The energy and pace of a start-up is high octane and exciting. Ireland’s start-up culture often appears in the media, not least for the success stories that have grown from humble start-up beginnings into massive companies.
With the momentum that goes hand-in-hand with running a start-up, it’s easy to forget the need for a robust legal contract to be in place right at the outset. This is an error that can grow to have very serious consequences later down the line when your start-up is ready to scale or making a lot of money. A SA is optional, and you can forego writing one, but as a document that provides a clear agreement on issues that might face the start-up in its lifetime, it protects shareholders, and for that reason is invaluable.
What does your Shareholders’ Agreement need to include?
We’ve already mentioned that your SA will be as unique as your start-up, but there are three essential topics to cover in every Shareholders’ Agreement.
The roles and responsibilities of each founder How equity is divided Intellectual property protection
Founders’ roles and responsibilities
While there is no doubt that a founding team needs to collaborate, to create and enhance operational efficiencies primary responsibility for each aspect (finance, marketing, business development etc.) needs to rest with one person. Roles and responsibilities need to be assigned according to each person’s strengths, and though it is a controversial statement, co-founders are not always suited to be co-CEOs.
Even if the start-up is at a very early stage, it’s imperative to decide how the equity within the start-up is to be split amongst the founding team. This can be a sensitive conversation, and one that founders want to put off until the start-up is making money, but this can cause a lot of trouble. It’s not a given that each founder will have an equal slice of equity, dependent on their roles and responsibilities and any assets they added to the start-up in the first place.
It’s always a good idea to keep a share of the equity available for additional hires. Attracting talent to your start-up can be easier when you can offer a package that includes stock.
You also need to decide how equity in your start-up will vest. Founders may want to move on to other projects while the start-up is still in an early phase and you’ll need to decide how their share pays out. Although this can be a difficult conversation, working out how equity vests before time is much healthier for your start-up. A founder leaving creates additional risk, especially if you need to part with more equity to bring in a replacement. Knowing how equity will be paid out will mitigate a lot of this risk and your investors will expect you to have a plan in place too.
Protecting your intellectual property
Your start-up begins with an idea, but as you work on this idea and turn it into a commercial opportunity your founding team will create intellectual property (IP). We provide some additional information on protecting your IP in this post, but apart from protecting your IP from competitors, you also need to think about your IP in relation to the founders who create it.
If a founder leaves, the last thing your start-up needs is the IP going with them.
The best way to deal with this situation is to include a clause in the SA that any IP created for the start-up belongs to the start-up, not the founders/shareholders. It’s a simple process to assign the IP to the start-up and a lawyer can help you do this.
10 March 2017