Posted 21 Oct 2007
Sun Tzu is generally credited for coming up with the phrase, “Keep your friends close, and your enemies closer.” He obviously never launched a startup and got shafted by a co-founder.
Entrepreneurs often believe their startup company faces legal threats from only external sources. And that’s a big mistake. Instead of worrying solely about some 3rd-party stealing your business idea or a “slip and fall,” your startup company’s top legal priority should be the reduction of its internal legal threats: co-founder disputes.
You can start by examining every aspect of the co-founder relationship. Your startup company could be ultimately doomed by a co-founder dispute, as even small disagreements can systematically erode the core of your company. Therefore, at the earliest time possible, sit down with your co-founder(s) and talk about issues like:
(1) the goals each of you have for the startup;
(2) the goals each of you have for yourself;
(3) duties, job descriptions, and hour commitments;
(4) who pays for what;
(5) who gets paid first and why;
(6) what happens if one of you wants out;
(7) what happens if one of you wants to sell the company, raise capital, or end it;
(8) what happens if one of you gets disabled or dies;
(9) what happens if things take longer than expected; and
(10) whether launching other startups, i.e. “moonlighting,” is ok.
This is not an exhaustive list of topics and by no means whatsoever will such discussions be easy. If it is easy and everything sails through without a hitch, someone’s holding back and you’ve all wasted your time. And for the love of high-speed internet and all things Web 2.0, do not think being friends or relatives reduces the need for these difficult and/or awkward conversations. In fact, if your co-founder is a friend or relative, that should trigger even more issues and discussions. Because now you have more to lose than just a company and your (or someone else’s) money.
After you have discussed everything that needs to be discussed, DOCUMENT-DOCUMENT-DOCUMENT. Make sure your startup company documents reflect all of your discussions. Don’t leave anything out just because you and your co-founders already talked about it. Take nothing for granted because memories will inevitably differ.
Once you have discussed and properly documented your co-founder relationships and thereby protected your startup company’s core, then you can focus on external legal threats.