How To Legally Protect Your Business From Co-Founder Disputes?

Because nearly all new businesses are established between friends or relatives, when you embark on a business venture, you risk not only your financial resources but also your personal relationships.

So, how can you prepare for the breakdown of a relationship with a co-founder? Firstly it would be a good idea if you hired a corporate lawyer who would be able to advise you on the agreements and contracts that you should have in place and if something does go wrong between yourself and another founder or shareholder, the next steps you need to take.

Relationships Between Co-Founders: The Human Factor

Start-ups are, by definition, difficult. There is rarely sufficient money or time, and the future is uncertain. You and your co-founders are secluded from partners, family, and friends. It is not surprising that tempers can become frayed.

Moreover, as your business begins to expand, the working environment can change rapidly. As the commercial landscape evolves, the value of a particular founder’s skills may diminish. It may have been essential for the personality or work style of a founder to get the business off the ground, but they may now be hampering the future growth of the business.

It is quite common for founders to leave the companies they founded. Nonetheless, this topic is rarely discussed. The majority appears to believe that it will never happen to them.

However, just as in business, risks are most effectively managed when they are comprehended and discussed prior to becoming a reality. However, these discussions can be challenging. Here are some considerations we suggest you make:

  • What will every one of us be doing? How could this evolve? How much time are we each willing to invest?
  • What kind of business do we wish to form?
  • Are we willing to issue stock in exchange for financing? How much would each of us like to retain?
  • How long do you plan to operate your business?
  • When might we give up?
  • What will we do if we lose our footing? Should we involve a mediator at this time?
  • When and how to have the challenging discussion

As with all relationships, the optimal time to have difficult conversations is at the beginning, when romance is in the air and the future appears bright. Moreover, to withstand the intense pressure of running a business, you must build your company on solid foundations, so the time to get serious about the details (and document them) is before disagreements arise.

By asking yourself tough questions about your co-founders’ obligations to the new venture, your short, medium, and long-term goals, and your vision of success, you can anticipate potential pinch points and differences between you.

Starting a business requires foresight, candour about one’s motivations and feelings, and the ability to grasp the intricacies of a founder’s agreement. This is the prudent and deliberate way for start-ups to embark on the path to entrepreneurship.

Use a founder’s agreement to safeguard your business against the dissolution of co-founder relationships. A contract dispute solicitor or corporate solicitor will be able to help you draw up all relevant founders’ agreements, contracts and shareholder’s agreements.

In the unfortunate event of a breakup, it will be comforting to have proper and legally binding documents between you – a shareholders’ agreement in the case of a company or an operating agreement in the case of a partnership – to make the path forward more transparent.

A well-drafted founders’ agreement – an informal agreement that serves as a precursor to a shareholder’s agreement – will lay the groundwork for an official partnership or shareholders agreement that not only protects your interests but is also legally enforceable, addressing the evolving needs of your business. It may include topics such as:

  • What will happen if one of you becomes gravely ill or passes away?
  • What will you do if a founder’s personal values change in an incompatible manner with your own?
  • What happens if one of you wishes to sell their stake to a third party with whom you believe you would be unable to collaborate?

Founder agreements can resolve frequent issues in co-founding relationships.

As the venture’s success increases and its problems become more complex, a variety of troubles may arise. All these issues can be explored and discussed in a founder’s agreement, as well as a shareholders or partnership agreement in the future. For instance:

Intellectual Property

Intellectual property and assets are crucial to the success of your company. If one of the founders has registered a trademark in their name or designed a logo on a computer at a previous job, they must transfer it to the company.

Similarly, you will need to establish service agreements for each director and, potentially, employment contracts, so that their terms can also be tackled in the founder’s agreement.

Deadlock

One of the most common clauses in shareholder agreements stipulates that all business decisions must be made by consensus, with the approval of all business members required for major decisions.

When a business is small and easy to manage, this seldom causes issues. However, as your business grows, any disagreement over its impending direction could lead to a stalemate, or worse, a major dispute, if you have not discussed how to manage it beforehand.

Cashing in your Stake

As your business begins to expand, you may need to attract outside investors by offering them company stock.

Just imagine that you can grow your start-up into a business worth millions of pounds, but you are unable to sell your share because a minority shareholder, you know, the one you have not seen since the last annual meeting, wants to block the sale.

A shareholders’ agreement may contain ‘drag-along’ provisions that allow founders to compel a minority shareholder to sell their shares so that the sale can proceed.

You can pave the way for a shareholder’s agreement by discussing these types of issues in advance and establishing some rules in the founder’s agreement.

You might like: Hire a Business Lawyer: What Does A Corporate Lawyer Actually Do?

Navigating co-founder equity

Initially, a simple shareholders agreement with straightforward provisions will typically suffice in terms of equity. It can address the relationship between the entrepreneurs, the number of shares they will own, their voting rights, responsibilities, and equity contributions, as well as the vesting schedule for additional shares (or transfer into personal ownership).

However, once the company has begun to increase its market share and is considering consolidating its position, you will need to place existing investors and any new investors on a more formal basis.

Investors in venture capital will seek a more complex arrangement, which will result in a new shareholders’ agreement and revised corporate documents.

Equity can have a significant effect on culture and motivation; allowing everyone involved in the founding stages to acquire a stake in the form of equity sends a message of fairness.

Consider, when drafting a founder agreement prior to your first shareholders agreement, what should happen if a co-founder wishes to leave; should they be permitted to sell their shares without the company’s consent?

If you and your co-founders agree beforehand on what will happen if you decide to part ways, you will have a better chance of avoiding a painful dispute during a delicate time in the company’s growth.

Mishoura can put you in touch with a corporate lawyer if you do not already have one. Working with businesses in the UK Mishoura does all the hard work for you and matches your business needs to the relevant solicitor.

After an initial consultation, Mishoura will be able to give you a shortlist of corporate lawyers in your area who will be able to help you with all your contracts, founders agreements and shareholder agreements.

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