10 elements of an early stage business agreement
In the last post, I have highlighted the importance of a business agreement in the early stage of a startup endavour (e.g. after eight weeks of successful team work and problem/solution fit). Starting this process soon helps to get clarity on expectations and committments of each member of the founding team and can save you precious time and money. Most likely you and your partners will learn a lot more about yourself and the team in the process of writing and discussing such a document.
This post now deals with 10 elements that I find useful to incorporate into a business agreement with your partners:
- Origins and history
- Core business and target groups
- Management and core tasks
- Incentives, livelihood security and renumeration
- Company shares
- Company goals and culture
- Resignation of a founder
- Concluding remarks
I am going to discuss each element with a brief explanation and short samples or directing questions where applicable.
This part is a no-brainer I guess. Include at least the following parts:
- Name and addresses of your partners as well as date and time
- As a subject you can use something like this for example: “Business agreement: cooperation of [PARTNERNAME_1] and [PARTNERNAME_2] in the context of [BUSINESS_IDEA]”
- Signatures at the end of the document
#2 Origins and history
Think about the following questions:
- Where did your business idea come from?
- Who started with it?
- Did your team change in the mean time? What about claims of people who dropped out?
This is highly specific to your context of course and might not be necessary for every startup. However, I think it is still a good idea to capture the beginnings and make clear what is the current plan for the remainder of the document (e.g. to restart an earlier idea with a new team and maybe a different focus, etc.).
#3 Core business and target groups
It is always a good idea to briefly state the core of your planned business and mention some of the most relevant target groups. Just to make sure that you are really all on the same page and clear about the core of your endeavour (e.g. are we a game development house or a service provider? Or both?). Most likely you had many discussions around that but quite often the formal documentation in a concise and meaningful manner tends to get forgotten or is not kept up-to-date. That does not mean that it can’t change soon again – e.g. after a pivot or so. Just make sure that you have captured the current view on the business at the time of the signature.
#4 Management and core tasks
Describe the different management roles and core tasks each one of your founding team members will own. In some cases it can make sense to point out who in the team will be the CEO and/or the one with signing authority, etc. Don’t go too far but briefly state who is going to own what (e.g. Mike – “Business Architect”: takes responsibility for the following topics: Business Administration, Sales & Marketing, Fundraising, HR). Emphasis is on ownership here. That does not mean that this person is the only one who does something in the respective topic area but rather orchestrates and drives these things.
Basically think through the following issues:
- How are you planning to come to a decision?
- What if you do not find consensus? How are you planning to come to a decision in that case?
- Are you planning to involve other parties to facilitate in critical situations?
#6 Incentives, livelihood security and renumeration
In this section you define your planned incentive scheme (e.g. salary and shares) and renumeration if applicable. Don’t forget to also state how your team is going to ensure livelihood security for each member assuming that you are not externally funded yet and money is an issue. As easy as it may sound, many times people are not aware of what it really means and cost to survive say 6 months without any funding. Make sure that all partners involved have made up their mind in this area as well. Furthermore, cover the following topics:
- What about people who are not part of the founding team or join later? How are you planning to incentivize these people? (e.g. you might think with shares, but others might not be willing to share)
- When are you planning to start yourself a salary? Do all get the same amount of salary (e.g. CEO vs. other roles, etc.)?
This is obviously a really tough part and a topic on its own. I would still give the following humble advice: do not start too early discussing it, but not too late either. As pointed out in my former post, consider the following five factors: pre-existing IP and effort, opportunity cost, focus of the company and contribution (time, cash, network). A detailed discussion of how you might distribute your equity is out of scope for this post (see here for basics and here for one concrete approach).
For the sake of an example, let’s assume you go with the quite common approach of an initial allocation for the contribution so far (immediate grant) and a milestone-oriented vesting schedule for future achievements (vesting according to achievements or something similar). Your first draft could look like this:
|Milestone||Owner 1||Owner 2||Equity after target achievement
|Equity after target achievement
|Initial||See above||See above||10%||5%|
|Early Adopter Market Test||Some measurable business result||Some measurable product result||25%||20%|
|B2B Customer Discovery & Validation||Some measurable business result||Some measurable product result||40%||30%|
|First fundraising||Some measurable business result||Some measurable product result||60%||40%|
Note: milestone-based equity distribution table (illustrative)
You should also think about the case that you get external funding earlier. How are you going to deal with the share distribution then?
#8 Company goals and culture
In this section you should describe what is important to you and your team in terms of company goals and culture. What kind of culture would you like to establish and foster? Try to focus on the main things and be concise.
#9 Resignation of a founder
It is always a good idea to also think through the case that one of the initial founding team members leaves before you reach the first external financing (and probably have a more legally binding agreement). What do you plan to do in this case? Should the company have a right to repurchase stocks? How about the company valuation then? There is probably no perfect solution, but you can still make up your mind and propose a fair solution that allows the company to survive, but also values the contribution of the resigning partner.
#10 Concluding remarks
You can start with general remarks regarding the tone and purpose of this cooperation agreement and finish with a Salvatorius clause at the end.
All in all, these are the most important elements in my view. The earlier you start to think through these topics, the less trouble you might face in the near future. Good luck and don’t give up too early!
Feel free to contact me in case you are interested in getting a word template with the above mentioned elements and some rudimentary samples.