Starting a New Business – Start with A Founders’ Agreement

Categories: blog

Many of our clients’ businesses were started with friends or family members.  While such businesses often succeed and are long lasting, there are those which encounter great difficulty because they failed to formally establish the terms of their relationships. 

To ensure this is not an issue for you, before you begin your new venture, you should first prepare a basic Founders’ Agreement.  In short, a Founders’ Agreement allows people to discuss pre-business ideas openly and honestly while honing in on the goals and financial arrangements of the individuals involved with a startup.  Among other things, the Founders’ Agreement will address ownership, contribution of capital, responsibility, decision-making, operating procedures, and founders’ departures. 

When preparing your Founders’ Agreement, you should, at minimum, ask yourself the following questions:

  • Who is going to do what?
  • Is the distribution of duties equal?  If not why not?  Who brings what to the table?
  • Is the relationship equal in terms of financial and non-financial contributions?  If not, what value should be placed on what one partner brings to the table that another does not?
  • Who will make the management or business decisions? If both partners are responsible for making decisions, how will you decide a tiebreaker?

When answering these questions honestly, you should be able to identify who can fill specific niche roles for your business.  You can also identify an unequal relationship before it becomes a problem down the road when one partner feels he or she is bearing too much of the load.

After completing the Founders’ Agreement, your business may need to evolve even further through a formal corporate filing.  If you intend to form a LLC for your business, you will need a more formal Operating Agreement which further defines the parties’ relationships and responsibilities.  A Founders’ Agreement will serve as a great start for the Operating Agreement and will avoid future disputes among business partners.

#smallbizmonth