As an emerging business, it’s likely that you are seeking or considering funding from outside sources – venture capitalists, angel investors and others. When you do seek that kind of funding, provisions in your entity formation documents and operating agreements could be potential roadblocks in sealing the deal. Those provisions include founder vesting, first right of refusal, buy-outs, transfers in ownership and more.
However, you as founder and owner need 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, your attorney can help review any agreements with investors to determine if the terms are at odds with your business operating agreements. If your original agreements are too stringent for investors, you might also consider revising those documents – again with the help of legal counsel.
If you are an emerging business owner with questions about your business agreements, contact EmergeCounsel today.