A startup founder responds before they’re even asked the question:
“I can do that.”
We know, we’ve been there. And here’s what we have learned: running a startup doesn’t mean you have to do it alone. The best entrepreneurs know when to ask for help.
Our experience in providing startup legal and business consulting services is both personal and professional. In addition to representing startups as a lawyer, Brett works as a startup consultant and am an active angel investor. As an entrepreneur himself, and having worked previously in venture capital in Silicon Valley, he is familiar with the unique challenges and opportunities facing startups. Also, he is a licensed Delaware lawyer (although he lives in Texas), which makes representing Delaware-incorporated startups a perfect fit.
Having launched six companies, Brett brings a well-rounded perspective to helping startups navigate critical stages in formation, raising capital, protecting intellectual property, entering into stock purchase and vesting agreements, negotiating and drafting founders and voting agreements, and so much more.
Startup founders and partners are hard-working, resourceful and enterprising individuals, but when it comes to legal services, a DIY approach often just isn’t practical — and mistakes may be especially costly.
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 our involvement here, we break our services into dispute work and mediation services (You can read more about my dispute & mediation services further down the page). 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’s not easy and can be an emotionally grueling process. We always keep the relationship front and center in our mind when helping partners and founders structure their deals and resolve their disputes.
A quick word about words. We often 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 lawyers, 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.
Partners and Cofounder Formation
If you are just beginning a partnership or other relationship with cofounders (launching a startup together), you only have one opportunity to build a strong foundation from the get-go. At Cenkus Law, 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’s 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. The reason you need to create a solid partnership agreement isn’t why most people think. It’s not because you want an ironclad contract to enforce if things go wrong. You want that, although this is the third most important reason to go through the process of creating a clear, solid founder’s agreement.
The single best reason to spend time creating a strong founder/partnership agreement at the start of the business is to talk through all the important considerations, to be sure you’ve come to agreement on how things ought to proceed. This includes what you each expect from your relationship together. Some of the things we talk about 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 decisions (e.g., borrowing money, admitting new partners, selling the company – the types of things that owners typically decide)? Will this be done by majority vote, super-majority vote (varies between 60%-80% generally) or unanimous vote?
- Will you draw salaries?
- How much will you each work? How many hours per week?
- Will you be able to freely transfer your ownership to a third party?
- What happens if you disagree on an issue? If two founders each own 50%/50% or any decision requires unanimous vote, there may be deadlocks. What will you do about that?
We encourage founders to talk about their goals and expectations. Why are you each doing this? Some of these things go into the founder documents, some of them just help foster understanding and mutual consideration.
Issues around dividing up shares of founder equity are always interesting conversations. 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 help guide these discussions. That’s all they are – 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. We will say that venture capitalists are generally drawn to 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.
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 haven’t yet discussed than things you have
- You may learn that you and your partner have very different views on the way something should be done, in which case you may decide not to work together at all or you may come up with a compromise or work-around. Either way, having this information is critical
- It helps foster understanding and connection, which are the lifeblood of strong, mature relationships
To read more about this primary benefit of strong founder agreements (actually, any business contract), visit The Most Important Reason to Create a Business Contract
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 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.
Our work with partners and founders creating and documenting their agreements upfront is often done as counsel to the company itself, not to the individual partners/owners. It doesn’t always have to be this way, although because the startup formation and launch process is usually collaborative and amicable, if we represent the company and each founder/owner does not feel the need to have their own individual legal counsel, overall legal fees can be kept down.
Last point on partner and founder formation issues — 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. When it comes to a founder or partnership agreement, a template contract rarely works. Every relationship is different and you want to be sure your agreement mirrors what you and your cofounders want. This almost always requires custom drafting from an attorney. We are not angling for business when we say that. It’s simply true.
“When my wife and I launched our business, we interviewed many other attorneys who didn’t really seem interested in us, as people, or our business. Then, we met Brett. Brett sat down with us and wanted to learn all about our business and us. We learned that he not only graduated from Harvard Law School, but was also a business owner himself, and therefore had a ton of real world business knowledge and experience. We hired Brett Cenkus and it was by far the best business decision we ever made. Brett is not just our attorney but also a trusted member of our team who is constantly guiding us in the right direction.”
– Mohammad S., RollBliss Kimonos