Some of the most successful businesses are the product of positive partnerships. But before you begin to think about investing time and money into a new venture with someone else, it’s crucial to clarify your own position as a co-founder.
After all, being business partners is a lot like being married: you have legal and ethical obligations to each other and if you don’t understand these responsibilities in full you risk facing issues down the line.
Here are six critical co-founder questions to address before you go into business together.
How much of the business will you own?
This may seem like a straightforward question with an easy answer – divide the whole by the number of co-founders involved. However, what happens if you invest twice as much as your partner(s)? And what if one of your co-founders is investing their skills rather than their money? The right answer is rarely “divide the business equally among all”, which is why you need to agree on division of shares at the start.
How will decisions get made?
The voting rights of each co-founder normally mirrors ownership rights, which means that ensuring you’re happy with the number of shares in your name is especially important.
You may also want to think about having voting and non-voting shares, or adding a one per cent partner (someone you all implicitly trust, such as a seasoned business person or mentor unrelated to you) in case of deadlock decisions.
Read more: The golden rules of venture capital funding
What agreements should you sign?
Written records are especially important when it comes to contracts between individuals – be they employees, clients or, indeed, co-founders. In the case of the latter, you will want to ensure all partners sign both a founder’s agreement – which outlines roles, rights and responsibilities, as well as agreed equity and ownership – and a non-compete agreement.
Co-founders may also consider signing some sort of contract with the company itself, outside the shareholder’s agreement.
How will you resolve any disagreements?
While you hope business will be smooth sailing, it’s always worth having a contingency plan in case of co-founder conflict.
One idea might be to set up a board and grant them veto rights over a number of decisions. Common areas to address include executive hiring/firing, share dilution, and mergers and acquisitions. Another sensible idea is to include an arbitration clause in your co-founder contracts and those with any clients and third parties, in case you need a legal expert to help resolve a dispute or disagreement of any kind.
What happens if you want to quit the business?
It may seem like an unthinkable scenario now but you need to have a pre-agreed exit plan in case you or one of your fellow founders decides to leave the business. Work out how the business will be valued if such an event arose, and agree how the departing partner will be compensated in a manner that won’t crush the company.
What happens if you want to fire a co-founder?
What! A co-founder can be fired? Too right they can. Think of Steve Jobs’ termination from Apple in the early days. Just as you should plan for any intentional exit, so too you should think what will happen if you need to force one. Decide how you will terminate a co-founder’s contract gracefully if that’s the right thing to do for the business.