12 Things To Consider When Establishing Ownership
Through the rest of the Spring and Summer we at Briefcase have created a plan to bring you a series on the LAUNCH, GROW and PROTECT legal essentials that you need to incorporate into your business model. In this week’s series we cover the need for every business having a written agreement establishing ownership.
You absolutely have to agree with your co-founders early on what the “deal” regarding ownership of the business is among you. Who owns what? Not doing so can cause enormous problems later (think of that awkward scene in the Social Network between Mark Zuckerberg and the Winklevoss brothers). It’s a well known fact that half of all marriages end in divorce, however, as much as we try to tell founders to get the ownership issues right, there is a hidden truth that disputes and business break-ups arise in more than half of the startups and small businesses. Don’t make the mistake of thinking you are immune.
As much as you think that it’s a noble thing to begin a business relationship on “trust” or a “gentleman’s agreement” we have found that these types of arrangements have an even greater likelihood of failure. This agreement needs to be in writing. Period. This is the “pre-nuptial agreement” for your business. Here are the key deal terms you need to address in the agreement establishing ownership:
- Who gets what percentage of the company?
- Is the percentage ownership subject to vesting based on continued participation in the business?
- What are the roles and responsibilities of the founders?
- If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares?
- At what price?
- How much time commitment to the business is expected of each founder?
- What salaries (if any), are the founders entitled to? How can that be changed?
- How are key decisions and day-to-day decisions of the business to be made? (majority vote, unanimous vote, or certain decisions solely in the hands of the CEO?)
- Under what circumstances can a founder be removed as an employee of the business? (usually, this would be a Board decision)
- What assets or cash into the business does each founder contribute or invest?
- How will a sale of the business be decided?
- What happens if one founder isn’t living up to expectations under the founder agreement? How is it resolved?
- What is the overall goal and vision for the business?
- All good questions, right? So once you have asked and answered them you will need to memorialize your respective desires into the appropriate document. For establishing ownership the document that should be used in the LLC and Corporation context is a Subscription Agreement. A basic and advanced version is available on the Briefcase platform, as well as guidance from our attorneys regarding the various provisions within the document. The subscription agreements for each member or shareholder will serve as the backbone of how your organization is owned and controlled so it is vital to get it right.
A written document establishing ownership is a fundamental legal essential for your business. You can get as complicated as you want to get with the terms after walking through the questions above but you need, need, need to make sure that the final decisions are documented. We started Briefcase to help startups, small businesses and entrepreneurs have these conversations and ask the right questions.
P.S. In our next post we are going to cover making the transition from simply establishing ownership to establishing appropriate boundaries regarding how a business is controlled. Ever had something take place behind your back? Stay tuned to find out just how to prevent that type of situation from happening in your business.