Taking you through ideal partnerships in the eyes of the law
Just a while ago, I met a tech entrepreneur who was having challenges with the relationship between himself and his co-founder. The constant squabbles which involved shouting matches between them, inability to make joint decisions on issues affecting the organisation and difficulty in collectively articulating the goals of the business became the order of the day.
Undoubtedly, both co-founders were unhappy because they had each contributed significantly to the establishment of the business and its growth thus far. The party I spoke to complained about having made a mistake entering into a partnership, arguing that since the idea was his, he could have simply started in his house.
Not a bad idea, I dare say. However, the advantages of entering into a partnership operated under clearly defined terms far outweigh the disadvantages of carrying out business as a solo entrepreneur, in the long run. The modalities of partnerships and its advantages and disadvantages will be discussed by the writer in this article.
Choosing a Co-Founder
The term partnership as used in this article is used in the strictest legal sense. It is used to describe two people doing business together.
There have been various arguments for and against partnerships. However, I belong to the school of thought which ascribes strength to numbers and believes in the opportunity to share profits and losses with a co-founder or two.
In making a case for partnerships, it must be mentioned that care must be taken when choosing a partner. Generally, it is advisable to look out for a co-founder who would act as a complement. Virtues such as commitment and integrity must not be overlooked.
When you are deciding who to start a business with, it is important to ensure that both parties share a common vision, aimed at growing and nurturing the business to greater heights. Extensive due diligence must be carried out on a prospective partner, prior to commencing the business relationship. The right foundation must also be put in place to ensure that the business relationship stands the test of time. Therefore, co-founders who look forward to building a successful brand must ensure that they sign a co-founders’ agreement between them.
A founders’ agreement sets out the terms and conditions of doing business together and meticulously spells out the duties and responsibilities of each party. Most tech entrepreneurs have minimal legal experience, which can pose a problem as the company expands, and stakeholder accountability becomes priority. It is therefore important to lay the necessary legal foundation for the business from the inception. With the advice of a lawyer, a number of legal issues need to be addressed and captured in some form of legal documentation. A few of the questions which need to be answered and captured in a founders’ agreement are as listed below:
- What is the percentage ownership of each founder?
- Is the percentage ownership subject to vesting based on continued participation in the business?
- In the event that one shareholder leaves, does the company or the other founder have the right to buy back that founders’ shares and at what price?
- Are the founders to be paid a salary? If yes, how much?
- What is/are the reporting structures and decision making structures?
- What are the roles of each of the founders?
The contents of a founders’ agreement are not limited to the answers given to the questions above. However, providing answers to these questions is useful and helps reduce the chances of friction between the parties. Generally, a co-founder agreement is described as a prenuptial agreement, while partnership in itself is described as some form of marriage.
On the issue of share ownership/splitting equity among co-founders, the easiest model is to have an equal share split. In the instance where there are two partners, each partner would own 50% (fifty percent) equity.
However, it is known that equal share does not necessarily add up to fair share. Equity share should therefore be calculated based on each party’s contribution but in terms of cash contribution and ideas contribution. The partner who brought the original idea to the table should be given some credit for his or her creativity and therefore could be given extra shareholding.
Monetising creative ideas or contributions may be difficult but an agreement can be reached on how shares will be distributed among the co-founders. It could also be agreed that the person bringing something of value to the company during its formative stages such as a filed patent (not a provisional), a compelling demo, an early version of the product, or something else that means much of the work towards financing or revenue is already done should receive a considerable part of the equity. This topic is often a sore point between business partners and should be dealt with decisively and objectively from the inception of the company.
Legal Foundations for the Business
Having stressed the need for a co-founder’s agreement, it is important to mention that a co-founders’ agreement will not serve its purpose if the necessary legal structure is not put in place. First, it is important to register the business at the Corporate Affairs Commission as a limited liability company, preferably. Also, protection of intellectual property is very important for tech companies.
Therefore, it is germane to protect the intellectual property rights of the company during its formative stages. This is done by relying on patents, trademarks and copyrights as well as ensuring that all co-founders and third–party developers assign their rights in the intellectual property created for the company.
The importance of drawing up contracts to guide the relations between the company and other third parties including service providers, clients, suppliers, etc. should not be overlooked.
When running a business with more than one person, adherence to corporate governance principles becomes even more important as the need for accountability is heightened.
On a Final Note…
Having appreciated the value his co-founder brings onboard the company, Mr Crypto, as he is popularly called, has decided to put in place the necessary legal structure to protect the relationship between himself and his co-founder, as well as the brand-reputation of the company. He engaged the services of a lawyer to draw up the necessary legal agreements.
Be Like Mr Crypto.
Aderinsola Fagbure is a Corporate lawyer with a special interest in corporate governance. She is a Senior Associate in the Transaction and Business Support Practice of Esher and Makarios. She is a graduate of Igbinedion University and has a Master's Degree in Corporate Law from University College London. She is a member of the African Society of Crowdfunding. Her column "in black and white "which is published in Thisday Law discusses innovations in corporate governance and finance. Derin is passionate about advising small businesses with a view to ensuring that they outlive their founders. An active bar member, she currently serves as the Chairman of the Young Lawyers' Forum of the NBA Lagos Branch.