Startups · Business Strategy

What's a good agreement to use between three indivduals in a Corp start up?

Richard Propper SVP, Global Sales & Acquisitions | COO

September 19th, 2016

We are three individuals who are providing sweat equity and cash to launch an OTT channel.  Our start up attorney provided a "Master Services Agreement."  It's a bit boiler plate.  While I want to be exacting in responsibilities, this "MSA" is almost agressive in its tone and not how I want to start off a new company with its founders.

Does anyone have experience with another document that is more "friendly"?  There has to be something out there which provides a decent level of security for all parties but keeps the spirit moving forward.

Many thanks for your insights and assistance.




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Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 19th, 2016

Stop being naive. A good agreement between 3 partners in a start-up should cover likely contingencies, especially the likelihood that the 3 of you may add others down the road or split up.  A common scenario is that one of the 3 gets divorced and the spouse makes a claim on that person's shares. I actually have a problem with one lawyer representing all 3. even though i am a lawyer, I always had another lawyer watch my back whenever I got  into a long term relationship with business partners. The work may be equal but people are always different. More partner's utter the phrase "you are not pulling your weight" than "what are you going to do with your share of the millions that we sold the company for?"    That these people are your friends is great, but they are also your partners. What you don't cover up front may effect the business and the friendship later on. 

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

September 19th, 2016

As a NON-LAWYER, here is one way to think about it:
  • The MSA is your "legal backstop" that is the LEGAL requirement in case the wheels completely fly off the bus and one or more of you decide to start throwing lawsuits around.
  • I have found it useful to have a documented agreement (not necessarily a formal contract) that specifies 6 different aspects of how you will work together:
  1. Relationship - how will you interact with each other and keep each other informed?
  2. Results - what result(s) are each of you responsible for producing?
  3. Rights - who gets to be involved in each kind of decision? In what way? What happens if someone disagrees with a decision?
  4. Rewards - how will the assets of the organization be reinvested and distributed?
  5. Risks - what risks is each individual assuming? what mechanisms will you put in place to mitigate risks?
  6. Remedies - how will you deal with disagreements (short of resorting to your "backstop") as they arise?
This is just a brief overview of what we call the While We're Still Friends Conversation. My clients have found it useful and I hope you will too.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 20th, 2016

Ms. Fuchs: You are a breath of fresh air on FD; a rational professional. But let me warn you that there are a great many people here who do not appreciate the value of good counsel,  who believe that lawyers can be replaced by form agreements and who, although not lawyers, give out imperfect legal advice on a daily basis solving other people' legal problems without the benefit of all the facts or asking what state the questioner is in.     

Terri Friel CEO Doctus and Member International Advisory Board of Cracow School of Business CUE at Cracow University of Economics

September 19th, 2016

You can have a lawyer draw up a collaboration agreement that includes clauses for dissolution, how to share the revenues and expenses etc.  I had one done and use it for several collaborative agreements currently.  It can be done as a master/blank with details to be filled in by the parties involved.  

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 19th, 2016

Mr. Propper:  With that much experience I would assume that you have good attorneys. An agreement such as the one you want is first and foremost an agreement that sets out the rights and responsibilities of the parties and includes often standard clauses about how to deal with events that might or will occur in the future.  A good agreement survives the worst case, meaning litigation. You want the language crystal clear enough so that someone's lawyer cannot second guess it and that a judge will enforce it as intended by the parties. It is not as easy as it sounds. A standard clause drafted into an agreement in New York may not be interpreted the same way in California as it would where it is written. One of the first things I learned as a young lawyer was that you could take a 100 page commercial lease, change a few words and eliminate a comma or two on page 97 are change the entire deal. Contracts are not written for the signatories, they are written for the judges who might be called upon to interpret and enforce them. I appreciate that you want a document that has less legalese and there are lawyers  who will write them but I don't recommend it. Give the judge language that the judge understands because he/she has seen it before. That said, the process, even if the parties are all represented by counsel, does not have to be adversarial. Good lawyers explain each clause to their clients so everyone understands what they are signing.  Negotiate the terms; leave the language to the lawyers. Bring a bottle of good champagne to the contract signing to celebrate the new business venture so it gets off the ground with good will all around.

Alf Poor Chief Operating Officer at Global Data Sentinel

September 19th, 2016

Sounds more like you need a partnership agreement, if you're all putting cash and sweat in for equity. One assumes you're all equals?

Annick Fuchs Startup lawyer in the Silicon Valley and Europe, ex Director Legal PayPal

September 20th, 2016

Richard - I might be missing something here, but wouldn't your concern be addressed if you/your attorney summarized the main terms of such an agreement in a Memorandum of Understanding (in bullet point format for example) in commercial rather than legal terms and took that document as the basis when talking to your co-founders? After commercial discussions on the points in the MoU with your founders you can adapt them (in your language) and then make your attorney draft up the legalese in a proper agreement? That way you avoid making the agreement the basis of your discussion and having to read the legalese and "aggressive tone". Again not sure I understood you correct - but just a thought that might do the trick? I personally use that with a lot of clients and it works very well.

Mike Moyer

September 19th, 2016

Hi James, 

You said, "Make it flexible, and agree to reassess as you go. "

Then you said, "This partially explains why I believe the "slicing pie" model doesn't work for many different companies as well"

Um, are you sure you understand the Slicing Pie model?

Slicing Pie is the world's most flexible equity model that gives teams an automated way of reassessing the split over time and specifically takes into account this thing you also said: "Everyone on our team has a full time job, a spouse, numerous children. We aren't going to make a dime off this for at minimum 1 1/2 years, maybe more. I'm asking these people to put in time after a 45+ hour week, without pay, to work on our project at midnight on a Tuesday."

What you described is the exact reason that Slicing Pie works so well! I'm not sure I can even come up with a more perfect case for Slicing Pie.

I'd be happy to share a copy of my new book!

-Mike

James Haynes Web Content Writer & Freelance Writer, Local SEO, Mobile App Developer

September 19th, 2016

Mike, I suppose what I mean is that almost everything I read has (IMO) ridiculously low %s. There have been people on this forum who have advocated giving a new CEO 3% of the company. Um....

Our team is much larger than just founders; we started with three people to begin with, and have added anther three since. Suppose my point is I'd much rather "give away" equity, regardless of any formula or these bottom-barrel numbers I've seen elsewhere....and have a company that is part of the tiny minority that actually becomes something!

The people spend lots of time worrying and fretting about dividing up an imaginary company between each other, that in all probability isn't going to exist barring some unbelievable partnership together that looks FAR beyond these percentages, is wasting their time IMO.

What these people don't realize... they would be BLESSED beyond belief to have these "problems" in the future!!

David Martin

September 19th, 2016

As a clarification, all the non formal discussion is valid for sure before you start putting cash and major sweat equity into your venture.  You obviously don't want to sit down and start going through long form contracts before your relationship is solidified.  But after that, I would be very upfront that for all of your partners protection and the future foundation of the company, you want to have as much in writing and understood as is possible.