Why We Recommend a Co-Founders’ Agreement – the All-Important What-Ifs
I recently interviewed the founding partner of a local private equity firm. Something he touched on was the fact that when he established his firm, he had an unwritten, understood 50/50 partnership with his co-founder. Years later, when the two decided to go their separate ways, they struggled through the procedures, protocol, and legal matters that inevitably come up as a business dissolves.
Had they created a co-founders' agreement at the firm's inception it could have streamlined the process, addressing the all-important what-ifs that any business creator might face. Instead, the absence of a carefully negotiated and drafted written partnership agreement left the two of them with no road map when they wanted to make a clean break and go in their separate directions.
Keep It Real
We recommend that any type of business partnership be entered into with eyes wide open and with a careful view to possible what-ifs - those scenarios that could conceivably unfold in the future. These are generally situations that business owners will say could never happen. Or if both parties do acknowledge what-ifs during upfront planning, they could imagine that their reactions would always be proper, so putting policies to paper isn't necessary.
The truth is that when health problems, financial issues, or internal conflict in the company necessitate shutting things down or walking away, emotions will inevitably be running high. All of the ideal imaginings we had might not line up with reality. Factor in the stress that comes with change and it could be very difficult to think through situations with a level head.
For these and other reasons, it's absolutely key that what-ifs are carefully considered, anticipated, and planned for. This means putting plans in writing for what to do in every circumstance.
Some things to include as part of a comprehensive co-founders' agreement are what to do in the case of:
- Death or disability of a partner
- Bankruptcy of a partner
- Failure of a partner to perform or deliver
- Desire of one partner to leave the business
All of these seemingly far-off situations come to pass everyday and can wreak havoc on a company and personal relationships. They can feel so distant when in the throes of creation. That's why we suggest that when you're looking to start a business, you should partner with experienced legal counsel.