3 ways to legally avoid co-founder conflicts

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This article is part of Tech in Asia’s partnership with Asia Law Network where we publish articles written by lawyers on their advice for startup founders. For more articles in this series, go here.

At the start, things seem rosy. A few people come together with a brilliant idea to start a business that will change the world or, at the very least, disrupt an industry. The plan was to introduce something groundbreaking, hopefully make a fortune, and then ride off into the sunset.

But the reality is that many startups and businesses are derailed by disputes and conflicts between founders and business partners.

Why this happens

For startups, conflicts typically arise when a company has its first taste of success (e.g. attaining a certain number of subscribers or achieving a revenue target). Once this happens, they may have vastly divergent views on how to proceed and on the future strategic direction of the company.

For more mature companies, on the other hand, conflicts typically arise when business partners have differing goals with respect to their personal lives and how this relates to the company. For example, a business partner may want to retire while the others still want to proceed. In this case, the issue would be how the business partner may exit and cash out his or her stake in the company without disrupting or compromising the business for the other partners.

Mitigating the risks

Strategy document

To mitigate the risk of conflict in terms of differences in company direction and strategy, founders and business partners should discuss and agree upon the future direction and strategy of the company in detail from the very outset. This should be set out in a strategy document which can be updated periodically as and when strategic plans change.

For added rigor and formality, founders can consider holding regular founders’ meetings where company strategy is part of the agenda.

Shareholders’ agreement

To mitigate the possibility of a power struggle and exit risks, founders should have a carefully drafted shareholders’ agreement in place.

The shareholders’ agreement regulates the relationship between the founders (as shareholders) of the company. It contains provisions dealing with critical issues such as company management (for example, who is to be appointed to the board of the company) and how important company decisions (such as any future fundraising, the purchase of major company assets, or the hiring/firing of key personnel) are to be made.

There are also numerous permutations as to how company decisions may be made. Decisions may be at the board or shareholder level and may be decided upon via a show of hands, a simple majority vote, or by poll. To mitigate the risks of future conflict, founders need to carefully consider how each of these are structured, taking into account the number of founders, the role of each founder, and their shareholding stake in the company.

In our experience, the risks of conflict may be greatly reduced by making a decision at the outset as to who is in charge.