Mo’ Founders Mo’ Problems – Another Vote For Well Drafted Partnership Agreements

November 24, 2012  |  By

Note, the advice below is entity type agnostic. Member Agreements, Company Agreements, and Founder Agreements are included in the context of partners agreements. 

Founder disputes are unavoidable – and the more founders, the higher the likelihood for disagreements. Every startup will encounter business related obstacles (and a reluctance to follow the status quo was likely one of the reasons for the startup), so disagreements are sure to swell. Oftentimes founders aren’t yet equipped with the business or leadership experience to resolve these disputes; thus, without well drafted partnership agreements, the founders may be without a process to handle the problem.

A leading cause of founder issues is plain ‘ol life. People get married, they have kids, they go crazy, a family member gets sick, etc. The more founders you have, the better the chance that one of them experiences a life changing event.

There’s also the ever popular “she/he is just not carrying her/his weight.” When I get this, my first response is always, “What are her/his written obligations?” Usually, the non-contributing founder doesn’t even know that he’s not contributing. Just because you are pulling all-nighters, are your partners obligated to do the same? Make sure that everyone understands their role and that the other founders are comfortable with everyone else’s commitment level.

And then we have money problems. Running out of money usually leads to problems, but oftentimes so does coming into it. Do we have salaries agreed upon? Are we deferring? Or not taking any salaries? Is Founder A lending the company money, or contributing it for additional equity? If he’s lending it, when does he get paid back? If he’s contributing it, at what valuation? Or perhaps we just closed a round and we have $50k left in our budget. What do we do with it? What happens if two founders vote one way, and the other two vote another?

By no means am I against multiple founders. I think that well constructed teams can be successful regardless of the idea (hence “pivoting” – it works out pretty well from time to time). But if you’re going to have multiple founders, please sit down and get your duties, rights, and obligations down on paper. You don’t need a lawyer to draw something up for it to be enforceable. There are plenty of great templates out there. Now, I would definitely advise you to find an attorney who focuses on startups to help you map out your structure, but even without an attorney, the fallout from the problems above can be avoided by well-drafted agreements.

Posted in: General Business

About the Author(s)

Vela Wood

Vela Wood is a boutique corporate law firm with a local feel and a global impact. We focus our practice in the areas of M&A, Private Equity, Fund Representation, and Venture Transactions.