Starting a new business can be a very exciting and exhilarating process. You are putting in the hard work and the rewards are beginning to show. But suddenly a problem develops and you don’t know what to do to resolve it quickly with the minimum impact on your business.
The following are ideas you should consider prior to embarking on your business in order to limit the possibility for any problems developing in future.
All too often business whose founders have known each other socially beforehand encounter trouble because neither side considered the difference between their friendship and their business relationship. All too often a previously strong friendship is ruined because the parties didn’t appreciate this key difference.
It is always advisable to consider whether you will be able to work collaboratively before starting a business. We also suggest that you ensure that you have an effective Partnership Agreement, Shareholders Agreement or Contract of Employment so everyone knows where he or she stands.
It is always important to know who does what in your business. A clearly defined structure and job description will make this clear and remove any confusion, as well as people taking work on outside of their remit. It is advisable that before you do anything you should map out your structure along with identifying key individuals and their job descriptions.
Too Many Cooks
Think about how many businesses started with more than two founders? – Marks and Spencer? Apple? Facebook? (although exactly who the two founders were is debatable). The key point is to think about how many people you want to work with at this formative stage.
Remember, the more people you have, the more people with vested interests you will have to manage. How much time do you have to spend in meetings discussing basic management points when you could be running the business?
You should try to limit the number of people you want on board at start up, certainly no more than 3.
One of the key decisions you will need to make is how you want to resolve situations where there is a deadlock as to what direction the business will take. One key resolution will be via a shareholder resolution.This requires all the shareholders to vote. If you and your business partner own all shares on a 50:50 basis, then that will mean that the deadlock will continue. You should consider allocating shares in such a way that one of the shareholders will hold a majority e.g. 49:51 (or better still 24:76! So as a principal founder, you can pass those special resolutions unhindered!)
You should also ensure that any shares you issue “vest” at a point in the future, e.g. upon the business turning over a certain amount. That means that you are not allocating shares for a specific value at the outset where that shareholder could walk away at any time and take that full value with them regardless of how the business is performing.
It cannot be exaggerated how important it is to set any agreement or decision in writing. Notwithstanding that the law requires limited companies to record certain events. To avoid doubt in future, you should always document key decisions such as Offers of Employment, Disciplinary Meetings and Contracts of Employment to name a few.
CloudLegal can provide you with further advice if you need it!
Tel: 0800 6894168