Why You Need Agreements Between Founders

With all the considerations that go into getting your small business or start-up off the ground, it is all too easy to overlook setting up an agreement between the founders. Unfortunately, not having one can be catastrophic for your business.

You’re friends, right? Family even, maybe? What could go wrong? In our experience, a lot can and does. Establishing agreements between founders at the start of the business will assist you in managing and navigating the challenges commonly seen in running your start-up or small business.  Read on to learn more!

Partnership agreements, love law firm, Francine e love, small business, start-ups

Which Type of Agreement is Right for You?

The first step in setting up the contract is to determine which contract is appropriate for your business structure. of 

  • Shareholders' Agreement – If you have formed a corporation (i.e., an “inc.”), Shareholders’ Agreements are where we typically find decisions about how to run the business, vote the shares, and buy/sell shares under different circumstances.
  • Operating Agreement – If you formed a limited liability company, Operating Agreements are the place where these same decisions go, including profit sharing and other financial considerations.
  • Partnership Agreement – If you formed a partnership (of course, not a general partnership which we recommend against, but a limited liability partnership), the Partnership Agreement is where all of these same types of decisions are recorded.

Each agreement has specific elements that will govern the business relationship and detail the rights, responsibilities, obligations, and liabilities of each founder. 

Element One – Who’s In Charge Around Here?

Deciding and agreeing upon who will oversee various aspects of the business is paramount. Each founding partner should have a frank conversation where they discuss what they believe are their strong suits based upon their skills, interests and backgrounds. From handling the financial aspects of the company to overseeing technical issues or design – understanding these roles and responsibilities is critical. These items should be detailed in the founding documents and include a determination as to who has the final say in various aspects of business.

Element Two – Show Me The Money!

There are many ways to distribute the profit made as a result of growing your small business or start-up. Things to consider include how long each partner has been working to build the company, as well as the financial contribution made by each, among various other factors. By having an attorney assist you in drafting these agreements, you can be sure you and your other partners will come to an agreement that is fair and takes into consideration the many ways a person can add value to a company.

Element Three – I Own How Much?

Ownership allocation provisions are another important and delicate subject to navigate. Generally speaking, founders might think that a 50/50 split is fair. This is often the case, so long as one of the founders did not have a greater initial investment (e.g., in time, capital, sweat equity, etc.) to get the business off the ground. These are important details that require a trusted and knowledgeable attorney to help navigate. Additionally, vesting provisions can protect you from the possibility of your partner leaving, as their ownership percentage will decrease over time due to a well-crafted vesting provision. These types of agreements incentivize founders to continue building the business and protect both the business and all the founders. 

Element Four – What Happens To What I Create?

Perhaps one of the more important considerations when establishing an agreement between founders is the ownership of intellectual property. Intellectual property is the bones of your business and the added value that makes your start-up unique. This can include design elements, technical elements, business processes and the like. You will want to come to an agreement and outline alongside your other founders and business attorney, just what intellectual property is included in your business, who makes decisions regarding it, and what information is considered confidential. 

Element Five – What If I Want To Leave?

Everyone starts a business intending to be with it for a long time. But sometimes life doesn’t work out the way everyone intends and one or more founders need to exit even while the business is a going-concern. There are a lot of reasons why this might happen – disinterest in continuing the business, disagreement with the other founders, disability forcing you to leave employment, or even the death of a partner – to name but a few. A well crafted founders’ agreement will handle these possibilities and provide for you, your co-founders, the business, and potentially your family, should you need to exit.

Conclusion

You’ve put so much into starting the business – now protect it and you. Founders’ agreements aren’t optional; they are essential for a a healthy, functioning business that provides returns to all of its founders for a long time to come.

Francine E. Love
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Founder and Managing Attorney at Love Law Firm, PLLC which dedicates its practice to New York business law