Before launching a startup, every founder faces the dilemma of finding a partner. On the one hand, giving a share and authority will be necessary. On the other hand, to share the risks. And most importantly - to increase the probability of success of a business or project.
How does the possibility of raising investments depend on the number of founders?
"Investors prefer startups that have two or more founders. Such companies are more likely to complete a funding round." — Anthony Rose, CEO of SeedLegals [UK's largest fundraising platform].
According to venture fund First Round Capital statistics, multi-founder teams outperformed solo projects by 163%, while single-founder startups had a 25% lower initial valuation.
A second partner is some "insurance" for the investor. If one founder burns out, gets tired, or gets sick, there is a second one who can make decisions and move the startup forward. But on average, every fifth startup only survives due to disagreements between partners and conflicts in the team. One of the most prevalent complaints is the inability to hear each other and resolve disputes.
In theory, everything is clear, but when it comes to practice, it turns out that issues that will affect the company's life in the future are left aside. You need to discuss the rules of a joint business "on the shore," but if you have not done this yet, it's time to protect yourself from possible problems.
Icon.Partners lawyers have compiled a checklist of important issues to discuss with a partner and legal advice, following which you can quickly draw up a partnership agreement that will help you avoid possible conflicts!
The legislation does not require the conclusion of a partnership agreement. It is better to draw up a partnership agreement in writing. It is done not because there is doubt about the friendship between the partners but to secure each side
Unlike the statute and memorandum of association, a partnership agreement is confidential between partners. In this document, it is possible to regulate the provisions related to a business's activities with a partner and not disclose them to unauthorized persons. Changes in the arrangements under the partnership agreement do not require registration and amendments to the charter
Within one year, 496 cases arising from corporate legal relations reached the Supreme Court, so it is essential to agree "on the shore" before starting a business
Instead of concluding an agreement and settling relations, the parties often say, "we trust each other." These partnerships are similar to relationships in marriage when the spouses first trust each other and then divide the property in court :) When a dispute arises between the founders (for example, after the death of one founder, the heirs want to sell the business, and the second founder intends to develop it further), the courts take years, and business activities are blocked
You should not do a 50/50 business (or a similar distribution of shares with equal parts) because in the event of a conflict or dispute, you will find yourself in a deadlock, and the business will again be blocked
Provide in the partnership agreement the resolution of "deadlock" (deadlock) situations (a situation where none of the shareholders does have enough votes to decide on the company's activities)
If you want to avoid asking each other questions and discussing the terms of the partnership agreement, hire a lawyer who will do this and help you draw up the contract correctly
It is also necessary to establish responsibility to the parties and the procedure for resolving disputes (Arbitration Court, court of general jurisdiction)
Checklist of questions for partners
Missions and goals of the startup
Why do you need a partnership agreement?
What happened before you decided to make it?
What will change after the agreement is drawn up?
How often do we plan to revise the partnership agreement?
What business are we in?
What value do we bring?
What are we focusing on?
What do we want to achieve?
What is it for each of us?
How long is the partnership agreement valid?
How will terminating the partnership occur, and on what conditions will we part? What is the period of the partnership, what should happen with the property, and what are the obligations of each partner in this case?
What problems need to be solved?
What is the criterion for achieving the goal?
Will we buy other businesses?
Are you ready to join the big business?
Company's capital and contributions
Who contributes the initial capital, and are additional contributions expected?
What is a contribution (cash, intellectual property, services rendered, etc.)?
What happens if the partner does not cope with the obligations of the deposit (not all the money or did not transfer the intellectual property)?
Who manages the company's operations, and who will be the director?
Who do we take on the team, and under what conditions?
What powers does the director have? Are there any permission restrictions?
What is the procedure for appointing or removing a director, forming or dissolving a board of directors? What is the procedure for changing directors?
What limits the number of transactions with third parties or affiliates that a director can enter without the other founders' consent?
What are the collective powers of the founders, and what forces are granted to the director? Who will be responsible for making decisions for the director?
What is the responsibility for exceeding the powers of the director? Who will make decisions that will affect the company's operations?
In what shares will the founders own the company?
How will the company's profits be distributed among the founders?
Conditions for reducing the share in the company if the needs are not met?
How is the profit distribution decision made?
Will there be a moratorium on the distribution of profits? For how long?
What part of the profit goes to further business development?
Founding Partner Meetings
What is the regularity of the meetings, and who initiates the discussions?
What is the quorum for general meetings?
How are issues that fall within the competence of the meeting resolved?
Work of partners in the company
Distribution of areas of responsibility, who is responsible for which size?
Can you work on the side or freelance?
Will there be KPIs for partners working for the company?
What if the partner does not fulfill or fulfills improperly assumed obligations in his area of responsibility?
What happens if the founder decides to leave the partnership or retire?
How will the overall contribution to the business be measured?
What happens if a partner dies or becomes incapacitated?
Privacy and Non-competition
What information is confidential, and which can be disclosed?
How are issues of non-poaching and non-competition resolved?
Attracting investments in the future
What is the procedure for financing the company's project?
What is the procedure for terminating project financing?
Is the issue of new shares allowed? If so, for what purposes and in what order?
What are the classes of shares? How are the classes different? What is the purpose of this or that class?
What restrictions do you want to impose on the transfer of shares?
Will there be a moratorium on share transfers? Can a shareholder sell them to third parties?
How are the rights of minority shareholders protected?
Dispute and conflict resolution policy
Will deadlock mechanisms be used, such as Russian roulette, Texas shoot-out, and Mexican shoot-out (Dutch auction)?
In conclusion, these points are essential to prescribe, even or especially if a close friend becomes a partner. The long-term partnership does not depend on the initial relationship. But it gets stronger whenever you discuss problems, synchronize, and find a solution.