Avoiding co-founder disputes

Legal 101s

by GLS GROUP June 01, 2020

boot out

INTRODUCTION 

It is a common headline – “Co-Founder of [insert name of multi-million dollar enterprise here] gets booted out of the company.”

What typically starts out as a rosy partnership with honest intentions of working harmoniously towards a common goal can often take a downturn and end up as your worst nightmare. Take the example of Eduardo Saverin who was infamously cut out from Facebook despite being its third largest stakeholder and co-founder of the company. The drop out was so iconic that a multi-million dollar movie was based on it.

A majority of people who enter into a joint enterprise do not anticipate the possibility of “breaking up” as a result of co-founder disagreement.

Disagreements arising from “who gets more or whose decision is more important” are common breaking points of a start up given the fragility of it being at its infancy stage.

While issues with funding, hiring key staff and business development are matters that most founders face, the Co-Founder conflict is often a Business’s death sentence if left unresolved.

It is therefore best to iron out all discussion about Co-founders' mutual expectations as frankly as possible and to reflect it in formal legal documentation for effectiveness.

To help you sleep soundly at night, we at GLS Group have crafted a list of steps you should take to help mitigate or avoid entirely the possibility and risks of co-founders disputes.

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Step 1: The “Right” Partner

Being in a ‘co-founder’ partnership is just like being in a marriage. Much of the same emotional tools and behavioral rules are required in both circumstances to build a successful relationship together.

In order for such a partnership to go the distance, it is essential for You to choose the “right” partner for your business.

While it can often be appealing to start a business with your best mate from your previous workplace, you need to consider if your business values and goals align. Running a Business is hardly an easy task so having the right partner with you can help immensely with making the hard times tolerable.

As a general guide, in ascertaining whether the person in mind is going to be the “right” Co-founder, you should have the following in common:

BUSINESS VALUES MUTUAL RESPECT
BUSINESS GOALS COMMITMENT
WORK ETHIC TRUSTWORTHINESS
SYNERGY PERSEVERANCE

 

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Step 2: A Frank Discussion

After identifying the right partner, it is now time to have an honest discussion.

One of the benchmarks of a successful relationship is your communication with your partner.

Poor and ineffective communication can be a hinderance to the construction of your start up where both founders are not in sync with the other. Misunderstandings occur, things do not get done and this lifts the focus from the ultimate goal of establishing a successful, self-sustaining business.

At the outset, it is recommended that co-founders sit down at the drawing table to discuss mutual goals, ideas and iron out expectations. This includes setting out clearly each co-founder’s rights, obligations and entitlements.

Where negotiations fail at this point, it is a potential red flag that the partnership isn’t going to end up favourably.

Having a thorough, frank discussion is therefore going to save you from complicated, time-consuming and costly co-founder conflict.

To ensure a fruitful and efficient discussion, it is recommended that you go through the following points:

● What are the roles and duties of each party?

● What is the purpose of this partnership?

● What do you hope to achieve?

● How will profits or shareholding be allocated?

● How are decisions made? Consider situations when a deadlock occurs.

● How will you handle disagreements?

● What happens when a co-founder wants to leave or the partnership is terminated?

● What are the circumstances that might lead to a termination?

Businessman looking at road with maze and solution concept-1

Step 3: Strategy Document

A strategy document is useful in formalising the general direction that a company will take with respect to achieving its desired goal.

Documenting the company’s strategy formally is a great management tool that will assist with developing focus and directing resources to the organisation.

Prior to documenting the details of your discussion into a formal founder’s agreement (as made out below), it is often a good idea to first commence on a strategy document.

As the Strategy document can be updated periodically, this helps with mitigating the risk of conflict where there is a misalignment in company direction and strategy – particularly when strategic plans shift with the passing of time.

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Step 4: The Founders' Agreement

Founders should have a thoughtfully drafted Founders' Agreement in place.

This Agreement should capture the details of your discussion and highlight pertinent procedures that regulate the relationship of Co-founders and that with the company.

Apart from setting out the mutual rights, obligations and entitlements of co-founders, your founders' agreement is key to providing protection to both parties and offering clarity in enter and exit scenarios.

Typically, a comprehensive founders' agreement should deal with the following:

● Identity of the Co-founders and Business

● Term of Agreement

● Roles and responsibilities of each co-founder

● Equity breakdown

● Vesting Schedule

● Intellectual Property Rights

● Dispute resolution

● Compensation entitlement

● Exit mechanisms

Just like any commercial relationship, the proper documentation of parties’ rights and obligations can set the stage up for a successful and productive relationship from day one.

double exposure of businessman or salesman handing over a contract on wooden desk

Step 5: Finalise and Sign

Last but not least, parties to the Agreement must review and sign the document in order for it to be legally binding and enforceable in a court of law.

This is the time for you to thoroughly review the document and to resolve any concluding differences.

Once you and your co-founder(s) have signed the agreement, you should set it aside for safe-keeping, to be referred to when the appropriate circumstance arises.

Business man climbing up on hand drawn staircase concept on city background

Conclusion

As a start up founder, you’ll want to be focused on the critical matters – like growing your business. Getting entangled in pesky co-founders' disputes is something that you’ll definitely want to evade. We hope the above information has been useful in providing clarity on the steps you can take to avoid such disputes.

That said, we cannot stress enough the importance of having a well-documented agreement to reflect the intentions of your co-founder and you.

If you want a quality document capable of covering all bases and comprehensively documenting your relationship with your co-founder, then you may wish to click here.

At GLS, we offer a world-class founder’s agreement that is not only tailored specifically for you but also at a fraction of the cost that you would expect to pay at the big firms.

The End written on rural road

WHAT’S NEXT?

If you liked this topic, you might also like 10 Basic legal considerations every start-up entrepreneur must know.

*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.  

 

GLS Group - Nominated by Financial Times as the:
"Most Innovative Law Firm - Asia Pacific"
(2018)
Innovation through Technology 
The Middle East Legal Awards 2020

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