Series: Important Questions To Ask A Co-Founder {Episode 2}

{Episode 2 – Threats, From Co-Founders & Beyond}

We are picking up from last week’s episode on co-founder accountability, so check that out if you want to see the first three important questions to ask a co-founder. If you’re all caught up, let’s kick it into high gear immediately. Sometimes, it is the owners themselves who put the business at risk. By asking these questions, you can take a step closer to protecting your business. You’ll find that, usually, a buy-sell agreement is the answer.

4. What happens to your interest if you die or become incapacitated?

Tragedy is not a topic anyone is dying to address (there’s that pun I warned against in the last episode!), but it’s a necessity for the continuity of your business. Especially when the founders are young, the thought that something awful might happen to one of them is distant and unreal. But what happens to your co-founder’s interest if they become incapacitated or die? Chances are that there is someone waiting to inherit their share in the company. What do you know about that person? What will the heir’s interest or involvement look like?

There are ways to control the consequences of the unexpected. Many businesses have buy-sell agreements (more on this below), which have provisions for the company’s right of first refusal or specific transfer restrictions. This agreement can be, and should be, tailored to the company’s needs. You won’t know what those needs are, however, if you don’t talk about it and ask the difficult question: “Who gets your stuff when you kick the bucket?”

5. Is your interest at risk? OR Will your ownership prevent or hinder our ability to obtain a liquor license?

In addition to the death or incapacity of a co-founder, there are numerous other ways a co-founder’s ownership can impact the company. Lawsuits, divorce, and debt can make shares vulnerable to control by an outsider.

Most founders are like Gollum – and rightly so. Your business is precious and so you want to guard it as closely as possible. One important way to do that is to protect it from outsiders. Make sure someone who isn’t part of the plan doesn’t get his/her grubby hands on your or your co-founder’s interest. 

This is especially important for businesses with liquor licenses. The ABC is very cautious about who controls the liquor license they issue. New owners and existing owners who screw up can put the license at risk. For example, your super-duper fun-loving but incredibly irresponsible co-founder gets a DUI and he’s a 50% owner. That’s a big OH-NO. The ABC then tells you that person can no longer be an owner or else you lose your license. Now, your super-duper fun-loving “friendly” co-founder refuses to sell his interest in the business even though your company is in jeopardy. He holds the interest hostage and wants you to pay through the nose for it. Do you think I’m making this up? I promise I’m not.

Just like in question 4, a properly drafted buy-sell agreement can address these issues. You have to ask the tough questions, answer them realistically and soberly, and put them in writing. Make a promise to each other that you won’t screw each other over. It can be that easy to protect your business from your co-founder.


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