Establishing the basics
You have the vision, business plan and a viable proposition - but what do you do next? Whilst tempting to jump in, the focus of a new business' principals should be on identifying the appropriate business model and structure (company, partnership, LLP, limited partnerships, joint venture etc) and jurisdiction (on-shore or off-shore, and if off-shore, where) for the business. Long-term and significant tax, regulatory, legal and commercial implications may arise both for the business and for you as principals if called incorrectly.
Considering your relationships
Entering into business with friends, family and close commercial partners can put relationships at risk.
Even the closest relationships get embroiled in disputes, whether businesses are very successful or under strain. Priorities change, visions develop, finances become pressurised, valuable exits are tempting. The involvement of "outsiders" – such as third-party investors or funders and the introduction of employees - can fundamentally change the dynamic, direction and powerbase of a business.
The involvement of such third parties will be likely necessary for any business to grow and should not be seen as a negative. However, the implications should be very carefully considered by the other principals before committing and there should be clarity in the event that relationships begin to fracture.
Setting out the vision
The principals should agree and document the over-arching vision and goals of the business as this is fertile ground for disputes, for example:
- What is the purpose of the business?
- What do the principals consider "success"?
- Will the principals consider external investment and the connected loss of equity to grow?
Setting these visions and goals down may not be contractually binding but ensures that all the principals are on the same page prior to committing their time, money and energy. As a result, it could reduce the potential for dispute (and is a useful paper trail if such a dispute does arise).
Clearly defined and documented roles and responsibilities are essential, particularly when friends or family are involved. It is not uncommon for the principals to wear multiple "hats" in a business – shareholder, director, board member, employee, creditor – especially in a business with family or close friends. These various roles can run into conflict so need careful management and delineation to avoid the potential for a dispute.
In particular, the principals should consider and document:
- How should differing financial or management contributions be reflected?
- Who has what role with what responsibilities?
- Who is on the board?
- How will decisions be made?
- Is there potential for deadlock?
Company directors (or designated members in LLP's) owe serious wide-ranging and fiduciary duties, including promoting the success of the company and avoiding conflicts of interest. The principals must obtain a full understanding of the nature and extent of their duties and be aware of potential repercussions of breach. Where the principals are wearing multiple "hats" these duties must be given very careful consideration.
Creating good governance
It is essential to define and then record agreement on governance issues in the business's constitutional documents – for example, Articles of Association, Memorandum, Shareholders Agreement, Partnership Deed, Joint Venture Agreement and Service Agreements. These should be professionally drafted and regularly reviewed as the business develops or takes on further investment by the principals or external investment.
Handling disputes that may arise
The impact of disputes can be mitigated with corporate governance – including dispute avoidance/escalation procedures – but the risk of dispute cannot be eliminated. If a dispute arises, obtain legal advice from specialists with experience in resolving these technical, complex and emotionally charged disputes.