Loosing Friends over a Business: Start-Ups and Founder Agreements: How to avoid conflicts among founders if the ship starts to sin

by Armen Kiramijyan on Dec. 05, 2013

Business Contract Business Business  Business Organization 

Summary: It is not a good idea to start a venture without having some idea of how you will end it. A lot of founders make the mistake of simply distributing pieces of the business to each other and other without proper contracting.

It is not a good idea to start a venture without having some idea of how you will end it. A lot of founders make the mistake of simply distributing pieces of the business to each other and calling it a day.  However, thinking about the “if one of the founders decides to climb Mt. Everest right before we IPO, what do we do?” scenario will make life much easier for you and Mr. Cliffhanger.  Agreements are to avoid all the headaches that come with these little mysteries in life.  Plan it out accordingly to avoid losing friends over it. 

As you raise equity, you need decide what to do with it. You may have a prefect business model and vision.  What you cannot foresee that you may hit roadblocks in its development, resulting in the modification of your founder team.  Based on the change of hearts and ideas, you may have to add or remove some people from the team. By keeping the structure of your new business flexible to cater to theses changing waters you will prevent a lot of headaches down the line.   

Keep in mind, this article is for educational purposes only.  If you do not like expensing legal fees for your business, you should at least have a business attorney guide you through the waters.  The article DOES NOT create an attorney-client relationship unless you have expressly retained KAASS LAW in person at their office.   

First, it is always a good idea to have written founders’ agreements.  Use the structure up front to prevent disputes later.

Second, avoid using percentages to describe a founder’s ownership. The agreement should use specific numbers of shares of stock to avoid both legal and financial impacts down the line.

Third, be cautious when you are vesting stocks to founders, it is a very valuable tool.  Consider restricted stocks to the founders in accordance with the splits they devised. Include a right for the company to repurchase some or all of the stock back at a very low price should that founder leave the company.

Forth, you might also want to place some restrictions on when and to whom the founders can sell their shares to.  You can achieve flexibility in the relationship among founder by adding a right of first refusal for the company or the other founders to buy the shares on the same terms.  Further you add a tag along right, essentially giving the other founders the right to sell some of their shares on the same terms.

Fifth, intellectual property should also be an important discussion among the founders. Having each founder contribute to the company any intellectual property he/she may have developed prior to formation is critical, but keeping control of the intellectual property that is developed over time can also prevent problems in the future. The founders can also decide in this agreement what should happen with the intellectual property if things go underwater. 

It is much easier and less costly to deal with such issues up front than when the dispute arises.  This not only costs time and money, but relationships and ultimately the feasibility of the startup.   

This content is intended for educational purposes only.  KAASS LAW is authorized to practice law in California.   The above content is intended for California residents only.  This content provides only general information which may or may not reflect current legal developments. KAASS LAW expressly disclaims all liability in respect to actions taken or not taken based on any of the contents of this website.  The above content DOES NOT create an attorney-client relationship.  KAASS LAW does not represent you unless you have expressly retained KAASS LAW in person at the KAASS LAW office.  KAASS LAW helps clients in: Los Angeles, Burbank, Hollywood, Glendale, Van Nuys, North Hollywood, Studio City, Eagle Rock, Sunland, Tujunga, Sylmar, La Crescenta, La Canada, Beverly Hills, Westwood, Santa Monica, Brentwood.

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