Legal Tips for Startups: Essential Considerations for Founders Agreements.

In the second part of our two-part series, we are taking a deeper dive into one of our Top 10 Legal Tips discussed in Part 1.  If there are any other topics you want us to write about, please let us know.

You might be lifelong friends from school or newly connected from a networking event – a million dollar idea is formed and you are off to begin a new venture.  Not so fast! The honeymoon period is always sweet but what happens if things go south? Before diving in, it’s essential to consider potential pitfalls that could arise. A Founders/Shareholders Agreement is a crucial document that outlines the roles, responsibilities, and expectations of each founder, helping to prevent conflicts down the line. By investing time in this agreement and seeking legal advice for startups, you can safeguard your interests and set the stage for success.

Here are some key legal tips and legal advice for startups to consider when drafting your agreement, ensuring you have the necessary legal support for startups and protecting your interests: 

1. Align the vision

A good place to start is to agree on the overall goal and vision of the business. If the founders cannot agree to this then there is no point in continuing. Do you want to revolutionise the transportation market? Change the way charities fundraise? Maximise profit on second hand fashion? Why, what, when, where and how.

2. How big is your piece?

Perhaps the default position is an equal split among the founders but does that reflect reality?  What is the level of contribution and commitment expected from each founder?  Every member will bring in a unique set of skills – whether it is technical, business, networks or otherwise – have an honest conversation early and allocate a value for that skill.  Decide upfront how the vesting of the shareholding should work.  For instance, it may not be ideal for all the shares to be allocated upfront; instead, consider using a vesting structure where founders will get a certain percentage of shares upon each milestone reached.

3.  Who does what and what do you bring to the table?

Define your roles clearly and set performance targets based on those roles. This holds everyone accountable. Founders may also be required to contribute cash or assets into the business.

4. If someone leaves then what?

Be prepared for someone’s exit, including your own. Should that co-founder’s piece be split up evenly/proportionately between the remaining co-founders? Perhaps there would be a “right of first refusal” for the co-founders.  If that is the case, how much should the co-founders pay?

5. Money for food?

How will co-founders be compensated? Dividends are unlikely in startups so specify the salary to be given to each co-founder.

6. Day to day decisions vs Reserved Matters 

Day-to-day decisions will likely be made by the CEO. However, where significant risk or direction of the company is at stake, shareholders may want a say in that decision – these items are sometimes termed as “Reserved Matters” whereby unanimous, majority or some other agreed percentage of shareholder approval for the entry into certain types of deals (e.g. sale of the company, incurrence of debt above a certain level or disposal of assets beyond a certain level etc.).  This power may lie with the board of directors (though for a start-up, this would likely be the shareholders themselves).

7. Breakups happen 

This is a touchy topic but if there are irresolvable internal conflicts then the best outcome for the company is a fast resolution. Should there be a formal procedure to be followed to resolve a conflict?  If someone needs to leave, are they allowed to keep vested equity?

Laying the Groundwork for Your Business

Managing a startup requires careful planning and consideration to ensure long-term success and sustainability. It is essential for startups to establish a clear and cohesive vision that aligns with the goals and aspirations of all founders. This unified vision serves as a guiding light, directing the business's efforts towards shared objectives. By prioritising these foundational elements, startups can lay a solid groundwork that facilitates innovation, adapts to challenges, and most importantly, supports sustainable growth.

Ongoing Legal Support

Establishing a Founders/Shareholders Agreement is just the beginning of your legal journey as a startup. To navigate the complexities of entrepreneurship successfully, having ongoing legal support is crucial. Regular legal check-ins can help ensure that your business remains compliant with evolving regulations and can adapt to changes in the legal landscape.

Your legal advisor can provide updates on relevant regulatory changes, which is essential for startups that may not have the resources to stay informed on all legal matters. Furthermore, should any disputes arise—whether between founders or with external parties—having a legal counsel who understands your business and its unique challenges can facilitate swift and effective resolutions.

Get Legal Advice & Support from KorumLegal

As you embark on your entrepreneurial journey, securing legal advice and support is crucial to safeguarding your startup business. If you’re seeking tailored legal advice and support or want to discuss any of the above in greater detail, contact us and a KorumLegal Consultant will be in touch.