Guest post by Akiva Szental, Lawyer, Warlows Legal
As a former Start-up employee, current start up founder of ozen and practicing Start-up lawyer, I have noticed there are several oversights which Start-up founders often make.
The early stages of any Start-up are intense and frantic often with little time to breath. Having proper legal documents in place is probably not the first thing on a founder’s mind.
Sometimes these oversights can be minor and can be rectified at a later date, but often they can completely de-rail an early stage Start-up.
In this article, I’d like to focus on one of the most critical mistakes Start-ups often make.
Not having a shareholder agreement can ruin promising Start-Ups.
First time founders often start their Start-Up company with friends, family or a co-worker as they haven’t established the external networks and support to attract an outside co-founder.
Often the thought process is “I’ve known this person for 20 years, I can trust them, right?” and thus fail to properly document their agreement from the very beginning.
The issue with thinking this way is that there are several critical terms which need to be understood and agreed upon before they arise, for example:
- What happens if one founder no longer is pulling their weight in the company?
- If one founder is working on the Start-up part time, when are they required to join full time?
- What happens to a founder’s shares or equity if they want to leave the company?
- What’s stopping a founder leaving the company and starting competition next door?
- What if a founder wants to sell their equity to a third party which the other founder doesn’t think they can work with?
- What happens if the founders disagree on a critical decision?
It’s easy to assume that both co-founders agree on everything but often they can have wildly different opinions.
Even the founder of Facebook, Mark Zuckerberg, failed to have a proper agreement in place with the Winklevoss twins and ended up litigating the matter in court, years after the establishment of Facebook.
It’s important that everyone is on the same page from the very beginning because leaving these decisions to later date only makes it harder when there is more money and pressure involved.
I’ve seen great Start-ups destroyed by disputes between the founders which could have been avoided if everyone was on the same page from the beginning.
Having said that, a shareholder or founder’s agreement is not a magic bullet to avoid disputes and even with the best drafted agreement issues can occur but it will minimise the risks.
What can you do?
Obtaining a professionally drafted shareholder agreement doesn’t have to cost thousands of dollars. There are several things you can do to make the process efficient and cost effective, such as:
- Finding a lawyer that works specifically with Start-ups. They will therefore understand your requirements better and can draft a document suited for the fast changing environment.
- Find a lawyer that can provide a fixed fee. This can provide certainty about the cost and avoid any surprise fees.
- Sit down with any co-founders before seeing a lawyer. This way you can discuss and come to an agreement on many of the major terms before seeing the lawyer to save time and cost.
- Don’t try to document everything in your Shareholder Agreement from the beginning. It’s impossible to document every potential event from the beginning, make sure your lawyer is experience to cover the major events and the document is flexible enough to be updated in the future.
The shareholder agreement will become the foundation of your company and it’s important to get it right from the beginning. If you are serious about your Start-up make sure you have one in place as soon as possible to protect you and your company.