Mind Your Business: Part Three – Agreements Among Founders and the Entity

There is a nearly infinite number of agreements founders can make amongst themselves and with the business. A few of the most common types are discussed below. Keep in mind that some agreements will not be valid if they contradict a statute that governs the operation of your particular entity type. This article does not take consideration of such statutes. As always, before drafting any agreements that will impact your business, you should consult with a knowledgeable attorney to discuss your goals and the best way to reach them. Founders’ Agreement A Founders’ Agreement is a great starting point when you first meet with your fellow founders to get in writing the things you expect from your business. It can also help to solidify your common goals and see the path of least resistance to get there. The Founder’s Agreement will often include the roles and responsibilities of each founder, the method for decision-making and operation of the business, ownership interest, how contributions will be valued, vesting of interest, and how to handle the voluntary (or involuntary) departure of a founder. It is important to keep in mind that the Founders’ Agreement is just a roadmap for the business and to be sure all appropriate topics are included in the operating documents of the entity.…

Mind Your Business: Part 2 – Initial Financing and Capital Structure

Once you have selected and formed your business entity by filing the necessary documents with the Secretary of State, the next most obvious questions are: how does the company get money and how do I secure my piece of it? There are a myriad of options for financing your business depending on your particular needs. It is crucial to work with your accountant and attorney to fully understand the implications of the various options. If you have additional concerns, it is prudent to hire an attorney who specializes in taxation to advise. Interest in the company is referred to as a “security.” There are two basic ways to acquire a security in the company – equity and debt. Equity is basically an ownership interest in the company. In a corporation, equity can be common stock, preferred stock, or a hybrid of both. Preferred stock has a senior position to common stock and has a liquidation preference, meaning the holders of preferred stock get their money out first in the event of dissolution. Equity In an LLC, the equity is referred to as “membership interests.” These can have similar characteristics to common and preferred stock with the creation of classes of membership interest (e.g. Class A and Class B). Partnership equity is the percentage ownership interest…