Your relationship with the co-founders of your business may substantially impact the running of your business, the growth of your business, and the potential diversions faced by your business.
Two hypothetical scenarios may be useful in depicting the impact of this relationship. In the first scenario, your co-founder is your best friend and you have maintained a conflict-free relationship for many years. However, the long hours and high stress associated with starting a business have strained your relationship. After spending so much time with one another in such a demanding environment, you are now barely on speaking terms. Or, alternatively, imagine the opposite scenario: your co-founder is someone you don’t know well. While you are courting potential investors for your business, you discover that your co-founder has massive personal debt and is entertaining thoughts of personal bankruptcy.
The above scenarios could carry major consequences for your business in terms of finances, growth, third party relationships, and day-to-day operations. Planning ahead for these types of contingencies will save not only future headaches, but also the time, money, and energy that would otherwise be spent on repairing these damaged relationships. A buy-sell agreement, whether drafted as a standalone document or as a series of provisions within a larger document (e.g., shareholders agreement or operating agreement) may assist in addressing these issues before they become larger problems.
Buy-sell agreements can address a broad spectrum of issues, ranging from options available to a co-founder during a potential involuntary transfer of business interests to a third party (such as in a divorce, bankruptcy, or death), to the sales price applicable when one co-founder wishes to buy out another co-founder.
Early in the life of your business, then, while the stakes remain relatively small and all parties are on good terms, it is crucial to identify and negotiate fair resolutions to potential problems and issues. Again, addressing these points on the front end may save considerable time, money, and energy on the back end.