Picture this: a few friends are at a bar one night griping
about work, when one turns to the other and says "let’s
start our own company!". Often, this is similar to Mickey
Rooney’s famous line "let’s put on a show!". In
principle, it could work. In practice, it requires a lot of
forethought and just plain hard work.
At a business’s inception, entrepreneurs face a variety of
decisions. Before they even begin any work they need a Founders’
Agreement. Working without a Founders’ Agreement is naïve and
akin to Rooney’s plan to "put on a show". It ignores
the fundamental reality that business is difficult and that good
plans can go awry despite best intentions.
A Founders’ Agreement can be as complicated as a fully
drawn business plan combined with a private placement
memorandum. In most cases, however, this level of complexity is
unnecessary.
At their core, Founders’ Agreements should cover the
following issues:
- Nature of the prospective business;
- Very general business plan;
- Identity and future positions of the prospective
entrepreneurs;
- Legal nature of the organization;
- Taxable nature of the organization;
- Apportionment of stock;
- Consideration paid for stock, either cash or in-kind;
- Operating Capital;
- How to admit new members; and
- Disposition of shares when one of the members dies,
wants to sell, or is forced to sell by court order.
In the opinion of the author, any Founders’ Agreement that
contains less than the Top-Ten is seriously flawed and may
eventually lead to significant problems.
Although any competent business lawyer should be able to
draft a Founders’ Agreement, issues peculiar to high-tech
firms may require greater expertise. High-tech entrepreneurs
should consult lawyers familiar with both business and high-tech
fields when contemplating Founders’ Agreements.
