Dealing with Co-Founders

Dealing With Co-Founders

Driven entrepreneurs who are truly proud of their ideas often have trouble slowing down and making sure all of their paperwork is in line before hitting the ground running. While this is a truly admirable act of passion, it’s important to press pause and make sure all of your legal documents and agreements are taken care of before moving forward or you may regret it down the line. 

Startups often come to us asking what they should prepare when it comes to co-founders and our goal is to give our clients a better understanding of how to navigate this process. 

Our short answer:

A big co-founder dispute can be an unfortunate early killer of even the strongest Startup. This can easily be avoided by having the right agreement in place.

Types of Agreements:

What agreement you have will depend on the structure of your business.  Regardless of your business, make sure you get the proper paperwork signed before starting anything! Below are the four major agreements to consider when starting your business:

Partnership Agreement

A Partnership Agreement is a contract between two or more individuals who would like to operate a business together in order to make a profit. This agreement states that each partner shares a portion of the partnership’s profits and losses and each Partner is personally liable for the debt and obligations of the Partnership. The agreement depicts the nature of the business, their profit sharing ration, the capital put up by each partner as well as their duties and responsibilities. 

Who this applies to:

This agreement is for those looking to set their business up as a General Partnership. A General Partnership is an arrangement which two or more parties agree to share all assets, profits as well as financial and legal liabilities of a business. 

Operating Agreement

An Operating Agreement is a document that governs the internal operations of a Limited Liability Company (LLC). This agreement will set forth how the company will be managed, how the finances will be handled among its members and other important provisions that set your business up for a smooth operation. You can expect this agreement to include the allocation of profits and losses, the percentage of interests, as well as the responsibilities of the members. 

Who this applies to:

An Operating Agreement is a key document used by LLC’s because it outlines the businesses’ financial and functional decisions. If you’re looking for a business structure with more personal protection and less formality, then a Limited Liability Company might be best for you.

Shareholders Agreement

A Shareholders’ Agreement is an arrangement among a company’s shareholders. The agreement outlines how the company should operate as well as the rights, responsibilities, and privileges of the shareholders. This agreement is put in place to make sure shareholders are treated fairly and that their rights are protected by law. 

Who this applies to:

A Shareholders Agreement is a contract between shareholders that outline how a corporation will be run. It is most often used in closely-held corporations with a small number of shareholders who are actively involved in the daily operations of the business.  

Founders Agreement

A Founders Agreement is a great contract for founders still in the very early stages and conversations of their business. This agreement lists the expected roles and responsibilities of each member of the founding team while covering allocated equity ownership and Intellectual Property ownership.

Who this applies to:

A Founders Agreement is a great contract for those who don’t know what entity they want to create yetbut want to start outlining specific rights and responsibilities of co-founders.

Avoiding Problems

While these agreements are sure to protect you legally, it’s always good to avoid getting to that last line of defense by understanding early on how to fight fair with your partners and work together against problems, not against each other. As business owners ourselves, here are two major tips that have always been a powerful tool for us:

Embrace Conflict

Learn to embrace, not avoid, conflict. After all, constructive conflict is really just a few people who care a lottrying to do what is best for the business. Once you realize that it’s you and your co-founders against the problem and not against each other, you’ll learn to hear each other out and come together to combat issues as they arise, evolve as a team and grow stronger as a company.

Establish Boundaries 

If you find that you and your co-founders are fighting unproductively and often, there is a good chance your individual roles have become blurred and are not clearly understood by each party. Sit down with your co-founders and make a list of each area that needs attention in your business. Once you’ve done this, have an open conversation and decide who is going to be assigned to each specific task. When the time comes and that situation presents itself, make sure everyone agrees to hear each other out, but ultimately, you should trust the person assigned to that area of the company to make the final decision. 

The Bottom Line

Co-founder disputes are one of the biggest early Startup killers, but it doesn’t have to be that way. Setting boundaries, learning to embrace conflict and having the proper legal paperwork in place will set you up for success as a team from the beginning.

If you still have questions about dealing with co-founders, reaching out to a lawyer for advice is recommended. At Benemerito Attorneys At Law, we offer free consultations and would love to help guide you toward the right decision for your business. 

Let’s talk >>> 212-785-1528

This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances.

Copyright © 2018 Benemerito Attorneys at Law Attorney Advertising