When two people fall in love and get married, they don’t expect to divorce. But with divorce statistics as high as 50%, it’s important to recognize that the odds are not on your side. Starting a company is a lot like getting married, only you’re often entwined with more people. Each person in the company –read relationship—has different agendas, goals, financial issues, family situations, and so on. Creating a solid agreement on the front end, one that accounts for as many contingencies as possible and acknowledges that some day one or more of you may want to leave the company, is a vital precaution.
Giving the company and its members structure from the beginning helps a great deal. I don’t know about you, but whenever I started a new job, the beginning was the most difficult because I had little idea of what was really expected of me. It always took me a few weeks before I really felt comfortable in my role, and could go home at night without worrying if I’d done my work correctly, or made the right decisions. In startup companies, our positions and expectations are even more abstract, and this makes management agreements indispensable.
To start, be specific. Sit down with your partners and discuss a regular day, week, month, and year of how everyone wants your company to operate. Come up with contingencies. Design them like quests. What happens if we get 30% less funding? Who or what aspect of our company takes the hit? How many vacation days should people be allowed per year? Who will track these? What if someone wants to leave – and take their ideas with them? Most companies include a lot of different personalities, and your “morning person” may not always get along well with your genius-work-until-4-AM-sleep-until-3-PM type. Put your expectations down on paper. Everyone will sit more comfortably, and work better, if they know exactly what’s expected of them.
Breaking up companies (“Dissolution” in legalese) can be an extremely stressful and costly ordeal. If you don’t put your agreements down on paper, then your lawyers have to figure out what you agreed on, which means showing a judge all of your emails and arguing what you meant when you said things like “Cool, I can use my work computer for personal stuff, right?” or “that sounds good, but I’m not the numbers guy, LOL,” etc. Trust me when I say that you do not want to pay lawyers and judges to examine all of your personal correspondence.
And while I recognize that it’s not at all romantic to figure out your own deal-breakers—i.e., business pre-nuptial agreements—in the middle of pre-formation bliss, it’s important to specify what’s going to happen if the company breaks up, so that you don’t lose all of your startup money in legal fees.
My advice? Make it fun! Play the Contingency-Incentive-Strategy Game! Go to the “Dissolution” section of your partnership papers, or the “Liquidation” section of your LLC Operating Agreement, make a fake company and come up with ways that you can exit with more value than anyone else in the room. That’s winning.
Then, you get to take all the winning strategies and account for them in the agreement. Make sure that no one can break your system. Take out all the glitches so that everyone can rest comfortably knowing that there’s little to no incentive to game your game…company.
As there’s a great deal more that can be written on this subject (What happens if a partner’s voting interest is passed to his or her spouse? What if a competitor company poaches your lead designer?) I’ll cover this in future blog posts, but the gist is that you need to imagine how exactly you want your business to operate, what the expectations are, who owns what, and what exactly will happen is anyone decides to leave the business.
All of these things should be considered before you actually start the business, or at the latest, in the initial stages of your company’s development. Consider every contingency you can think of, and how you’d like the outcome to be. Take your ideas to your lawyer and make sure that he or she includes the necessary agreements in your startup contracts to account for them.
Side Note about Blog Topics
Are there any blog topics you’d like to see? Any legal questions you’d like answered? Please feel free to leave them in the comments section or shoot me an email. I’d be happy to help out.
– Jonathan Sparks, Esq.