If you are starting a business with multiple founders, it makes sense to spend a little time to think through legal issues. Preferably at the beginning. The idea is to talk through potential sources of conflict before they become costly and time-consuming disputes down the road.
Many lawyers will tell you that disputes among partners tend to come from two sources: ambiguity and assumptions. Everyone may get along perfectly today (in the honeymoon phase) but as things progress, disagreements are sure to pop up. By thinking through crucial issues in advance, founders can make the smart moves that will help ensure that disagreements do not become fatal disputes.
It happens. Don’t let it happen to you.
Here are some key issues that I often advise people going into business together to consider:
1. Ownership Percentages
The concept is pretty straightforward, but it can get complicated if you’re not careful. Definitely discuss each founder’s percent ownership in the venture – people might assume one thing when everyone else assumes another. Also consider whether or not there is any sort of vesting schedule associated with ownership percentages (vesting vaguely means that ownership share increases over time). In assigning ownership percentages, think through what each member will contribute in exchange for his or her percentage.
2. People Leaving and Joining
Things change. That might mean that an original founder leaves the venture or that a new person wants to join the team. It’s important to give some thought to what happens when someone leaves, paying special attention to any rights or responsibilities they may have to the remaining members. Especially think through how and why someone might leave involuntarily. On the other hand, it makes sense to consider in advance how new members are admitted.
3. Decision Making
Any business involves decisions. Some of these decisions might be major (such as leasing office space or hiring an employee) or might be minor, such as making everyday expenditures below a certain dollar amount. When starting a new venture, it is wise to consider what types of decisions require agreement among the members (and whether it needs to be unanimous or simply a majority) and what types do not. Also, it might make sense for one person to make certain types of decisions in their area of specialty.
4. Intellectual Property
Any modern business will generate intellectual property (things like copyrights, trademarks, patents, trade secrets) and sometimes lots of it. In fact, intellectual property will likely create much of your venture’s lasting value. At the beginning, founders might provide much of the initial intellectual property. That means that everyone should discuss how those contributions should be treated. Are they owned by the company? Can they be used for other things? What happens if the founder who created something leaves?
5. Competing Businesses
It’s possible that founders will have more than one business going, so it’s important to be clear on what business opportunities should be brought to the business and what types can be worked on individually. The idea is to avoid a situation where one person appears to be going behind the other founders’ backs.
How Does This All Work?
Most of these questions will be answered in your business’ founding documents (e.g. LLC operating agreement, partnership agreement or corporate bylaws). Think of these founding documents as the contract between all of the members. For new businesses, these documents might not be complex or extensive, but they should be complete. Drafting them will help you think through the issues above as well as others.
Ideally, going through the process of answering difficult questions will help to avoid disputes in the future. As I mentioned at the beginning, the two things that can break an otherwise successful business are: assumptions and ambiguity. If the founders can get together to discuss important issues up front, it will do a great deal to reduce the chances of conflict.
This does not cover all of the issues, but should get you started on thinking about the types of things that are important to cover. Often, founders will work with an attorney to advise them on ways to consider these and other issues and draft documents that reflect everyone’s understanding.
None of the above is intended as legal advice and is provided simply as educational information. Be smart and speak to a lawyer before making any legal decisions as the facts in every situation are unique. You will thank yourself later.