Do You Need a Pre-Nup … for Your Co-Founders?

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When you pop the question, “Will you co-found with me?”, you are probably not already thinking about separation.

However, not all partnerships will go the distance. Personalities will clash. Creative visions will differ. Personal circumstances will change. Often, a parting of ways is sudden and less than amicable. Without a pre-nup, the departure of a co-founder may lead to unfair results. Why should your partner keep half of your company if he or she decides to raise alpacas in the Andes?

A pre-nup can take many forms. Regardless of whether it is called a shareholder’s agreement, a restricted stock agreement, a share repurchase agreement, or something else, the agreement should address, at a minimum, one fundamental question: Does the departing co-founder get to keep all of his or her shares?

In most early-stage situations, it would be unfair for the departing co-founder to keep all of his or her shares. Initial allocations of equity normally presume that all co-founders will maintain active, long-term roles with the company. Without a pre-nup, you could find yourself with a passive, and potentially disgruntled, shareholder who holds a disproportionate amount of your company’s stock. A well-drafted agreement can prevent that situation.

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Topics:  Restricted Stocks, Shareholders, Shareholders' Agreements, Startups, Stock Repurchases

Published In: Business Organization Updates, General Business Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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