by Tricia Meyer on September 5, 2013
It is tempting to start a business with a friend without first establishing some ground rules, but sooner or later you will find out (maybe the hard way) that lack of planning will damage the effectiveness of your business and cause undue frustration. A founder’s agreement is an absolute necessity for a company with more than one owner. It is one of the most important documents used by a company because it governs the internal affairs of your business and provides a framework for your expectations.
It happens all too often where I meet a couple of friends who start a business together, and it ultimately collapses due to mismanagement of expectations, differing goals, values, work ethic, and the list can go on and on. Even though you start off on the same path with common goals, those views can easily diverge over time. Although it is nearly impossible to prevent such differences, it is possible to bring some certainty to the business relationship so that you can predetermine and document how certain events will be handled. There are bound to be bumps in the road, so it’s best to discuss these issues at the beginning to ensure everyone is on the same page.
What are the key topics to discuss in order to draft a founder’s agreement?
- Ownership and Compensation. Who owns what percentage of the business, how much is each partner contributing? How and when will you get paid?
- Rights and Responsibilities. What duties will each person be required to perform? How you will decide on certain business decisions? Will you require unanimous consent? Or will one person be able to make all decisions on behalf of the company?
- Disputes. How will you handle a settlement of disputes between the owners? What if there is a deadlock?
- Restrictions on Transfer. Will you require an existing partner to offer to sell their interest to you before selling it to a third party? How will the partner’s value in the company be determined?
- Death or Disability. What happens upon the death or permanent disability of a partner? Will you want the right to buy their interest in order to retain control of the company?
- Protecting Business Goodwill. How will you protect your business? Do you want a restriction that prevents your partner from competing? Would you like to prevent each other from soliciting customers or new business from the company?
The above list is by no means exhaustive; however, it gives you an idea of items to be addressed from the beginning so that you can focus on the future of your business.
DISCLAIMER The content in this article is for informational purposes only and does not constitute legal advice. Readers should contact a qualified attorney to obtain advice with respect to any particular issue or problem.
Tricia Meyer is managing attorney of Meyer Law, a forward-thinking boutique law firm providing top-notch legal services to clients ranging from startups to mid-sized companies to large corporations in a variety of industries including technology, telecom, financial services, real estate, advertising, marketing, social media and healthcare. Learn more at MeyerLawGroup.com and follow us on Twitter @Tricia_Meyer or @Meyer_Law.