While some entrepreneurs feel that they should do a minimum of legal work to protect their startups from problems that occur when co-founders have disagreements, savvy business owners know better, and they engage quality legal counsel to protect their interests early in the process. While all co-founders may be 100 percent on-board at your company’s inception, it may not be long before someone becomes disgruntled. This can be followed by severance but not until sabotage and/or serious damage has occurred. There are ways, however, to mitigate your risk if you are faced with a rogue co-founder.
Fully Vested? Great, I’m Gone!
If you are offering company shares to co-founders, make sure you include a vesting schedule. Even if you want to keep things simple, be certain that your partner/employee/manager must continue satisfactorily working until a certain date before they fully own their shares. It’s fine if a reasonable share percentage vests every year, but make sure that any pre-mature separations are not awarded with a big chunk of your company. Vesting schedules can be creative, but owners need to ensure that the process does not happen too quickly.
Those entrepreneurs that come from large tech companies may have had to sign an onerous non-disclosure agreement. You may have executed one, and while you probably didn’t like it, you need to vigilantly protect your intellectual property, and a great way to do this is to ensure that co-founders sign a well-prepared NDA. Without this document, a rogue co-founder can take your carefully developed product elsewhere, and you will be powerless to do anything about it. Also, make sure that any IP your co-founder develops while working at your company is assigned to your company. This avoids the scenario where your former friend spends valuable company time on his/her own idea and then takes it to a competitor.
Pre-Executed Share Redemption
Anyone that touches your business should not be allowed to do so without a contract, and co-founders should not be treated any differently. And, if your co-founders breach their agreement, you need a signed share redemption agreement that addresses what happens next. It is a lot easier to cleanly part ways if all parties know that exactly how vested stock will be redeemed, and setting a share price and redemption method upfront can prevent future aggravation.
Be Pro-Active Early
While your main concern may be—and possibly should be—getting your product to market, those entrepreneurs that fail to protect themselves by carefully considering the legal what-ifs often cause themselves serious difficulties that can be avoided with proper counsel.
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