Co-Founders conflict Cyprus

Startup Co-Founders Conflict in Cyprus looks at ways in which the co-founders can design a Cyprus  structure that will factor in possible future conflicts between them. 

Let me start by saying that I hate divorce law since no one is ever prepared for one. Let also say that when a divorce case arises . . . usually the “gloves are off” and everything goes. Let me also say that in a family dispute or a business disputes its not about the money it’s about the principle – whoever has been involved in a Cyprus Co-Founders Conflict can relate to these analogies. 

How to minimize the damage?

As Rachel Blakely-Gray puts it the co-founder team should meat together and pass through all the anticipated hypothetical scenarios which might arise with the start-up and touch upon key decisions to be recorded in a written founders agreement. These decisions may include:  

• The roles of the co-founders, the responsibilities of each, the extent of influence the other shall have on a particular decision
• The liability which each founder will have against the other and the over all business plan 
•  A possible conflict resolution strategy (see deadlock below) 
• The minimum contributions (financial, time, milestone, kps) which each founders shall have as well as those of the start-up.

What is a Co-Founders Agreement?

If you don’t have one and you’re looking at this article the most likely scenario is that you’re too late. You’re in conflict with your co-founder and your start-up is in peril.

Although nothing in this article is set in stone if I was to consider putting together a co-founder agreement my first recommendation would be to put together a general or limited partnership structure. Nevertheless, it is possible to structure a co-founders agreement using an agreement between the parties such as a shareholders’ agreement or a joint venture agreement.

The difference between a shareholders’ agreement and a general or limited partnership structure is mainly relevant when we consider the laws and legal principles on which they are based. Someone who is not legally orientated will, at the end of the day, see an agreement and a line to sign. 

Why use a partnership agreement?

The aim of the partnership agreement is to clearly set out the duties and responsibilities of each party, the contributions which each party would make as well as the payout that each party would enjoy. A simple example would be to have the co-founders as limited partners and general partners whereas any persons added to the team would be general partners.

Would a partnership agreement define how we decide on strategy?

The Cyprus partnership agreement can clearly define the decision taking mechanics. As a rule of thump, only limited partners enjoy the right to vote in a partners meeting. The flexibility of the partnership agreement means that it may define the roles and responsibilities of each limited partner so, for example, one partner will be responsible for the business side of the startup whereas the other will be responsible for the technological innovations. Furthermore, the partnership agreement can include conditions to be met before key strategic decisions such as funding, exit, hires, sale of assets, etc. Lastly, any limited partner introduced typically enjoy the benefits of the partnership however not the decision-taking process.

Deadlock between the Co-Founders and how to resolve the conflict

A deadlock is defined as any situation whereby the business of the start-up cannot continue and the directors or shareholder cannot decide on a particular matter. This is different from a breach of contract and not deciding on something does not automatically breach the contract.

Agreements may include provisions caring for a deadlock situation with a possible mechanism to present the issue with the start-up’s mentor, incubator or another designated party. Another possible solution is to require one of the parties to exit from the start-up, either by paying an amount or assigning ownership interest.

If all other options fail a deadlock situation may be ground for the dissolution of the structure. . .

Would a Partnership Agreement Restrict Competition between the Co-Founders?

In a recent publication released a restriction restraining trade was considered. This restriction effectively prohibits a person or a business from carrying out a legal trade/business for a period of time. Under certain conditions this is allowable in the US and UK however a case from 1935 has made it expressly clear that Cyprus law does not allow parties to contract out of their rights. This is only allowable if a partnership agreement is in place. For further reading please consider the publication titled “Covenant to Restrain Trade“

By including a partnership agreement effectively any co-founder and partner who decided to exit the partnership will be restricted from pursuing a similar business or activity or even competing with the existing partnership.

What is the legal status of the partnership?

A partnership is not a private company limited by shares which enjoy limited liability and a separate legal personality. Effectively the Cyprus co-founders will be holding all the assets of the partnership in their name, or as otherwise defined in the partnership agreement. They will be personally liable for any losses and damages arising from the partnership. However, the partnership agreement can be registered with the Registrar of Companies which means that the parties interests are secure and publicly available.

What are the benefits of a partnership compared to a private company limited by shares?

In my view, a partnership agreement is more geared towards start-ups than a company. Especially when the Cyprus co-founders are in the seed stage of their idea. A partnership agreement will give the required flexibility to work with a co-founder and the security needed to ensure that the best interests of the founder are secured. I would recommend setting up a company when the founders are almost ready to capitalize on their start-up and definitely when they might be attempting to raise capital.