How to Avoid Disputes Among Co-Founders?
Different minds have different opinions and sooner or later, diverse mindsets may lead to conflicts. Every founder and co-founder should keep this in mind, while formalizing their relationship through a Co-founders’ Agreement. Disputes among founders is a key reason for the split or failure of many start-ups. Two heads are better than one, especially when it comes to managing adverse situations, pressure and risks. However, no business ventures and partnerships are absolutely immune from any conflict. Taking pre-emptive measures to avoid conflicts amongst co-founders are indispensable for establishing sustainable businesses. We bring to you a few strategies you can keep in mind to avoid disputes among co-founders.
Having a well drafted Co-Founders’ Agreement
This is one of the core pre-emptive measures that could be undertaken before the conflicts even arise. Core governing rules, liabilities, profit and loss apportionment, decision making process, exit formalities etc. should be captured and agreed upon in a written form. Having every possible term and condition governing the relationship in a written form helps maintain clarity and prevents confusion, which may prove to be a source of conflict. Dispute resolution methods should also be included in a co-founders’ agreement. During the course of “clause by clause” drafting of such an agreement, certain issues are bound to arise. This would give a better insight to the founders of potential areas where disputes may arise and hence, would enable them to plug these with more certainty.
Disposing conflicts in a timely manner
To prevent escalation of conflicts, issues must be addressed at the outset. The co-founders should have a timeline for dispute resolution and a proper process. This process can be captured in the co-founders’ agreement as well. For instance, initially, mediation should be resorted to. If after a period of 30 days, mediation bears no result, then arbitration would be the next best method. Details such as the method of choosing the arbitrator, seat of arbitration etc. should also be decided beforehand. Such planning and foresight would give an insight to the founders of how disputes are to be tackled. An agreement to the effect that conflicts would be resolved privately would also go a long way in maintaining cordial relations. This would also prevent the reputation of the entity from being tarnished.
Equity division amongst the co-founders
It must be understood that business ventures have their own ups and downs. Some of the co-founders may decide to leave the venture in between. Now, in this case, it becomes essential for the partners to have a mechanism in place, which will serve to provide for such contingencies as to what will happen to the equity of a co-founder when he or she decides to leave the company or is ousted from the venture. Prior well drafted and well-intentioned vesting structure (to provide for vesting of shares of such a co-founder/partner) in such a case could be, provided for, or incorporated, in the co-founders’ agreement itself.
A novel vesting structure provides that remainder shares owned by such a co-founder would revert to the corporation after first being vested in the other co-founders based on the cliff period (time that they have spent in the venture which could showcase their seriousness towards, and dedication for, the venture/start-up). An appropriately elastic cliff period could give the opportunity to the co-founders to understand each other.
Overcoming communication gap and hurdles
This could serve as one of the ways for the co-founders to get in touch with one another, especially at a more personal level. This would facilitate in building rapport amongst themselves. Greater communication channels could help in trust building and allay any fears and issues that they may have with one another.
Have a well-drafted Employment Agreement
Co-Founders may also be employees of a company, if they are performing certain functions. For instance, the principal coder of the company may also be a co-founder. It is important to have, in addition to the co-founders’ agreement, an employment agreement also signed with the co-founder. This agreement would list out his duties as an employee and hence would provide greater clarity. Moreover, the employment agreement, would create clear demarcations between his role as a co-founder and that as an employee. Hence, the disputes pertaining to his status as an employee would not be confused with the disputes pertaining to his status as a co-founder.
Having well-drafted legal documentation and a foresight for potential disputes is the key to avoid disputes among co-founders. You should always hire a lawyer to draft the initial legal documentation such as co-founders’ agreement and employment agreement with a co-founder. Lawyers have the necessary skill and experience to foresee potential disputes and they would prepare fool-proof documentation which would mitigate the risk of future disputes. LexStart has rendered such services in the past and is always ready to assist in the present and future as well! If you have any queries regarding drafting of your co-founders’ agreement or employment agreement with your co-founder, you can send us a mail at firstname.lastname@example.org and a member of our legal team would reach out to you.