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FROM THE BLOG

From partners to adversaries – what to look out for when starting a business

Posted by on 6 August 2019

Start-up founders often focus on the business and raising capital, whereby they often overlook the basic legal pitfalls when setting up their venture. This creates vulnerabilities for the founders, the investors, but also the business as such. These business threats may range from intellectual property-related issues, regulatory matters to contractual topics such as getting a founders agreement or the right terms and conditions. In this blog, we have a closer look at one of the core legal threats when becoming an entrepreneur, namely the relationship between the partners and how you can mitigate this risk.

Pitfalls-for-start-ups-FRORIEP-Mattig-MathisFor many founders having proper contracts in place is not a priority, so they often only realise the importance of well-drafted agreements once legal issues arise. However, by this time solving legal problems will cost the start-up more money than drafting a proper contract would have cost in the first place. In some cases, it may even be the end of a business venture. Start-ups are often founded by more than one individual with differing interests; hence, there is room for disagreement. Even if in the beginning everybody pulls in the same direction this is bound to change at some point. By clearly outlining every founder's rights and responsibilities, the partners can mitigate the risk arising out of differing opinions. A famous example of when the lack of an agreement between partners led to legal problems is the Zuckerberg/Winklevoss Facebook case. The case dealt with whether the idea for the social network was stolen by Zuckerberg. The dispute dragged on for several years before it was eventually settled. Nevertheless, it shows the importance of having a contract setting out the relationship between co-founders to ensure the continuity of the business venture.

Partners need to agree at an early stage on the key aspects of a venture, where they want to take their idea, how they will work together and maybe at some point end their business relationship. It is important to pick one's co-founders carefully and set a clear basis for cooperation to make sure that partners do not end up to be adversaries.

For some guidance in this matter, we have drafted the checklist set out below giving you some indication of what should be included in such an agreement to make sure that you will not end up becoming adversaries.

Checklist:

  1. What is the overall vision and goal of the business?
  2. Who gets what percentage of the business?
  3. What is the capital contribution of each investor?
  4. Is the percentage ownership subject to vesting based on continued participation in the business?
  5. What are the roles and responsibilities of the founders?
  6. What happens if one founder wants to leave the business? Is there a share buyback option? At what price?
  7. What kind of commitment is expected of each founder?
  8. How are daily decisions being taken? How are the key decisions being taken?
  9. Can a founder be removed as an employee of the business?
  10. How will the sale of the business be decided?

This is just one out of many pitfalls to avoid when starting your business.

 

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Topics: Corporate & Commercial

  
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Felix M. Mathis

Felix Mathis is a Zurich-based partner with a particular focus on corporate and commercial law as well as commercial litigation. Felix Mathis has been a partner at our Zurich office since 1995. He advises domestic and international clients on a broad range of industries, including aviation, pharmaceuticals, internet, construction and start-ups. He obtained his law degrees from the University of Zurich in 1980 and New York University (MCJ) in 1988. His working languages are German and English. Felix Mathis is a member of the Zurich Bar Association, the Swiss Bar Association and the Union Internationale des Avocats (UIA).

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Cornelia Mattig

Cornelia Mattig specialises in data protection and intellectual property law, as well as corporate and commercial law issues. Cornelia Mattig joined Froriep as an associate in 2018. Before joining Froriep, Cornelia Mattig trained with firms in Ireland, Germany and Switzerland as well as at the District Court of March in the Canton of Schwyz. After she passed the Bar exam in the Canton of Schwyz, she worked as a notary public and lawyer in an accounting and auditing firm. She graduated from the University of Zurich with a Master of Law (Business Law) in 2014 before obtaining her LL.M. in European Law at Queen Mary University of London in 2017. She was admitted to the Bar in 2018. She also holds a Data Protection Officer Certificate from the University of Maastricht. Her working languages are German and English.

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