As an emerging business, it’s likely that you are seeking or considering funding from outside sources. These outside sources could include venture capitalists, angel investors, and others. When you seek that kind of funding, take precautions to ensure the provisions in your entity formation documents and operating agreements are not potential roadblocks. Those provisions include founder vesting, first right of refusal, buy-outs, transfers in ownership, and more.
However, as founder and owner, it is important to ensure that your own investment in the business is protected as well.
A sound business agreement should answer the following questions:
- What are the overall goals and vision of the company? Is each party in sync?
- Who gets what percentage of the company?
- Is the percentage based on vesting or continuous participation?
- What responsibility does each founder have?
- What happens when a founder leaves?
- What employment relationship does each founder have with the company? Should there be a separate founder agreement?
- What time commitment is expected of each founder (if any)?
- What salaries are the founders entitled to?
- What are the different levels of decision-making?
- How can you remove the founder(s)?
- What is each party putting in to invest in the business?
- Who makes decisions about changes regarding controlling/selling the business?
- Can the terms be changed, and how would we do that?
As you proceed with securing funding, a skilled attorney can help review any agreements with investors. An experienced attorney will help determine if the terms are at odds with your business operating agreements. Additionally, if your original agreements are too stringent for investors. If this is the case, you might also consider revising those documents – also with the help of legal counsel.
If you are an emerging business owner with questions about your business agreements, contact EmergeCounsel today.