A dispute with your co-founder can ruin more than just a friendship -- such disagreements can pose a major threat to your company’s success. Laying a clear legal foundation from the outset, generally through written documents and by establishing internal procedures, can aid in preventing co-founder disputes and minimizing the negative impact of any disagreements that nevertheless do arise. Priori is committed to helping you find and hire the best co-founder dispute lawyer for your company. This lawyer can help establish agreements with your co-founder and create internal procedures to aid in preventing co-founder disputes and can help co-founders engage in dispute resolution if disputes do arise.
Preventing Co-Founder Disputes
One of the best tools that can aid in preventing co-founder disputes is a strong, clearly-written document memorializing the rights, responsibilities and ownership stakes of each co-founder. This document should also lay out other operating rules for your company. Depending on your entity’s form, this agreement may take the form of corporate bylaws, an operating agreement, or a partnership agreement. Specific topics typically included in this document are:
What each partner contributes to and owns in the company. The agreement should clearly state what each partner’s capital contribution will be, as well as their ownership stake in the company. The document should also clarify arrangements regarding contributions of intellectual property created prior to forming the company and arrangements regarding intellectual property created by the company.
How business decisions will be made. Creating a well-functioning mechanism to determine how to move forward on contentious business decisions can aid in preventing co-founder disputes and can mean the difference between a simple disagreement or a full-flown argument. Allocation of decision-making power between co-founders may depend on how much of the company each partner owns, or it may be split based on other considerations. Many agreements draw distinctions among different types of decisions, with consensus or other special procedures required for certain specified decisions as opposed to requiring a simple majority for others.
How much and when each partner will be paid. A well-drafted agreement should decide when you and your partner may draw money from your business. How will founders who have contributed funding to the company be repaid? How will future profits be distributed between founders? Under what circumstances will salaries be paid to partners?
How much equity each partner will receive and when that equity vests. Another important tool for preventing co-founder disputes is to clearly delineate how much equity each co-founder will receive, how much equity will be reserved for equity incentive plans, and the vesting rules for each of these types of equity grants. A co-founder dispute lawyer can help you draft an equity plan for the company, individual agreements outlining the vesting, and other arrangements and rules for each individual receiving an option grant or other form of equity compensation.
What happens in the event of a partner’s departure from the company. If a partner chooses to leave the company, as a result of a co-founder dispute or for any other reason, provisions to manage their departure can be integral to protecting your company. For example, in order to address this concern, some agreements include buyout clauses establishing how a departing co-owner may sell his or her stake in the business to other owners.
Right of First Refusal. You may consider establishing a right of first refusal. Such provisions specify that certain parties (which may be some or all of the owners) have the option to purchase any equity offered by a departing partner before any parties not benefiting from the right of first refusal have the option to purchase that ownership stake.
Tag-Along Rights. In the event that a specified class of, or a particular, shareholder enters into an agreement to sell an equity stake, a “tag-along right” provides that the shareholders benefiting from such a tag-along right may also sell his or her stake in the company as part of the negotiated transaction on the same terms as the initiating shareholder.
Drag-Along Rights. In the event that a specified class of, or a particular, shareholder chooses to sell his or her share of a company, a “drag-along right” requires that shareholders subject to such drag-along provisions participate in the transaction.
Intellectual Property. You should also set out what would happen to any intellectual property created by one of the co-founders if he or she leaves the company -- before your co-founder storms out with your most recent app in tow. Two common approaches to handling this are (i) assigning of the intellectual property to the company in exchange for a lump sum, specified stake in the company or other compensation, and (ii) licensing the intellectual property to the company in exchange for royalties or other compensation (note that in this latter scenario, ownership of the intellectual property does not transfer to the company).
If your founders serve as employees of the business, for example, the CEO, you may also consider having such persons sign employment contracts. These are separate documents from co-founder agreements, but they can also be used to establish a co-founder’s salary, benefits, or other aspects of their employment with your company.
Dispute Resolution For Co-Founder Disputes
Even if you have taken care to set clear expectations and establish legal protections for your company together, co-founder disputes may arise. Having a plan for dispute resolution for co-founder disputes can help you and your co-founder address the conflict through predetermined channels, helping to minimize the damage and resolve the issue as quickly as possible. For example, you and your co-founder may decide that you will first attempt to resolve any disagreement with a pre-selected co-founder dispute lawyer who can guide you through a negotiation or mediation. However, if the situation escalates, you may find yourself facing difficult decisions. If you’re in this situation, working with a co-founder dispute lawyer can help you protect both your individual interests as well as the company you’re working so hard to build.
Through Priori, creating co-founder agreements on an hourly basis typically ranges in price from $150-$450 per hour. Multi-member operating agreements can range from $1,315 to $3,250 for simple agreements to $4,875 to $5,000 for more complex agreements. Drafting and implementing equity incentive plans, including stock options, can cost from around $5,000 for a simple award plan to $10,000 for more sophisticated agreements with multiple incentive products with a Priori discount. Pricing on employment contracts (including the Priori discount) range from approximately $250 for simple agreements to $5,000 for more complicated arrangements. Submit a request to schedule a consultation with a Priori lawyer for any of these legal needs.
My co-founder is my best friend, and we’re bootstrapping -- do we really need to pay a lawyer for a co-founder agreement?
Yes. Asking a lawyer to draft a concrete co-founder agreement doesn’t mean you don’t trust your friend -- it means you both care enough about your company to protect it from any unexpected problems that may come up along the way. Getting company ownership and operating procedures down on paper will reduce opportunities for conflicts, and it will help you and your best friend continue to enjoy your weekly breakfast-for-dinner tradition for years to come.
If I get the sense that things are about to turn sour with my co-founder, when should I reach out to a co-founder dispute lawyer?
Contacting a lawyer before a dispute arises is the best way to protect your company. Once a conflict begins, it may be too late to create protective decision-making and dispute-resolution procedures. Stopping a problem before it starts is the most cost-effective legal strategy you can pursue!