Many companies today are launched with multiple cofounders. While this is the best option for many start-ups, it also presents its own potential legal issues. One thing that you and your cofounders may not know is that the attorney you retain to represent the company does not also represent you or your cofounders’ personal best interests.
Only having the company attorney is fine for many situations, but as the company grows, cofounder needs and interests may change, leading to some tricky situations. Here are some potential issues you may face:
When forming a new company, it’s common for founders and employees to sign non-compete agreements stating that they will not use the company’s intellectual property or processes to launch a competing company. These agreements can make it exceedingly difficult to find a new job after leaving the company, however, and it’s important to have an individual attorney’s counsel before signing a non-compete.
Many cofounded companies use founder’s stock to make sure that each founding member “earns” their share of stock (see “Intellectual Property”). The issues involved in founder’s stock, especially when a founder resigns for good reason or is fired without cause, can be quite complex. An experienced attorney can help each founder make sure that the founder’s stock is set up in an equitable way.
Typically, once a founding member contributes intellectual property in exchange for founder’s stock, the intellectual property becomes the property of the company and the founder no longer has any personal rights or control over it. Contributing founders may want to retain individual legal counsel to write up a detailed intellectual property contribution agreement.
Minority Shareholder Protection
As a company grows and the founders’ interests change over time, relationships can become tense. When this happens, the founder with the least stock in the company (the minority shareholder) can be at risk of termination by the board of directors. Having an individual attorney can help the minority shareholder navigate these waters successfully.
These are just a select few of the potential issues that cofounders can run into when launching a new startup. If you’re launching a new company with cofounders, consider hiring an attorney who represents your personal interests, rather than relying on the company-hired attorney.