Start-up founders often focus on the business and raising capital, whereby they often overlook the basic legal pitfalls when setting up their venture. This creates vulnerabilities for the founders, the investors, but also the business as such. These business threats may range from intellectual property-related issues, regulatory matters to contractual topics such as getting a founders agreement or the right terms and conditions. In this blog, we have a closer look at one of the core legal threats when becoming an entrepreneur, namely the relationship between the partners and how you can mitigate this risk.
For many founders having proper contracts in place is not a priority, so they often only realise the importance of well-drafted agreements once legal issues arise. However, by this time solving legal problems will cost the start-up more money than drafting a proper contract would have cost in the first place. In some cases, it may even be the end of a business venture. Start-ups are often founded by more than one individual with differing interests; hence, there is room for disagreement. Even if in the beginning everybody pulls in the same direction this is bound to change at some point. By clearly outlining every founder's rights and responsibilities, the partners can mitigate the risk arising out of differing opinions. A famous example of when the lack of an agreement between partners led to legal problems is the Zuckerberg/Winklevoss Facebook case. The case dealt with whether the idea for the social network was stolen by Zuckerberg. The dispute dragged on for several years before it was eventually settled. Nevertheless, it shows the importance of having a contract setting out the relationship between co-founders to ensure the continuity of the business venture.
Partners need to agree at an early stage on the key aspects of a venture, where they want to take their idea, how they will work together and maybe at some point end their business relationship. It is important to pick one's co-founders carefully and set a clear basis for cooperation to make sure that partners do not end up to be adversaries.
For some guidance in this matter, we have drafted the checklist set out below giving you some indication of what should be included in such an agreement to make sure that you will not end up becoming adversaries.
- What is the overall vision and goal of the business?
- Who gets what percentage of the business?
- What is the capital contribution of each investor?
- Is the percentage ownership subject to vesting based on continued participation in the business?
- What are the roles and responsibilities of the founders?
- What happens if one founder wants to leave the business? Is there a share buyback option? At what price?
- What kind of commitment is expected of each founder?
- How are daily decisions being taken? How are the key decisions being taken?
- Can a founder be removed as an employee of the business?
- How will the sale of the business be decided?
This is just one out of many pitfalls to avoid when starting your business.