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Before You Start Your Startup Make a Founder Agreement

Posted by Corey F. Schechter | Oct 25, 2016 | 0 Comments


Getting involved in your first company can be an exciting time. When talking with your partners about a new product or service it can be hard to focus on the more mundane tasks of incorporation, agreements, and contracts. However, when you encounter challenges down the road, the lack of a proper founders' agreement can lead to lawsuits and potentially threaten the company.

Most start-ups never address these issues until they rear their ugly heads as problems that could potentially threaten the relationship between the founders, and the future of the company. Just because all partners are friends and get along well at the outset does not mean it will stay that way. Preparing for the future is not being pessimistic; it simply means you are addressing potential conflicts before they arise.

There are a number of simple questions to discuss with your partners to help avoid costly litigation down the road. These questions primarily involve money, ownership, roles and responsibilities.

When starting a company, all the founders may treat their role as a full-time job, putting in all the work that is necessary to make the business succeed. However, in time, each person may be confronted with conflicting interests, including relationships, family, and competing job offers. Knowing how much time everyone is expected to commit will help manage expectations. It will also enable the founders to decide what to do if someone has to change their time commitment.

In most start-ups, the founders initially decide to own the company evenly. However, as the company grows, duties evolve, more partners join, and investors ask for a share, this even split may be more difficult to reconcile. If one founder is putting in more money or more time, they may expect a greater share of the company, while the other founders may disagree.

Money can be a major contributor to conflict in a growing company. When the company needs more money, some founders may have additional assets while another founder is still scraping to get by. The founders need to confront how additional investment dollars will impact the ownership of the company.

By confronting these types of issues before they come up, if they do eventually occur, you'll have a framework in place to deal with the situation. Through the founders' agreement, you have already considered those problems and agreed on how to resolve them. You may also be much more likely to determine a fair course of action before problems arise (when heads are calm).

When founders devote adequate time to prepare a flushed out founders' agreement early on, they are more likely to avoid significant conflicts later. After discussing possible scenarios and deciding on how to approach various problems, there will be fewer surprises down the road and greater predictability on how to address those problems. A founders' agreement can be a wise investment in the long-term success of any startup.

If you have any questions about business planning or counseling, contact Butterfield Schechter LLP. With a focus in employee benefit legal services, business and transactional counseling, and tax law, our firm can help you establish a custom plan that conforms with regulatory requirements and represents your best interests. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


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