on September 4, 2014
by Burton Law

Does your startup need a prenup?

Prenuptial agreements are seemingly reserved for Hollywood celebrities and the independently wealthy. Often the center of water-cooler talk and the brunt of a cocktail party joke. So what similarities does your budding startup and the Kimye wedding share? A lot more than you’d think.

Startups and fledgling businesses usually begin by cobbling together every resource you can get your hands on. Family members volunteering to help, lending services, making cold calls to help you get off the ground, while getting paid in pizza.

It’s during this time that you feel like you’re just trying to hold on and keep sane as you ride this lighting bolt of entrepreneur adrenaline. You’re making quick decisions, trying to save money everywhere you can and working hours equivalent to what feels like slave labor.

The good news is… that you won’t be there for long. All those hours, hard work and late nights will pay off. You have a good idea, you’ve got friends in your corner and a team of cheerleaders ra-ra-ing you on. So what happens when you get there? What happens when you start seeing some success… and money?

The conversations start. Unfortunately not always the ones you want. Sometimes the people closest to you, your best friend, your old co-worker turned new teammate, your sister, cousin, wife, and lazy (but free) accountant might present you with some harsh words or demanding requests. This is not a coincidence, this sadly is a natural cycle in business, and one that not many know will come or how to plan accordingly.

Enter… the prenup.

Your business is the closest thing to marriage you will ever encounter. We often advise our entrepreneurs to ‘date before you marry.’ As you truly don’t know a person until you’ve dated, and maybe even lived together. So many entrepreneurs co-found their business with a best friend, colleague, spouse or family member. Long before they have road-tested their idea, figured out funding, or worked together in such close capacity. Only to find out their partner in this life journey isn’t really ‘all that into it’ or is constantly juggling other commitments you weren’t made aware of.

This is business, this is life. In the same way a prenup can help protect the interests and clear the bargaining table in a marriage, proper legal planning does the same for your business. Not can the proper documents clear the air and define exactly what will be expected from each party, they can also outline the rewards for achievement.

Here are just a few of the tools you can use to ensure that everyone involved in launching your idea feels both accountable and rewarded. When delivered by a strong legal partner who can be both a neutral voice and business advisor you can remove yourself from the emotions of running your business, and make logical decision that shape the future success of your work.

Business Incorporation: We cannot express this enough. Date before you get married. Once you’ve entered into the sacred ground of business ownership you’re rooted there. For a long time, like a really, really long time. Like marriage. Only this divorce might cost you a lot more than a real one. So many times we’ve seen the ambitious bright eyed couple, pair of brothers, college roommates or new-found friends go 50/50 on a business. Only to find out six months later they can’t stand each other. Don’t let your story end like this too. Baby step your way into business ownership together. Hold onto your equity until you really know what and who you need. There’s no telling what will happen, and you may really need that 20% you gave to your college friend to get the funding you need to grow. Use employment contracts, letters of intent and other tools to offer a commitment of ownership without giving up your bargaining chips before you see results.

Operating Agreement: Who owns, gets and makes what? That might be easy to decipher if everyone’s under the impression they’re in a 50/50, 60/40, or 70/30 split. Then life comes to the party, sales go up, then down, reinvestment of dollars for growth is needed. People can’t just pull their money out and head to Mexico for retirement. No, this is a long haul not a trip to the corner store. An operating agreement dictates what milestones must be achieved to receive financial rewards, how partners may join or leave, as well as several other key facets of business ownership and management.

Employment Contract: Working for free pizza, even if it’s really good pizza won’t go over so well when you start making money. Outlining how each person will be compensated when that happens, as well as what they will be expected to deliver can mitigate some serious employment issues before they occur.

So before you jump headfirst into business marriage, take a moment, breathe, and think through some of the ‘what if’ scenarios you might encounter. If and when you still have questions, we’re here to help. Consultations with our team of business law advisors will meet with you in person, or over the phone.

Until then, onward and upward!

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