Legal Mistakes Made By Startups: Co-Founder Conflicts

With the amount of time, energy and expertise required to launch a Startup, it’s no mystery why many entrepreneurs team up to take on the challenge. 

Many Startup co-founders start as friends before becoming business partners, which means that they often make the mistake of assuming that their chemistry and goodwill will carry them through any conflicts that ever arises. However, without an effective legal framework, amicable partnerships can sour quickly. Oral promises and vaguely defined agreements are guaranteed to spark miscommunication or misinterpretation down the line, which can seriously disrupt a Startup’s growth and progress.

To thwart potential fallouts before they threaten a fledgling business, it’s advisable to use an intelligently written and effective “founders agreement”. 

Here are some key issues that you should consider addressing when preparing an founders agreement:

• What is the overall goal and vision for the business, both short term and long term?
• What are the specific roles and responsibilities of each founder?
• How day-to-day decisions will be made – define the circumstances when founders can make judgment calls and when they must seek the consent of other founders
• How major business decisions will be made – majority vote, unanimous vote, separated areas of responsibility, etc
• Time commitment expected from each founder
• Whether founders will be expected to comply with certain constraints, such as non-compete clauses
• Assets and financial contributions expected from each founder
• How accountability of founders is to be measured and validated
• Whether each founder’s percentage of ownership in the company is reliant on meeting certain time commitments or participation
• Projected timelines for the Startup’s development and each founder’s expected role for each phase
• Whether equity will be split equally among the founders and, if not, what determines the distribution ratio
• Procedures for hiring employees – how to determine when and which type of staff are needed, what salaries and benefits to offer, what specific limitations and expectations should be included in their employment contracts
• Whether founders are entitled to salaries and how/if those salaries may be changed in the future
• Methods to resolve potential future conflicts – how to respond to a founder who is unable or unwilling to uphold their commitment to the Startup, under what circumstances a founder may be removed from their position
• Procedures to follow if a founder leaves – determine whether the other founders can buy the departed founder’s share of the business and at what price, develop a plan for how to divide that founder’s responsibilities, etc
• What will occur in the event that there is an offer to purchase the business?
• How, when and for what purpose any of the above terms can be altered

As they say, if you “fail to plan you are planning to fail” - a Startup without a strong legal basis and clear goals shared by all its founders is fated for sticky situations in the future.

Next steps

When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.

We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.

*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.