When a great idea takes off, the true colors of the people involved often reveal themselves. Without an agreement in place detailing ownership of the business, dispute resolution, and other issues, an entrepreneur risks being left out in the cold. Ambiguity in the infancy of a startup company can cause significant issues later, just ask Mark Zuckerberg.
Therefore, startup co-founders should keep the following in mind:
Deciding how to divide ownership of a startup is often one of the most critical aspects of the founders’ agreement. Provisions might include:
- Each founder’s ownership percentage
- Whether the vesting of their percentage depends upon their continued involvement in the business
- How ownership might transfer upon a founder’s departure
When thinking about ownership, remember that a percentage should also be set aside for future employees. Many advise allocating a 10% ownership share for this purpose.
The startup agreement can also address your desired goals and vision for the business – as well as what will happen if a founder does not comply with those expectations. Similarly, founders should outline their roles in the organization and the responsibilities that accompany those roles.
Finally, the founders’ agreement should also address how you plan to make important decisions. These provisions can detail the power and responsibilities of the Board, whether you’ll require a unanimous vote, how founders can be removed from their positions, and more.
One final caveat based on some of our clients’ missteps: Resources are available online for drafting a founders’ agreement, but keep in mind that online resources seek to serve the common denominator – despite the fact that every business and every partner presents a unique set of circumstances, facts, and personalities. That is why you are strongly encouraged to consult with an attorney to draft your founders’ agreement or, at the very least, before you sign any DIY agreements.