Avoiding Disputes between Founders
Avoiding Disputes between Founders
• 01 Dec 21
Within any professional business environment, disagreements and disputes are inevitable. Working alongside various personalities can often lead to a great deal of frustration and misunderstanding. Research shows that ‘founder dispute’ is a leading cause of Startup business failure. In this article, we take a look at some of the main reasons behind co-founder disagreements, and highlight the importance of establishing a clear alignment of views to ensure long-term success.
Achieving Founder Alignment: Execute a well-drafted Founders’ Agreement
A well-drafted and thoroughly researched Founders’ Agreement is the first and most basic step in outlining the rights, responsibilities and obligations for each Startup founder. The document, which must be revised and signed by all parties, will significantly reduce the risk of contention between co-founders further down the line.
Matters that ought to be covered in the Founders’ Agreement may include:
- Roles and responsibilities of each founder
- Shares held by each founder
- Restrictions on share transfer
Although some founders may not see the need for this contract based on their friendship or good standing, a signed document could prove to serve as legal protection in the event of a disagreement and the potential folding of a business. In this regard, a comprehensive founders’ agreement could ironically preserve the friendship, even if the Startup should dissolve.
We recommend that before putting pen to paper on your shareholders agreement, you undertake a working “alignment session” with your co-founder/s. The purpose of this session is to actively discuss all the key points that every founder should have considered from the outset. While this may seem trivial practice, it is an important and precautionary method of ensuring all founders go into the project without any misconceptions.
GLS offers a Shareholders Deal Shaper toolkit to help you facilitate this work session.
Most common legal founder disputes (and how to avoid them)
Lack of clarity around roles
By clearly defining and communicating individual roles and responsibilities assigned to each founding member, your business will be set up for achieving its goals. When an individual is unsure about their role and function, there is a lack of cohesiveness and teamwork, which will certainly result in aggravation and disagreement. Take all the necessary measures to ensure each partner is clear on what to do – this includes assigning titles and crafting job descriptions for each person.
Differences in contributions
‘I’m working harder than you are!’ is a commonly heard phrase among co-business owners. This can be put down to a lack of planning and communication. Taking the time to equally allocate responsibilities will help to avoid some partners feeling overworked and frazzled, while others are coasting along. Distribution of responsibilities is crucial! Remember, the business is an investment for each member and should therefore be prioritised as such.
Map out certain clauses within the founders’ agreement for when a member is not performing to help you facilitate a quick solution. Also consider that each person is facing their own individual challenges which may affect their abilities. Providing an open platform for honest communication can help alleviate these issues.
If additional funding is required
Seeking out funding for a Startup business is one of the most critical and challenging tasks for all members. Co-founders often run into serious disagreements about securing investors, and may drop the ball when it comes to sealing the deal. It is imperative for all co-owners to be on the same page when discussing the financial future of the business. Hashing out any concerns beforehand will allow your business to approach funding opportunities as a unit with a single goal in mind. Fighting about it will only steer you away from your goals.
Decision making disparity
By being as clear as possible about the roles of each member, you will begin to realise that each business partner possesses a unique set of skills and talents. This will make the decision-making process a breeze. If someone is more financially adept – allow them the space to make the necessary decisions on behalf of the business. Much like if another partner is more inclined to making great marketing moves, allow them the freedom to explore and decide on which route to go. However, all decisions should still be agreed upon by all members.
Differences in Compensation
Founders who also serve as employees are likely to receive a salary from Startup profits. It is not uncommon for such founder-employees to receive different salaries, which could become a source of discontent. When a founder-employee believes that they are receiving an unjustifiably lower salary compared to other founder-employees, therein lies the possibility of a rift developing.
To avoid a dispute of this nature, a signed employment agreement should clearly indicate the appropriate compensation for founder-employees. The agreement would typically also cover other matters such as working hours, leave and non-negotiable obligations, leaving little room for future discrepancies.
Good practices to help avoid disputes:
In addition to your shareholder agreement, there are other good practices that you can implement in order to mitigate potential for dispute.
Document all correspondence
It is advisable to document all important correspondences with your business partners, preferably in writing. This could mean keeping a written record of all meetings as well as keeping an organised record of email correspondences or recording of any business-related discussions. This practice aids in eliminating any doubt or uncertainty regarding matters agreed upon during meetings and/or informal conversations.
Formal Dispute Resolution
Ask any commercial lawyer and they will say the same thing – Formal Dispute Resolution is an absolutely vital provision to set out in any agreement. Dispute resolution, as the title suggests, dictates the process of formally and professionally resolving disputes amongst parties.
While the default convention is to adhere to the decisions of the courts, many countries are now encouraging companies to resolve legal disputes using Alternative Dispute Resolution (ADR) prior to filing in court.
Some ADR examples include:
This procedure allows parties to convene and mediate their disputes with the help and supervision of a professionally trained, impartial third party.
A confidential proceeding is typically utilised by parties to bring their disputes before an objective third party (i.e. an arbitrator) whose decision is binding and enforceable.
Informal Dispute Resolution
Senior managers and/or other personnel meet to discuss and attempt to resolve disputes in good faith and an equitable manner. Having these dispute mechanisms in your agreements can potentially help you save time and unnecessary costs. If you would like our assistance with this, get in touch for a free consultation with our GLS legal expert.
Looking for Legal Help when it comes to Founder Agreements?
GLS offers invaluable information and resources to help define a clear founders’ agreement document, inclusive of all legal aspects. Check the related products in the side scroll bar or click here to get in touch.
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.