What is a founders’ agreement? Describe the purpose of a buyback clause and why it’s important. List and explain four (4) steps entrepreneurs can take to avoid legal disputes. List and briefly describe three (3) specific steps that an entrepreneurial organization can take to build a strong ethical culture. What is meant by the term “piercing the corporate veil”? How can the corporate veil be pierced?
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Introduction
Entrepreneurs run into difficulty or barriers to a successful business launch when they skip over basic steps or considerations that should be included in their business plan. The purpose of this guide is to discuss some of these pitfalls and to provide answers that these barriers pose. Specifically, the discussion will include what is a founder’s agreement, a description of the purpose and importance of a buyback clause, and the steps an entrepreneurial organization can take to build a strong ethical culture. Finally, if the entrepreneur decides to incorporate, what is the corporate veil, and how can it be pierced?
Founder’s Agreement
A Founders’ Agreement is a formal contract that considers and is forthright regarding the rights and obligations between the parties involved. The Agreement should explicitly record the nature of the business as well explain the general business plan. Founders’ names and positions belong in the Agreement. It does not matter if a founder is a relative, friend, or an associate, or that a perceived level of mutual trust and fairness fills the hearts of all. Defining role expectations in black and white in a Founders’ Agreement eliminates confusion and assumptions.
Buyback Clause
The Founders’ Agreement usually includes a number of considerations such as non-compete, stock and options, vesting schedules, tax treatment, voting, termination, restriction of transfer of shares, and right of first refusal right. This leads us to the buyback clause. The buyback clause is an important factor in the Founders’ Agreement, because without it, the remaining founders may face the very real potential of losing or at least facing a disruption in control over their company.
To prevent an unpleasant intrusive take-over from an outsiders, the buyback clause legally binds the founder who decides to quit to sell …
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