Too often, entrepreneurs (who intend on starting the next IPO) pay little to no attention to their organizational documents. This is quite intriguing, as it is similar to buying a house, and not paying attention to whose name is on the title, or what is in the covenants, conditions, and restrictions or neighborhood association bylaws; or getting married and not discussing prior to such marriage who will pay the mortgage.
Frequently, the common mindset is that the organizational or governance matters can be taken care of later, and that there will never be a disagreement between the business partners. In reality, this process should move a little slower. Would you marry someone without knowing how much debt they are in? Would you want to know if they have been married before or have kids?
Some time should be spent confirming your business partner is a good choice and setting up proper governing documents so that each party’s expectations are known and aligned in an attempt to minimize any future surprises or disputes. Some of the factors to consider may seem obvious, while others frequently go overlooked as technicalities.
Ownership Percentages and Financial Responsibilities
First, a few big issues to address are ownership percentages, the responsibility of funding operations, and the amount (or absence of) increase to a partner’s ownership percentage upon contributing additional capital. These factors all seem relatively obvious, but not having an agreement in place to define them in detail can have serious consequences.
Clearly Defined Management Roles
Second, another obvious issue is responsibility for management, and if there is a disagreement, the partner with the final say. Without having an odd number of business partners, one partner must have the final say, otherwise, decisions can end in deadlock. Deadlock in business decisions or management can end in the dissolution of a company.
Properly Structured Business Procedures
Third, some things that seem small can end up being perturbingly annoying. For instance, it is easy to overlook the rules that govern official meetings of a company, such as who may call them, the number of partners required for a quorum, the means and methods by which a meeting can be held, and how notice of meeting may be given (mail, letter, email, phone). A hostile business partner can exploit a poorly thought-out meeting procedure to prevent a company from ever holding an official meeting.
Some of the foregoing factors cannot be simply fixed later, and if any fixing is needed, it may be prohibitively difficult. When starting a business, especially a business that will have significant capital invested, the process should begin with solid governance documents to account for the foregoing factors, amongst others.
If one plans to invest significant time and capital in a business venture, it is exceedingly wise to allocate some portion of that time and capital to set up the correct entity with governing documents that will account for the growth of the business and the changing landscape that may lie ahead.
It may be helpful to see the governing documents as more of a prenuptial agreement, rather than a formality that can be handled later. If a spouse possesses significant assets acquired before the marriage, a prenuptial agreement essentially states what those assets are, that the parties agree on what the assets consist of, and what will happen to the assets (and the other assets acquired during the marriage) in the event that the marriage ends.
Without some sort of agreement at the outset of a marriage (or business venture), and in the event of a separation and dispute, it is usually more difficult to prove the relevant facts and details, and more time is required to sort out the details, and any control over the rules governing a potential dispute is lost.
It is almost always less costly, less frustrating, and less time-consuming to simply agree upon these details from the outset. So, when entering into a business venture, think about the future now and not when it is too late.