother down, and I told her the truth – that our mother/daughter dynamic was just too volatile to have it play out at work. She was in her early seventies, so I also pitched this as retirement. And I told her that we kids had agreed to support her so she wouldn’t have to work anymore. Even with all this accommodation, my mom was hurt, and the whole process was painful. But it had to be done, and truth be told, I should have done it way earlier. 

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So, here’s what I learned about working with family the hard way. 

First, if you have a family relationship with someone else, you will also have a pre-established power dynamic. These power dynamics have probably been with you your whole life, and they’re hard to break. Sometimes, you don’t even see how they’re affecting you, but other people do. One time, I came home raging mad about something my mother had done at work, and my husband said, “Well, your mom knows how to push your buttons. After all, she created your buttons”. My brother and I also had multiple power dynamics going on. I mean, he worked part-time at first, but I worked full-time. But he was the inventor. But I was the CEO. But he was older than me, in fact, 11 years older, so he still thought of me as a kid sometimes.   

The point is that the normal power dynamic that would be in any company between any two employees can be turned upside down if those employees have a deep pre-existing relationship. This can also be true of spouses, or significant others, or even close friends. 

And those power dynamics can really mess things up. People in the reporting structure between the two of you can get caught in the crossfire. Behavior that would not be tolerated in a regular employee may be tolerated in a family member, creating an environment in which some people unfairly have it better than others. Relatives may be put in positions they don’t merit due to familial pressure, meaning that not only will your culture take another hit, but work that needs to get done maybe won’t be done well. And startups usually can’t afford to carry anyone who’s not fully contributing. 

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An additional problem with nepotism is that family members often have patterns of communication that supersede what would be appropriate in a work situation. You might not tell someone in shipping about some big secret deal that you’re working on – but you might tell your mom. And then, unfortunately, she might tell someone else at your company. Your shipping person might not be comfortable telling you that she thinks your senior sales director is a jerk, but your mom might, even if she has to interrupt your most important meeting of the day to do so.  

Now, I’m not saying you can never work with relatives. I’m super grateful that my brother chose to work with me, and I really enjoyed working with him and a bunch of other relatives who did time at T/Maker. We still reminisce about those good ol’ days at our family dinners – well, at least some of those good ol’ days.  

However, relatives and startups only mix when you establish firm boundaries, and that’s what I needed to help Simon understand now.

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Remember Simon? He’s that entrepreneur with the incompetent big brother who started this whole episode off. I returned his co-founder Lexi’s call, and she laid out the problems. Simon’s brother Jimmy was going through a divorce and missed a lot of days of work because he just didn’t feel like coming in – behavior that was noticed by everyone and behavior that would not be tolerated from anyone else. He’d also badmouthed a few of his co-workers to Simon, and when Simon bounced the info off Lexi, there was no real truth to what Jimmy had said. Simon had also given Jimmy a grant of shares when Simon first founded the company, and Jimmy often talked about his ‘big stock position’ to his coworkers. There’s nothing wrong with a founder deeding some of his own shares to a sibling, but it feels off to have that sibling bragging to everyone that he owns more stock than the VPs do. 

I asked Lexi’s permission to speak to Simon directly about this, and she welcomed the help. So, I set up a one-on-one dinner with Simon, away from the office and away from everyone else. At dinner, I told him a few of my own war stories about working with family so that he’d understand that I could definitely relate.

I also said that it was ultimately up to him whether he would continue to employ Jimmy. But I wanted him to be clear-eyed and rational about the potential problems. So, I walked him through some of the issues – power dynamics, work expectations, communication problems, and impact on company culture – stuff I had learned through my own painful experience. And Simon admitted that he could see some parallels between my experience and his current situation.

In the end, I asked him to live by one simple rule. When you hire a family member as an employee, your relationship must conform to the norms that would be expected as co-workers, not as family. And if you can’t live by that rule, don’t work together. 

What does this mean? It means setting up a whole lot of boundaries that may feel quite uncomfortable.

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For Simon, I recommended the following guidelines.

Number one, no work talk outside the office or outside of what would be normal between the CEO and a person in Jimmy’s position.

Number two, job placement, evaluations, and compensation would be dictated by someone other than Simon, in this case Lexi.

Number three, whatever Lexi decides goes, no hard feelings. For this one, Simon was going to have to work really hard to overcome his natural inclination to protect and defend his brother.  

And number four, if at any time Simon and Jimmy couldn’t live by all of these rules, as judged by Lexi – Jimmy would have to go. Simon would have to work extra hard to encourage honest feedback, too, since it’s clear the current dynamic was not accomplishing that.

I also told Simon that having a lot of relatives to work at my startup is not something I would do today. I still think it’s fine for siblings to found a company together, as long as they talk through their individual goals and motivations first, as well as set up rules for managing their work relationship to avoid all the pitfalls we just talked about. But for roles that could easily be filled by non-family members, I personally would no longer populate my startup with relatives. Like many things about startup life, it’s hard enough to be successful without creating more problems for yourself, and having the entanglement of family ties interfering with normal operations is just not worth the trouble.

So, what did Simon do? Simon had a heart-to-heart with Lexi and asked her to give it to him straight up. While he hated to hear what she had to say, he’d also sorta known most of it already and had just been avoiding doing anything about it because, well, Jimmy’s his big brother. After a few more days of thinking it through, Simon talked at length with Jimmy, and they agreed Jimmy would leave. Simon told me it was really hard to do and that Jimmy had been a bit hurt. But Jimmy also respected Simon’s position, and he knew he needed to support Simon’s decision.  

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So, what can you take away from the Case of the Nepo Nightmare?

First, there can be very good reasons for starting a company with a relative. But just because you know someone well in a family context doesn’t necessarily mean you know them well in a business context. It’s a good idea to talk about your motivations and goals up front, as well as agree on some rules and boundaries to help avoid problems that your family relationship might create.

Second, when you work with a close friend or family member, you bring along your pre-existing relationship, including its power dynamics and patterns of communication. These are hard to overcome and can be inappropriate and even damaging, depending on the roles you’re in.

Third, when a relative gets preferential treatment, whether that’s accommodating work failures, getting unwarranted pay, or being privy to information they otherwise wouldn’t know, this will almost certainly create a rift in your company culture.

And finally, if you’re going to work with a relative anyway, be sure you codify the work relationship and agree that it supersedes the family one. If at all possible, put someone else in charge of managing that person and promise to keep yourself out of all decision-making with respect to the role.  

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HEIDI: And that concludes “The Case of the Nepo Nightmare.” For the record, Simon, Lexi, and Jimmy are composites, but boy, my mother was real. And no startups were harmed in the making of this podcast. 

Thanks for listening to “The Startup Solution.” We hope you have enjoyed this episode, and if you have, please pass it along to someone who could use it. I’m Heidi Roizen from Threshold Ventures.

Further Reading

This covers the pros and cons of hiring relatives, including some tax benefits on the pro side: Should You Hire Family Members to Work in Your Startup? 

Here’s even more reasons not to hire a relative: 25 Reasons Why Hiring Your Relatives Is an Even Worse Idea Than You Suspected

Here is an interesting, honest perspective from someone struggling on the employee side of this unfortunate equation: I am the Nepotism Hire Who No One Likes

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