Entering into a new business enterprise can be exciting. Having a well-crafted written agreement among the founders is an essential element to successfully managing expectations and avoiding disputes down the road. Before you can start putting anything in writing, however, you must reach agreement on some basic terms. Here are four important topics you should cover in your initial discussions to avoid difficulties in the future.
How Decisions Are Made
How will the venture be managed? In other words, who will be responsible for making the day to day business decisions? What company decisions can be made by a single partner, and which ones will require a majority or even unanimous vote? One common approach would be for (a) any partner to have authority to make binding company decisions on minor issues and expenditures, (b) a majority vote to be required for expenditures over a certain dollar amount threshold, and (c) unanimous consent to be required for major decisions like adding another partner or selling the company.
Where the Money Comes From
Despite current trends (such as leveraging technology to save costs and focusing on establishing a Minimum Viable Product), most new businesses require an infusion of cash to get off the ground (and often subsequent infusions of cash at certain milestones in their lifecycles). Sometimes one or more founders contribute their own money. The amount of those contributions may determine what percentage of the company each founder will own at the outset. There are endless options for funding an enterprise and structuring its ownership; the bottom line is that you must address who is contributing what to the business so that the understandings of all parties are aligned.
Where the Money Goes
Just as knowing where the money is coming from is important, so is knowing where the money will go. A detailed budget with expense and revenue projections will be needed at some point early in the company’s lifecycle, but is probably overkill at this stage. Nevertheless, a preliminary understanding of how the initial infusion of business funds will be spent and how long they are projected to last is essential. This early stage is also a good time for a discussion of when first revenues are expected and how / where / to whom they will be allocated.
Death, Incapacity, and Dissolution
These are perfect examples of issues that can be simple to work out ahead of time but messy to sort out if neglected. There are myriad challenges that arise upon the death of a business owner, such as what happens to her ownership share and how are proceeds from “key man” insurance to be used? Upon the death or incapacity of a partner, do the company or the other partners have a right to purchase the deceased or incapacitated partner’s ownership share? How will that share be valued? What if one or more owners want to dissolve the business? What criteria and processes must be met and followed?
The four broad topics above merely scratch the surface of what legal and operational issues should be discussed among business founders ahead of time. Nevertheless, hopefully, they can serve as a starting point for those of you who are considering co-founding a business. One thing these topic illustrate well is that when it comes to business partnerships, it is always far better to have the details worked out ahead of time. No matter how unlikely or unpleasant they may seem – particularly when the parties are focused on working together towards a prosperous shared future – these are all issues that may arise during the lifecycle of a company. The most painful and expensive time to work out these details is during litigation when the parties are at odds with each other. Figuring these things out in the beginning can save your partnership in the end, particularly when the unexpected happens.
CLARK.LAW
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