By Fernando Berrocal
A partnership is a commercial relationship between 2 or more persons. To establish a partnership, you don't need to file any papers; all you have to do is decide to do business with somebody else. Although a partnership can be formed without applying or enrolling, it must adhere to other businesses' licensing and tax rules. A partnership agreement and business coverage are also essential to these professional relationships.
A formal partnership agreement (or startup co-founder agreement) is a contract that lays out the principles of a partnership's activities. In these documents, there are numerous problems that must be addressed. To start a new organization with formal partners or co-founders, one of these two agreements is required. Approach - and settle - these concerns with a potential partner or co-founder early on in your discussions, as this will help you prevent conflicts and arguments later on. It also ensures that all shareholders are on the same page when it comes to how the business will operate.
Your first step should not be establishing your firm as a general partnership; this might expose the partners to accountability for the organization's debts and liabilities. Starting a new small business as a corporation or a limited liability company (LLC) typically makes more sense. (LLCs are U.S. businesses whose proprietors are shielded from personal liability for the organization's debts or obligations.)
Here's a rundown of what you should include in your contract:
- Ownership of the business as a percentage
What percentage of the firm will each founder have? A creator who comes up with the business plan or contributes to the funds may acquire half or more. The percentage of ownership may change when funding increases. To allow extra financial commitments from the entrepreneurs or early investors, what proportion of the founders' ownership authorization will be needed? Without this, a founder might simply quit and still control all of their stock, which might be acceptable–if the founders agreed to it in their business contract.
- Capital contribution
How much funding (or other form of capital, such as real estate) will each entrepreneur put up at the start? Will the contribution be made as a donation or loan? Is each entrepreneur bound to providing a certain amount of funds if the organization needs more money?
You will would like to be certain that any intellectual property brought to the organization by a founder (such as ideas, patents, and others) is appropriately assigned to the firm and held solely by it. All founders, workers, and contract workers must also sign a Confidentiality and Investment Assignment Agreement.” This ensures that any intellectual property created by business workers and contractors remains the firm's property.
- Titles and roles
Chief Executive Officer (CEO), Chief Financial Officer (CFO), and others are examples of distinct founders' roles and titles. Since this is important for the firm, specify whether each founder's role is part-time or full-time. Members of the company’s board must also be named. Note: it's critical to state how roles might change over time.
- Dividends and stock transfers
If the organization becomes successful, how would payments or dividends be calculated? The board of directors is primarily responsible for this. It may be desirable to keep earnings and reinvest them rather than pay dividends. The primary concerns for stock transfers are: will there be any limitations on a third-party transaction of a founder's stock? Will the other co-founders have wide discretion on the stock transfer?
- Dispute resolution
How will the participants resolve disagreements? It is suggested that the sides participate in private arbitration proceedings before a single adjudicator. This keeps costs down and saves time by avoiding costly litigation (that becomes public record.)
- Decision-making in critical situations and agreement changes
How would the founders/shareholders be involved in key judgments? Important decisions may require the agreement of 51% or 75% of the founders or shareholders. Examples could include matters like raising additional capital/investors, disposing of the firm, or taking on large debt. Some modifications to the founding agreement may just require a vote, while others may demand majority consent.
- Business withdrawal, dissolution, or sale
What occurs if a creator decides that they no longer want to be involved in the firm? Will the enterprise be able to buy back the share capital? If the response is affirmative, what is their price? Will there be any restrictions on dealing with the business once it has been withdrawn? The agreement should set out the processes for legitimately dissolving or selling the organization if it is to be dissolved or sold. What is the required ownership vote percentage?
A robust business co-founder pact might help you avoid unforeseen situations. The duties, responsibilities, and interests of the organization's founders must be outlined in a startup co-founder contract. This document can help avoid misconceptions and make the dispute resolution process easier to handle. Remember: you can't just fill information in on a boilerplate form. To develop it with your specific situation in consideration, enlist a startup lawyer or a trusted online resource.
Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.
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