(This is the fifth part of a six part series. The first part can be found here.)
In this fifth part of our series on the five things you need to do when starting a business, we are going to discuss the importance of having a founders’ agreement when starting a business with one or more other people.
Not many things come close to the excitement and exhilaration of starting a new business. If you are starting out with partners, they will be individuals you know, get along with, and share big dreams and big plans with. Everyone is very enthusiastic and optimistic; focusing on the product or service and building forward momentum. But what happens when the honeymoon phase winds down?
All successful businesses evolve over time. Circumstances and situations can change, and often do. Unfortunately, many startup businesses fail to account for these future changes by omitting a crucial step in their initial business plan – a well drafted founders’ agreement.
In simplest terms, a founders’ agreement, also known as a shareholders’ agreement for a corporation or an operating agreement for a limited liability company, makes sure everyone is on the same page at the start, and puts plans in place if there is a change in direction. A founders’ agreement lays out how the internal affairs of the business will be handled, and defines the relationship, including expectations, between the co-founders. It also serves as a framework for discussions about current and future issues, and how those issues will be dealt with.
A founders’ agreement should clearly define the roles, responsibilities, and rights for each owner of the business. It is important to remember that co-ownership does not always mean equal ownership. Each partner’s percentage of ownership, as well as initial financial investment and other contributions, should be clearly documented. The founders’ agreement should also outline the decision making process for the business, as well as how disputes will be resolved.
Another important component of a founders’ agreement is how existing partners exit the business, and how new partners are brought in. Additional information on what should be included in a founders’ agreement can be found here.
With any new business startup it is important that all co-founders have clear expectations from the beginning. A well-drafted founders’ agreement will do just that. Skipping this important step could lead to costly, and even disastrous consequences down the road. A good business attorney will create the right agreement to address your specific business needs and concerns, and make sure all the bases are covered if things don’t work out quite as expected.
If you have any questions about creating a founders’ agreement for your new business venture, please reach out to us. We are always here to help!
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.