Should You Have an Agreement with Your Co-Founders From the Beginning?

When you team up with your co-founders to start on the process of developing a product or service, and then launching a company to sell that product or service, the last thing you are probably thinking about is writing up an agreement among you and your founders. You may even believe that putting an agreement down in front of your co-founders to sign might scare them off, cause ill-will, or just kill the good will and can-do attitude many founding teams have when they first start off. You probably think you can wait until you actually incorporate the company to settle those issues. However, that thinking can sometimes lead to problems. Although separation probably crosses no startup team’s mind when they first get started, the fact that is co-founder teams are often in flux in venture’s early development stages. Although you may go in with a pre-conceived notion of everyone’s roles and commitment requirements, people can lose interest in a project, find interest in another project, or decide to return to or stick with a steady job rather than take the significant risk of launching a business. When someone decides to leave a co-founder team, they’ve likely contributed at least something to the development of the business. When they depart, the team must figure out if and what they may be entitled to. If a venture has already been incorporated, the founders are already likely subject to founders/shareholders agreements that include vesting, buy-sell, and/or right of first offer/refusal provisions that ensure that a founder who walks away early doesn’t walk away with a chunk of the company that the rest of the team is staying behind to build. If the company has any valuable intellectual property, such as patents or copyright, but even trade secrets such as business plans or customer/vendor lists, all the founders have ideally executed agreements assigning ownership of that material to the company and affirming their obligation to keep company secrets confidential. Before incorporation, the founder team has hopefully executed similar agreements (albeit without the formal structures of company stock and such) that affirm that the work all the founders are performing will belong to whatever venture arises out of the founders’ work (if any company is ultimately formed), as well as laying out what — if anything — founders who depart before incorporation are entitled to. Laying these issues out as early as possible not only reduces the likelihood of any dispute if and when a founder wishes to depart, but it also gives the company greater peace of mind that no one is waiting in the woods to claim a piece of what’s been built — this can be particularly important to investors.

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