Series: Important Questions To Ask A Co-Founder {Episode 1}

{Episode 1 – Co-Founder Accountability}

There are some concerns that are common to all businesses and alcoholic beverage companies are no exception. Formation and co-founder issues are at the core of many disputes, so being prepared for the bumps ahead can be a huge advantage. One way to know what to expect is to ask a lot of questions – to your CPA, to your lawyer, and especially to each other.

Because of the highly regulated and sensitive nature of the business, these questions are even more important for companies in the booze biz. While you should ask as many questions as possible, the following is a list of questions you don’t want to forget.

1. How much time do we expect each other to devote to the business now and moving forward?

It’s a tale as old as time – at least as long as home brewing has been a thing. You and your buddy have been brewing beer together for years. It tastes great and everyone you know loves it. You’re ready to make this a real business. You tell your buddy you’re going to start a brewery and you want him to be your co-founder. He’s so swept up by your excitement and the love for beer that he immediately says “yes,” so you form a company together.

Until now, you had been having a blast brewing together and didn’t have any real expectations. But now you’ve got money on the line and, maybe more importantly, your reputation. The bar is set much higher. No pun intended, honestly (see the next episode for the intentional pun – no Dr. Dre won’t be there).

You find yourself spending every waking hour on starting up your brewery and making it a success. Your fun and enthusiastic friend tells you, from the sidelines, how great everything is and how he didn’t expect it to be so easy! Daggers shoot from your eyes. Easy? Is he kidding? You’ve worked your Manolos to smithereens. It wasn’t easy for you because you were there day in and day out, putting out fires and being a boss. Your buddy was there for all the fun stuff – picking a name, choosing a location, and forming a beer selection. It’s not fair.

Except that it is. Did you and your co-founder ever discuss what your expectations were? How much time you were each obligated to contribute? Did you set out clear duties for each other? Just discussing it in passing isn’t enough. It’s only real when it’s on paper and signed by both of you. That’s when it becomes a promise.

2. Are we expected to continue to contribute capital to the company?

Most entrepreneurs know the term “bootstrapping.” It’s often a badge of honor when a company says “we bootstrapped our business from the get-go.” A necessary component of bootstrapping can be the continual contribution of capital by its owners. Sure, the goal is to allow the business to reinvest the money it generates, but most businesses need a startup fund that is replenished for a period and that fund comes from its owners.

Just like I wouldn’t suggest marrying for money alone, I don’t suggest selecting your co-founders based solely on their deep pockets. But asking if there is a plan to contribute capital and how much is not taboo – it’s common sense. Would you marry someone without knowing whether they are knee-deep in student loans? My husband married me despite my student debt crater, but he had prior knowledge so now there are no takesies-backsies.

The same is true with your co-founders. You need to know if they are capable of contributing capital, whether there is a plan for the founders to contribute, and at what frequency you will all be required to do so.

3. What will you do if one of the founders doesn’t pull their weight?

One of the reasons it’s important to ask so many questions before you commit to your co-founder is to avoid a situation where one person doesn’t pull their weight. If you are nervous about someone’s dependability, then it’s usually best to listen to your gut. However, your gut can be asleep sometimes or face an adversary too great. So what do you do if you’re still confronted with a lemon of a partner?

Pre-planning is key. If your business is organized as an LLC, then you can draft provisions in your LLC’s operating agreement allowing members to actually remove an underperforming member (note: this is usually tied to the termination of a member’s employment). Doing so is, of course, a double-edged sword because you may find yourself on the other end of that assault. The operating agreement can also account for a member’s wrongdoing or misconduct.

A corporation can arrange for a similar contingency through a buy-sell agreement. You’ll be seeing a lot of this in “Important Questions To Ask A Co-Founder” because buy-sells are a great vehicle for preparing for the (un)expected. This way, co-founders can provide for the compulsory purchase and sales of shares. Shareholders agree that, under certain circumstances, they will sell their shares in the company to either the corporation or the other shareholders. A carefully drafted buy-sell can help a business cut a dud loose.

Next time on “Questions To Ask A Co-Founder“…

In this installation we covered accountability questions for your co-founders. Next week, we’ll take a look at internal and external threats to the business and how you can minimize their effects. Be sure to subscribe to the blog for the newest episodes of this series and other fresh articles!

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Phone: (818) 247-2036