Partners and Cofounders
- Drafting partnership agreements, LLC agreements and other founder agreements
- Drafting shareholder and stockholder agreements
- Guiding discussions and providing advice to founders and partners about ways to structure their business relationship
- Drafting separation and withdrawal agreements
- Negotiating and enforcing partner/founder rights
- Providing strategic advice about separating from a partnership or other business relationship
- Pre-litigation dispute resolution, including mediation services and refereeing disagreements
- Selective litigation of partner/founder disputes
We do a lot of work with cofounders and partners. We are generally brought in either at the beginning of the relationship when everyone is excited and happy or much later on when the relationship is strained.
Our work upfront is spent helping founders and partners talk through and structure their relationship, so that it has the highest chance of success. This is time well spent on the front end.
Our involvement later on in a partner and founder relationship is often when things are blowing up. When we talk about the services we provide at this stage, we break them into three categories: pre-litigation dispute work, litigation, and mediation.
We use the word “relationship” a lot. Business partnerships are like marriages. A business partnership is a very significant relationship in a person’s life. When you form a partnership or join up with cofounders, you don’t just enter a contractual relationship – you form a separate thing that needs its own care and attention. If it flourishes, the sky is the limit for the business and that can be very satisfying. If it languishes, the business partnership will almost certainly not meet its goals or potential. And, if you must end a business partnership, like a marriage, it is not easy and can be an emotionally grueling process. We always keep the relationship front and center when helping partners and founders structure their deals and resolve their disputes. There are times when the other side clearly doesn’t care about the relationship and everything is about the law and leverage. If that is where things go, we go with it, although most of these types of disputes are solved, in part, by repairing the relationship or, at the very least, finding an amicable path to separate.
A Quick Word About Words
We use the words “partner” and “founder” interchangeably. We do that because clients don’t usually draw a clear distinction between the two terms. Two partners who form a company together are both founders. Each partner is a cofounder. Technology companies use the words founder and cofounder a lot. The word founder does not have distinct legal meaning. In other words, it can mean different things in different contexts. Generally, it means a person involved in the company at or near the beginning who has equity/ownership and a significant role in the management of the company. Most people define a founder as a person who helped launch the company and, because of that, it carries a certain connotation and is generally considered a badge of honor.
The word “partner” has legal meaning. Partners owe each other fiduciary duties. Fiduciary duties are a high standard of dealing with each other. As a lawyer, we owe clients fiduciary duties. This means that we have our clients’ best interest in mind. We must be honest, loyal, fair and treat them with good faith. In a nutshell, it means we have their back and will protect them. Their interests come before ours. This is what the law says partners owe each other, as well. Some founders are partners and vice versa, but not always.
Partner and Cofounder Formation Matters
If you are just beginning a partnership or other relationship with cofounders (e.g. launching a startup together), you only have one opportunity to build a strong foundation from the get-go. We believe this is important if you are going into business with your brother or your spouse and we believe it is extra important if you are going into business with someone you don’t know all that well. Launching a business with someone is a huge undertaking. It is exciting, but it carries some risk, which you can mitigate by spending a little time in the formation process and doing it right.
Strong partnerships start with strong founder/partnership agreements. This isn’t solely so you’ll have an ironclad contract to enforce should things go wrong (although that is a part of it) – rather, the single best reason to spend time creating a strong founder/partnership agreement at the start of the business is so each person can talk through all of the important considerations involved and make sure you’re in agreement on the way things ought to proceed. This includes what you each expect from your relationship together.
Toward this end, when we form companies and prepare partnership-type documents (we call this a Formation & Founders project), we give the founders our Cenkus Law Founder Consideration Questionnaire and let them talk through things – everything we can think of upfront. There may be other things on your mind and our questionnaire will help prompt those. The more time you spend upfront, talking through your deal with your cofounders, the better off you will be and the most custom and relevant our work will be.
Some of the things we discuss upfront with partners and cofounders are:
- How will you divide up ownership (equity percentage)?
- Will your equity interests vest over time, so that if one of you leaves before the vesting period is over they won’t keep all their equity?
- What will each person contribute to the venture (e.g. time, money)? If someone contributes money, will it be a loan or paid-in capital?
- How will you make day-to-day decisions? Will you each have officer titles and certain roles and responsibilities?
- How will you make more significant long-term decisions (e.g. borrowing money, admitting new partners, selling the company)? Will this be done by majority vote, super-majority vote, or unanimous vote?
- Will you draw salaries?
- How many hours per week will each of you be expected to work?
- Will you be able to freely transfer your ownership to a third party?
- What happens if you disagree on an issue? What happens if there are intractable deadlocks in the decision-making process?
We encourage founders to talk about their goals and expectations. Why are you each doing this? Some of these things do end up in the founder documents, and some of them just help foster understanding and mutual consideration.
Issues around dividing up shares of founder equity are always interesting conversations, as splitting founder and partner equity is more art than science. There is no easy way to answer the question about how much equity each cofounder should receive. There are tools out there, such as foundrs.com, that can help guide these discussions. That’s all they are, though – guides. Diving up startup equity is always negotiable. We are happy to give insight into the process, although we are careful not to make direct recommendations if we are representing the company as this is an issue that each founder/partner needs to resolve for themselves. There is no right way to divide or distribute startup equity. Most venture capitalists look for startups with multiple founders with fairly even equity splits. Solo founders or situations where one founder has the lion’s share of the equity are viewed as risky situations for a number of reasons.
Why Strong Founder/Partner Agreements
Spending time upfront talking through and documenting your partnership agreement does a few things:
- It ensures less potential for argument later on since arguments are more likely to arise over things you have not yet discussed than over things you’ve already considered.
- You may learn that you and your partner(s) have very different views on the way something should be done, in which case you may work towards a negotiated compromise or decide not to work together at all. Either way, having this information upfront is critical.
- It helps foster understanding and connection, the lifeblood of strong, mature relationships.
To read more about this primary benefit of strong founder agreements (or, indeed, any business contract), check out my article on the topic.
The second reason you should create a strong founder/partner agreement is to make a record of your agreement. People are prone to misremember or change their mind and pretend they don’t remember. It happens. A clear record of the deal is helpful.
The third reason you should have a strong founder/partner agreement is the one we mentioned earlier – in case one of you needs to enforce the agreement. This is the third reason because you are hoping the first two reasons make enforcement unnecessary. Enforcing an agreement means your business relationship has soured and that is never a good thing.
Us vs. Legal Technology Companies
The internet is an amazing and empowering tool. Sites like LegalZoom and Rocket Lawyer have made it really easy to obtain standard contracts and other documents. If all you need to do is file a Certificate of Formation or Articles of Incorporation, LegalZoom will get the job done. However, when it comes to a founder or partnership agreement, a template contract rarely works. Every relationship is different, and your written legal agreement should reflect candid, thorough discussion with your cofounders about what you all want and how your partnership should function. This almost always requires custom drafting from an experienced attorney.
Partner and Cofounder Disputes (Pre-Litigation)
We love transactional work – forming companies, helping clients raise capital and deal with securities law issues, mergers & acquisitions, joint ventures, employee stock and incentive plans, and other projects along these lines. These are positive events and they usually involve company growth.
Still, the world of business is not always rosy. Despite your best efforts, a business relationship with a cofounder or partner might go south. Sometimes the relationship can be saved and other times it can’t. If things are quickly getting nasty, it’s a good idea to have someone in your corner to represent your interests.
If you’re involve in a dispute with your partners or cofounders, we can help. We often represent partners or cofounders in disputes with their other partners and cofounders. Other times, we represent the company in a situation where one of the partners or cofounders has gone rogue.
Step one to resolving partnership and founder disputes starts with looking at the founder and corporate governance documents. These documents, when properly drafted, will explain how to handle disputes. Founder documents carry all sorts of names, depending on the type of business entity and the overall structure of the partnership relationship. Documents we will often ask you to provide may be called:
- Partnership Agreement or Limited Partnership Agreement
- Shareholders Agreement or Stockholders Agreement
- Bylaws of a corporation
- Founders Agreement or Cofounders Agreement
- Company Agreement, Operating Agreement or LLC Agreement
- Stock or Share Purchase Agreement or Vesting Agreement or Equity Vesting Agreement
Our goal with pre-litigation disputes is generally to resolve them without filing a lawsuit. Litigation is messy and expensive. There is a common saying that the only people who win in litigation are the lawyers. We can tell you that it is an often all-around painful process for everyone involved. The system and process can be frustrating for clients and 95%+ of cases end up settling, which means each side is gives up something in the end.
Still, sometimes it is not possible to resolve a dispute outside of court (including arbitration, which is best described as private litigation). In that case, filing a lawsuit may be the only viable option.
Partner and Cofounder Litigation
We do not accept a lot of litigation work because we are very selective about the cases we will litigate. With the occasional exception, we only litigate business partnership disputes. And, with rarer exception, we only litigate cases where we believe that our client has the better position – not that they need to be more likely to win (although we try to avoid, and encourage clients to avoid, cases that we believe have little chance of winning), but that they were mistreated and deserve to have things made right.
You have probably heard the saying, “there are two sides to every story.” In most partner/founder disputes, there are three sides – the plaintiff’s version, the defendant’s version, and what actually happened. Usually, each side played some role in how the parties got to where they are when they come to us. Not always, but usually. Sometimes, one side is simply a bad actor. They did wrong things – stole money, lied, manipulated, implemented an intentional plan to frame their cofounder as a bad/lazy/incompetent person to look better to other founders or employees and gain something, ran a side business, froze partners out of their accounts, withheld information other partners are entitled to, took other egregious actions that are totally inconsistent with what we think of as a healthy “business partnership” … the list goes on.
We will litigate a case where our client was the party harmed by a bad actor, although rarely the other way around.It is not that we can’t represent a bad actor zealously. Everyone deserves a right to legal counsel. And, we recognize that our determination of a just cause is subject to bias and error. We just have a lot more fun in litigation when we believe deep down at our core that our client was wronged. That makes the frustrating aspects of litigation easier to accept.
If you were wronged and need someone to help you navigate a partnership dispute, enforce your rights, and have your back in a business relationship dispute, call us at 512.888.9860.
Partner and Cofounder Mediation Services
Other times, you don’t need your own legal counsel to protect your specific interests. Sometimes you and your partner(s) need an impartial person to help you work through your partnership disagreement. In this context, mediation is a great tool.
If you are having problems with your partners or cofounders and you are not able to work things through amicably, there are a few options available to you. Among them are litigation, arbitration and mediation.
Litigation and arbitration are rarely preferred approaches. Litigation is a necessary tool at times, although even the litigators will tell you that very often neither party comes away feeling like they won. Litigation is slow, expensive and decisions from courts and juries are not perfect – they make decisions without knowing absolutely everything that happened and without full knowledge of the relationship that is affected. And, it is not the job of a judge or jury to help preserve the relationship. Arbitration is often just as expensive as litigation and it just as acrimonious. They are both poison to relationships, not to mention your wallet.
Mediation is a much quicker, simpler and less costly option. Most business disputes can be mediated in a half-day session. Since mediation is collaborative, whereas arbitration and litigation are adversarial, mediation requires each party to participate fully and openly. Otherwise, it’s a waste of time, which is why some attorneys don’t like it. Our experience is that it is a very good use of time and money. Sometimes what people really need is time to tell their side of the story and a neutral person to give some thoughts and insights and to encourage repairing and saving the relationship. If you and your partner are willing to talk and to try to work things out, mediation is a great tool.
Brett A. Cenkus provides a structured mediation process based on a unique and proprietary philosophy. He believes that the most effective mediation involves the parties working together in a non-judgmental environment. In one of his mediations, you and your partner will each have an opportunity to present your point of view to each other and to me. He will encourage you to talk to each other, focusing on facts and the impact events had on you, rather than slinging accusations and demands at your partner. Brett will also spend a significant amount of the mediation with you each separately. You can attend a mediation with your legal counsel or without.
Brett’s mediation services are primarily focused on partnership and founder disputes. His mediation services are always confidential.
If you’d like Brett’s help mediating a business issue, contact us at 512.888.9860.