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Multiple Founders: Avoiding Landmines

Many clients ask me to help them form new businesses. On several occasions, however, when there were two or more founders, the business never got off the ground. The common thread running through these situations is that while the founders thought that they had agreed on business terms, each party had unstated assumptions that came out only when legal documents were prepared.

If you find yourself talking about a new business with one or more other founders, here are some issues you should think about:

  • If one founder will provide most or all of the financial investment, anticipate that founder will want a return of his investment before any profits are shared.
  • If you are inclined to split all rights and obligations evenly, will that be an effective way to run the business? Will you be better off with a single manager who can make all but the most important decisions?
  • If there is disagreement on an important issue, how will any deadlock be broken? Here, an agreed-upon dispute resolution procedure in the formation documents can be very helpful.
  • When assigning roles, think not only about skills and expertise, but also about personal style. For example, does the presumptive CEO have the skills to manage people and the temperament to thrive in an ever-changing environment?
  • Do the founders have comparable sophistication about business issues? If not, the less knowledgeable should be brought up to speed, preferably before counsel begins preparing formation documents.

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This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.