When you start up a business with co-founders, there are a number of issues that should be discussed and negotiated at the outset to avoid conflicts in the future. The founders of the company should have a clear understanding of their rights and duties with respect to the financial, legal and strategic aspects of the relationship. Below is a summary of some of the most important factors to consider to protect your interests when embarking on co-ownership of a company.
Shareholders agreement. A written shareholder’s agreement should be drafted to cover, among other things, ownership structure, transfer mechanisms, co-owner duties and obligations, management arrangements, voting rights and exit strategies. Ownership rights can be allocated in a number of ways; they can be shared equally or structured disproportionately with one co-founder receiving an increased share of rights over time. The agreement should address vesting terms as well, including a vesting schedule, for the equity of the founders. This means that the founders must earn their ownership interests by creating value in the business.
If a co-founder decides to exit the business, the shareholder’s agreement should specify a mechanism for transferring or selling shares of the departing owner to remaining owners. The responsibilities of each co-founder must be enumerated, along with standards for performance review, and the process for dismissing co-founders who are not performing in accordance with the agreement. The process for making decisions, including the allocation of voting rights and the standards for requiring board approval, must be addressed in the agreement. While the typical arrangement stipulates that voting rights are proportionate to one’s ownership of shares, co-founders are free to establish any arrangement in the agreement.
Dispute resolution mechanism. Co-founders should anticipate how they will handle disputes that arise concerning the business. A dispute resolution clause in the agreement should specify these procedures and include instructions for proceeding when there is no majority consensus among the founder over a certain issue. This provision should also address the process of selling off shares of a shareholder who cannot reach a resolution with the remaining parties.
Intellectual property protection. Any idea or innovation produced by the co-founders of the company should clearly belong to the enterprise and not to the individual creator. Ensuring that all intellectual property is assigned to the venture will help prevent conflict if an employee or founder leaves the company.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.