Orrick’s Lynne Hermle and Ellen Ehrenpreis co-authored an article in Forbes with Orrick alum Richard Harroch, Managing Director and Global Head of M&A at VantagePoint Capital Partners, offering guidance on common mistakes made by entrepreneurs and startup companies in the early stages of growth, covering everything from company formation to employment agreements.
When launching a new startup, you can face significant business and legal challenges. We have seen plenty of mistakes made by entrepreneurs and startup companies.
The following are some of the more common and problematic legal mistakes made by small and growing companies. These mistakes are made at the initial formation of the business, in the early stages of growth, and when dealing with employees.
Mistake #1: Not Making the Deal Clear With Co-Founders
If you start your company with co-founders, you should agree early on about the details of your business relationship. Not doing so can cause significant legal problems down the road (a good example of this is the infamous Zuckerberg/Winklevoss Facebook litigation). Think of the founder agreement as a form of “prenuptial agreement.”
Here are the key deal terms your written founder agreement needs to address:
- How will the equity be split among the founders?
- Is each founder’s percentage ownership in the company subject to vesting based on continued participation in the business?
- What are the roles and responsibilities of the founders?
- If one founder leaves, does the company or the remaining founders have the right to buy back the departing founder’s shares? If so, at what price?
- What time commitment to the business is expected of each founder? What constraints will be imposed on outside commitments?
- What salaries (if any) are the founders entitled to? How can that be changed?
- How will key decisions and day-to-day decisions of the business be made? (by majority vote, unanimous vote, or are certain decisions solely in the hands of the CEO?)
- Under what circumstances can a founder be removed as an employee of the business? (usually, this would be a Board of Directors’ decision)
- What assets or cash does each founder contribute or invest into the business?
- How will a sale of the business be decided?
- What happens if one founder isn’t living up to expectations under the founder agreement?
- What is the overall goal and vision for the business?
Today In: Small Business
Similar mistakes are sometimes made with employees, through email or oral promises, such as “you’ll get 5% of the company” without vesting schedules, role definitions, decisions about what happens on termination, etc.
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