Posted on October 31, 2018
Starting a business with a co-founder is like getting engaged. Each of you sees a quality in your co-founder(s) and believes that there is potential for building a long-term relationship that holds long-term benefits for the individuals involved in this engagement. Just like getting engaged, starting a business with co-founders is a serious commitment and the probabilities of success drop if you do not address several vital issues early on. Developing a Founders’ Agreement implies documenting that you were once on the same page as your co-founder.
Have you come up with an amazing idea for a successful startup? Are you already dreaming of your unicorn company? Are you teaming up with a partner? Wait… Are you? If yes, then you must read Rita Khoriaty’s legal tips about Founders’ Agreements.
Setting up a business is exciting, but without the right legal advice, it can be a disaster. You are a business owner, not a legal expert. To draft your Founders’ Agreement, don’t simply download and sign templates found on the internet as those may not be appropriate in your jurisdiction, but rather seek suitable legal advice by asking a lawyer to draft it for you.
As soon as you start working on a project with a co-founder, you will need to identify what your respective roles and responsibilities are. Each party that is to sign the Founders’ Agreement should be aware of what is exactly expected from her in terms of work and involvement.
Even if your co-founder is your best friend, it is of utmost importance that you make up your mind on the way you will be spending your cash. You may be receiving grants from organizations or governments or you might be already generating revenues from sales or otherwise. You may, therefore, consider opening a joint bank account in the name of both co-founders and insert provisions in your Founders’ Agreement, setting the rules and authorities for spending the funds.
As a successful and devoted entrepreneur, you are probably committing to dedicate a lot of time to the business which means that you will probably quit your initial job. You need to agree with your partners on whether you will be receiving any remuneration in consideration of your involvement in the project or not.
You may agree with your partner that both of you will get the same equity ownership in your future company. But what if your co-founder quits the project, or doesn’t spend sufficient time on the business? He/she should not get the same amount of shares you will be getting when the company will be actually incorporated as this would be definitely unfair to you. Hence, discuss all this with your partner and get a lawyer’s help as the mechanics of the vesting may be tricky.
You wouldn’t want to work with a partner who is negotiating or working with other persons engaging or having interest in other businesses that are similar to yours or which compete with your project. You should ensure that your Founders’ Agreement contains appropriate provisions regarding exclusivity and non-competition.
Very frequently, the main value of a business resides in a software, a trademark or a patent. It is important to make sure that your Founders’ Agreement defines the identity of the person or entity who will end up owning the intellectual property developed during the early stages.
Whenever you work on a project, you and your co-founders may be sharing sensitive information with each other, so make sure that your Founders’ Agreement contains appropriate confidentiality and non-disclosure undertakings provisions.
/ About the writer /
Rita Khoriaty is a senior lawyer at Soumrani Lawyers and Legal Counsels and a member of the Beirut Bar Association since 2007. She is also a Lecturer at the Faculty of Law of Saint Joseph University. Specialized in civil law, corporate law and mergers, and acquisitions, Rita advises several start-ups, funds, accelerators, and incubators in venture capital investments and has a wide experience in private equity transactions. Rita holds a Ph.D. in Law from Paris 2 Assas University for a thesis entitled “The underlying principles of contract law: crossed views on French, Lebanese, European and international laws” published in Presses Universitaires d’Aix-Marseille. She is the author of several articles published in French and Lebanese legal gazettes.