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Forming a Startup – Important Questions Co-Founders Should Ask First
Many people have the dream of starting their own business. The thoughts of becoming your own boss and building something from nothing have been key motivating factors that have led to some of the largest and most successful companies in the world. Often times in the excitement of forming a startup, important questions are forgotten and left unanswered, resulting in serious problems down the road.
Dealing with Co-Founders
The importance of asking the right questions is magnified when you have formed a startup with other co-founders. If you’re not careful, many times problems relating to co-founders can even be more burdensome and detrimental to your startup than problems relating to the startup’s actual business and operations. If you decide to form a startup and co-founders are involved, it will be important to ask the following questions early on in the process:
1. How should the co-founders divide ownership of the startup?
It will be important to decide early on in the startup process how the actual ownership of the startup will be divided between the co-founders. The simple question of “What percentage of the startup does each co-founder get?” can be difficult to answer but resolving the issue upfront can save the startup from major problems and disputes down the road.
2. How will the co-founders make decisions regarding the startup?
Businesses make important decisions on a daily basis and it will be important to decide how these decisions will be made. Often times this is connected to the first question above (the co-founder who owns the greatest percentage of the startup usually has the most power when it comes to making decisions). There are other options that co-founders will need to consider. Whether or not they want to have voting shares, whether or not they want to set up a board, and if so, what kind of decisions will be taken to a vote or brought to the board.
3. What kind of personnel decisions can be made regarding the co-founders and how will they be made?
Co-founders will need to decide what will happen if one of them decides to leave the startup. They should also address the issue of whether or not a co-founder can be fired, and if so, under what specific circumstances.
4. What will each co-founder’s primary job be within the startup?
Not knowing the level of commitment of each co-founder can be dangerous for any new startup. Will the startup be the main focus of all the co-founders, allowing each co-founder to devote their time to growing the startup, or will some of the co-founders only work for the startup on the side?
5. How much are the co-founders investing and how will the co-founders be paid?
It will be important to decide upfront how invested money will be used and treated in the startup. Is a co-founder who invests funds buying shares in the startup or is the investment going to be treated as debt and the startup will be expected to repay the money to the investing co-founder? Deciding how each co-founder will be paid can be a tough decision. The risk that each co-founder is taking in the startup and what they bring to the table for the startup will be some of the factors that will need to be considered.
These are just some of the questions that need to be asked in the early stages of the formation of a startup. By asking the right questions, co-founders can avoid costly disputes and problems down the road that can severely harm or even destroy their startup. It will be important for you to talk with an experienced attorney during the early stages of forming your startup. Our experienced business and corporate attorneys at Gunderson, Denton, and Peterson PC will provide you with guidance in the startup formation process and make sure that the right questions are asked (and answered) so that serious problems down the road are avoided.
Written By Brad Denton
1930 N. Arboleda, Suite 201
Mesa, Arizona 85213
40 N. Central Avenue, Suite 1400-1532
Phoenix, AZ 85004
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