Starting a business is exciting and most founders are extremely optimistic and get along very well in the beginning. Many focus on the product or service they are offering, and don’t consider the legal framework of their business. One fundamental mistake made by many early stage companies is not getting a founder’s agreement in place. This can be a costly mistake down the line leading to a disaster that likely could have been prevented.
A founder’s agreement essentially governs the internal affairs of your business and provides a framework for your relationship with your co-founders. It helps you discuss important potential issues now and figure out how you will handle those issues should they arise in the future. Among the many things co-founder’s should be discussing are:
- OWNERSHIP. Each co-founder’s ownership percentage should be documented, along with the amount of capital contribution and a description of services being provided. It’s important for co-founders to discuss whether vesting terms apply and also consider what happens if a co-founder leaves either voluntarily or involuntarily. In each instance, you may decide that you would like to take a different course of action and may want to value the interests differently.
- ROLES + RESPONSIBILITIES. There will be many things to do so you will need to divide and conquer with roles and responsibilities clearly defined. This will help ensure each key area is covered. Most co-founder’s base roles and responsibilities on areas of expertise or strengths. It is vital to discuss expectations of each co-founder to ensure everyone is on the same page.
- DECISION-MAKING. It’s essential to clarify which co-founder has decision-making authority and in what instances. There may be certain instances where a co-founder would need to defer to the other co-founder’s and come to agreement. Whether it’s ordering office supplies, or bringing someone on as a partner, the decision-making authority should be well-defined.
It’s important to set clear expectations in the beginning to prevent disputes down the line and save yourself time, stress and money in the event things don’t work out as expected.
Tricia Meyer is Founder + Managing Attorney of Meyer Law, one of the fastest growing law firms in the United States. Meyer helps entrepreneurs and technology companies from startups to large corporations with day-to-day matters and notable clients include companies that have appeared on Shark Tank to companies gracing the Inc. 500 to some of the largest companies in the world.
Tricia has been named on the Forbes Next 1000 list, is one of the Most Influential Female Lawyers in Chicago according to Crain’s Chicago Business and been recognized as a top 10 technology lawyer.
As an entrepreneur and a lawyer, Meyer has a unique perspective and has mentored thousands of startups and scaling companies at tech incubators and accelerators across the United States such as 1871, WeWork Labs and Techstars. Tricia has been featured in Inc., Crain’s, Chicago Tribune, NBC Chicago, American Express OPEN Forum, and more. Learn more at www.MeetMeyerLaw.com and follow Meyer Law’s story on Instagram @loveyourlawyer.