The prospect of launching a new venture with a co-founder or co-founders is thrilling. However, once the start-up is fully operational, it is possible that you and your co-founder(s) may encounter some problems that you did not foresee at the outset. This article highlights key issues that you should discuss with your co-founder(s) before registration to avoid potential disagreements and disputes.
- Business structure
The first issue you and your co-founder(s) should consider is the structure of the business. There are different business structures in Kenya, such as sole proprietorships, partnerships and companies. It is important to choose the right structure for your start-up because the type of structure you choose influences your scalability, legal obligations, tax liabilities, and access to funding. Some factors to consider in choosing the right structure for you and your co-founder(s) include:
- Liability: How much risk are you and your co-founders willing to take on?
- Taxes: How will your start-up be taxed?
- Financing: How will you fund your start-up?
- Cost: How much will it cost to start and run your start-up?
- Goals of the start-up: What do you aim to achieve through your start-up?
- Ownership, capital contribution and equity distribution
On the one hand, capital contributions refer to the initial amount that you and your co-founder(s) invest in a business for its operation. These contributions may be in the form of cash, property, or services. There are two types of capital contributions:
- Initial capital contribution: The amount that a person contributes to the formation of a business entity.
- Additional capital contribution: The amount that a person contributes after the formation of the business entity.
Before you register your start-up, it is important for you and your co-founder(s) to agree on the type and amount of capital to be contributed by each person and the terms of the contribution. This is because capital contribution determines the ownership stake of each co-founder and distribution of profit and loss among the co-founders. Therefore, it is recommended to have these terms outlined in an agreement to avoid any ambiguity or misunderstandings.
On the other hand, equity represents ownership in a business that is typically allocated through shares or stocks. Equity distribution is the process of dividing the ownership between the co-founders. There are different ways of distributing equity:
- Equal split: This is where all co-founders receive an equal share of the equity.
- Weighted split: This is where the co-founders receive different shares of equity based on a co-founders input such as the initial capital, level of commitment, and expertise.
- Role-based split: This is where equity is divided according to the roles and responsibilities of each co-founder.
- Dynamic adjustments: This is when the co-founders agree on a set of metrics that will influence the equity distribution over time. The equity split is, therefore, adjusted based on these metrics.
Equity distribution is important to discuss with your co-founder(s) because equity is a tool that can be used to negotiate for voting rights, anti-dilution provisions, and share of proceeds.
- Roles and responsibilities
Co-founders are responsible for the vision, growth and success of a start-up. Therefore, it is essential for you and your co-founder(s) to discuss the following to create structure, accountability and clarity:
- Vision: What is the vision of your business? How can you structure the roles in your business to meet this vision?
- Responsibilities: Who is responsible for what? How will responsibilities be divided amongst you and your co-founder(s)? What are the reporting lines?
- Expectations: What expectations do you have for yourself, your co-founder(s), and the business at large?
- Success: How will you measure success of the business? What metric will you use to measure the performance of your co-founder(s)?
- Decision-making protocols
In every business, decisions must be made. For instance, there are operational decisions which concern a business’s day-to-day operations, such as the recruitment of employees and product inventory. In addition, there are strategic-decisions which are long-term decisions that are focused on the achievement of business objectives, such as expansion into new markets.
To ensure that decisions are made efficiently and correctly, there should be clear decision-making protocols put in place. You and your co-founder(s) should agree on who will be in charge of making what decision(s), how decisions will be made, and what procedure you and your co-founder(s) will follow if a deadlock has been reached.
- Exit strategies
An exit strategy is a plan for a person to exit a business. A co-founder may exit a business voluntarily or involuntarily for a multitude of reasons ranging from personal reasons to professional opportunities. Although uncomfortable to deliberate, it is advisable for you and your co-founder to proactively plan an exit strategy to safeguard the future of your business and ensure a smooth transition.
Some questions to consider are:
- Asset split: How will the co-founder’s assets be split out if they exit the business?
- Exit package: What is the exit package for a co-founder who wishes to exit the business?
- Buy-outs and acquisitions: Is the business open to buyouts and acquisition offers?
- Processes: What steps should a co-founder take if they wish to exit the business?
