Many entrepreneurs start their businesses with someone they already know and trust. A respected colleague; a school friend; a family member. In the early stages of your business it may seem unnecessary to formalize expectations in a written document. It’s not unreasonable to think this way. After all, starting a new business is a lot of work and likely demands most – if not all – of your free time. But thinking this way is a mistake. The benefits of a written agreement between founders far outweigh the small investment of time and mental energy that they require. Here are five of the most important reasons to do a written founder’s agreement as soon as possible.
- It sets expectations. A written founder’s agreement is a simple document – it merely establishes what the business is and how it will operate. This sounds easy enough to just communicate with your partner(s) about, but in reality no one can communicate effectively if they don’t know what the other party is thinking. Setting expectations in writing requires everyone to come together and agree to things like goals, general strategy, and how much is expected from each party. Doing this up front ensures that everyone knows exactly what is expected from them at all times and sets the standards for the business as a whole, which can make things infinitely easier as you try to grow your business.
- It provides a structure. Written agreements clarify what authority, and how much, each founder has. In many (though certainly not all) start-ups, founders may want to share management responsibilities and authorities equally. Doing so is totally fine, but inevitably disagreements will arise. A written agreement lays out how the disagreements will be handled and even how ties will be resolved if the initial procedure(s) doesn’t suffice. The likelihood of a conflict is actually reduced when everyone knows exactly how it will be resolved.
- It catches missed issues. Even the best-prepared, most communicative entrepreneurs in the world will fail to consider at least a handful of issues. Committing everything to writing requires each founder to come together with a third party and consider issues one by one and in detail. The process of discussing and finalizing a written agreement between founder’s helps everyone to consider things that may not have previously, and can identify issues that might be troublesome in the future.
- It promotes open and honest communication. A major dispute rarely flares up in an instant. Most often issues will fester over months or even years before they come out. This is often especially true with businesses between friends and family. Because a written agreement sets expectations for the business and lays out mechanisms to deal with disagreements, it is much easier for parties to bring up potential issues as they arise, deal with them quickly and effectively, and move on.
- It helps to preserve relationships. Even if you’re not starting your business with a friend or family member, odds are that if you’re going into business with someone you at least respect them and want to remain on good terms. New businesses are stressful endeavors that can strain relationships. Everyone wants their new business to succeed, but not at the expense of the people around them. By setting out processes and procedures as thoroughly as possible, a written agreement between founders helps to keep relationships professional and orderly and in the process, preserved.
These are just five of the many reasons that founders should always have written agreements when starting a new business. Contact attorney James Voigt at Lavelle Law for a more comprehensive explanation of the benefits of a founder’s agreement, and for help in committing yours to writing. He can be reached at 847-705-7555 or via email at firstname.lastname@example.org.