In the early days, startups are founded with excitement, trust, and mutual goals among co-founders. This initial hope translates into postponed or superficial negotiation of legal arrangements and rough-talking in the launch phase. But startup veterans often explain that the co-founder issue often becomes one of the most frequent sources of contention in the future. Conflict over equity issues, conflicting duties, and decision-making issues can silently ruin even the best of businesses. Learning from these contractual pitfalls can be just as beneficial for helping founders to develop long-term partnerships.
Never Defining Roles Clearly
The informal division of labor that often occurs among co-founders can be a challenge for startups to overcome, especially when it comes to operations, product development, hiring, finance, or strategy.
Equity Divided without Long-Term Planning
At first, sharing the ownership seems straightforward, but co-founders tend to forget to consider workload, experience, investment, and commitment levels when splitting up the equity.
Skipping Vesting Agreements
If there is no vesting, then the early co-founder might have a significant stake even if they only worked for a short time in the company. Example: A 4-year vesting with a cliff of one year may be used to encourage long-term commitment, as seen in many startups.
Ignoring Decision-Making Procedures
Agreements are often set easily in the initial stages, but business disputes are likely to escalate as the amount of money, hiring, and business pressures increase.
Avoiding Difficult Financial Conversations
If financial boundaries are not discussed early on, then there may be tension later on due to compensation expectations, spending, reimbursements, and fundraising plans.
Failing To Plan for Founder Departures
Some startups never talk about what happens if one of the founders decides to withdraw from the company, to be inactive for a while, or to unexpectedly sell part of the company during a bad time.
Mixing Friendship With Business
Many times, friends will start businesses together and make it work, but they don’t always make formal agreements or have uncomfortable discussions that are still necessary for the business.
Uncleared Intellectual Property Ownership
Disputes may arise later when raising funds or when a company is acquired, if the ownership of code, designs, branding, or product ideas is not properly legally assigned to the company.
Not Updating Agreements
The organization of a startup can change quickly following start-up funding, hiring, or growth. Agreements that are signed in the early phase of launch can date very rapidly.
Delaying Legal Advice Too Long
While some founders opt not to hire a lawyer up front, it’s not uncommon for contracts to be confused or for some protections to be overlooked, leading to much greater financial and operational issues down the road.
