Article
Helping founders protect and defend their position
11 April 2024 | 6 minutes
Founders are the dynamic forces that create innovative new businesses and develop new products and markets. However, they can face vulnerabilities throughout their careers and are particularly exposed at certain moments. Our founders-focused team regularly helps business owners negotiate these difficult transitions and shares their insights here.
Starting on secure ground
"As a young company takes off, there are often so many business issues to deal with that founders don't spend much time looking at their personal legal positions. This can quickly come back to bite them", says Doug Mandell, the San Francisco-based head of Withers' Founders practice. "As businesses grow and the stakes get higher, we have seen an increase in founders being fired by their boards or forced out by their more legally sophisticated co-founders. And when they review their equity and/or employment documents, they may find they have no protection in terms of acceleration of equity or other kinds of security, such as severance."
We have seen an increase in founders being fired by their boards or forced out by their more legally sophisticated co-founders.
This can be driven by the power dynamics among founders that can develop at successful businesses, says Doug. "A good example is where one of the co-founders - usually the CEO, who is more business-minded - pushes out the more technical co-founder, such as the CTO. The technical co-founder could find him or herself at a disadvantage by having declined a board seat in order to focus on building the business, only to realize too late that ceding control to a co-founder can lead to a precarious situation."
The best defense against this is to make sure that you understand your equity position, as well as your rights in the firm's corporate documents. This should include whether you are entitled to a board seat or information rights. Early stage founders should negotiate for these rights from the outset and understand what their position is if they do not have control.
Maximizing leverage
"Founders looking to shore up and protect their position should consider the most advantageous moments to do this", recommends James Hockin, an employment partner working with founders in London. "As with many things in life, timing is everything, including when to fight for strong or improved terms," he advises.
"A founder's maximum leverage is often at the point where an investment is being made into the business or they are selling out. The latter is also the time when there will be a substantial share purchase or investment agreement in progress and comprehensive employment agreements will be negotiated. So, grasp this window of opportunity and extract the maximum advantage from it," advises James.
If the value of future interests – whether that be equity or the deferred consideration from a sale – are related to the future success of the business, founders should make sure that they lead the negotiation of employment agreements to ensure a minimum term and protection from being shifted out of their role or deprived of responsibilities.
Too often, founders simply sign up to standard terms which don’t give them any tailored protection.
"Too often, founders simply sign up to standard terms which don’t give them any tailored protection: thereby leaving their future in the lap of the new investor or buyer. They are running a highly innovative and individualised business, so should not be accepting very vanilla, employer-friendly terms which don't work to their advantage," says James.
James also warns about post-termination restrictions, particularly where non-compete terms are drawn up with very broad parameters. "Equity and employment documents can include onerous non-compete clauses and, whilst the new investor or buyer may reasonably require restrictions so that you don’t go and set up a new version of the business tomorrow, it is important to think about how comprehensive these restrictions are and agree carve-outs from the outset. Don't take on trust that carve-outs will be agreed down the line. We have seen non-compete clauses so broad that the founders couldn’t work (even in a non-executive role) for a business which has a competitive arm or move to a venture capital firm with competitor firms within its portfolio."
Driving growth
In the burgeoning startup ecosystem of Southeast Asia, founders face the dual challenge of securing funding and ensuring long-term stability. Joel Shen, a corporate partner who co-leads Withers' tech practice in Asia and also leads Withers' Indonesia practice, highlights the dynamic opportunities in this region, marked by the swift rise of unicorns and high-growth companies.
To thrive, Joel advises founders to keenly understand the investment landscape they are in.
To thrive, Joel advises founders to keenly understand the investment landscape they are in, emphasizing the importance of strategic planning and local insight. "Engaging with the right investors—those who are not just looking for quick returns but are genuinely interested in sustainable growth—is crucial," Joel points out. He stresses the value of leveraging local networks, including incubators and industry events, to connect with potential backers who are familiar with the unique challenges and opportunities in the sector or region.
Additionally, Joel underscores the necessity of maintaining strict compliance with local laws and regulations, a critical factor for attracting investment and ensuring operational stability. "Founders should prioritize legal and regulatory compliance from the outset, making their ventures more attractive to both local and international investors."
For long-term growth, Joel recommends a focus on scalability and adaptability, ensuring that startups not only meet current market demands but are also prepared to evolve with the rapidly changing economic landscape of Southeast Asia. "Building a resilient and adaptable business model, backed by a strong, committed team, is essential for sustained success. In recognition of Indonesia's unique landscape, for instance, we collaborate closely with local law firm KARNA Partnership. This association enriches our international expertise with invaluable local knowledge, ensuring founders receive comprehensive support tailored to the complexities of Southeast Asia's markets," he concludes.
Managing business succession
As the TV show Succession shows, and in the experience of huge numbers of founders, preparing to hand on a business can be a difficult process and is often made more complex when the founder wants to keep ownership within their family and pass it on to their relatives. This is a common issue amongst Italian businesses, where an estimated 85% of PLCs are controlled by family members, and Withers' Italian team often works with founders to help them put a robust succession plan in place.
"A large proportion of Italian founders are now at retirement age and ready to pass on the management of the business to their children or grandchildren, but unfortunately very few have made a thorough succession plan. In some instances, there isn't even proper inheritance planning, meaning the business will be dealt with as part of the intestate estate, which can raise major tax and ownership issues," says Roberta Crivellaro, head of Withers' Italian practice.
Increasingly, founders and their management teams are also looking at adopting family business constitutions.
Roberta and her team assist founders with their succession planning, making use of corporate and inheritance provisions in Italian law to optimise and streamline the process. "Increasingly, founders and their management teams are also looking at adopting family business constitutions to document the family's agreed approach to how the business will be managed and how the succession process will operate. These are an excellent way of engaging family members in a discussion of the business now and in the future, and producing an arrangement that everyone has made a contribution to" adds Roberta.
Navigating crises with precision
In the unpredictable landscape of global business, crises represent pivotal moments that can drastically alter a company's trajectory and the career path of its founders. Amarjit Kaur, head of Withers' Singapore employment practice and part of the firm's global crisis management team, emphasizes the nuanced approach required to manage crises effectively. "Crises in the business world are commonplace, ranging from financial downturns to data breaches. However, it's the response that often defines the future of a company," Amarjit notes, reflecting on the complex nature of time sensitive, bet-the-company situations that founders might face.
Recent economic shifts and health crises have led to increased scrutiny on employment practices, from layoffs to remote work policies. "Navigating these waters requires a delicate balance between operational needs and legal obligations. It’s about safeguarding the rights of employees while ensuring the sustainability of the business," Amarjit adds.
Effective crisis management in employment begins long before a crisis emerges.
Her approach emphasizes the importance of understanding local and international employment laws, and implementing policies that are both fair and clear. "Effective crisis management in employment begins long before a crisis emerges. Regular training, clear communication channels, and a solid understanding of employment rights and obligations are foundational," she asserts.
Moreover, the economic volatility in Asia, exacerbated by global tensions and the pandemic aftermath, has led to financial uncertainties for many businesses. "Financial resilience is more than a safety net; it's a strategic imperative. Founders must be prepared to pivot, reassess, and sometimes even restructure to navigate through tumultuous times," she adds.
"Preparation is key. Understanding potential risks, including financial, operational, or reputational issues, allows businesses to create a framework for action that can be rapidly deployed when a crisis hits," Amarjit asserts. This preparation includes regular audits, scenario planning, and crisis simulations to ensure responsiveness and resilience.
In light of these challenges, Amarjit concludes with a call to action for founders and business leaders: "In the face of adversity, clarity and swift decision-making are your strongest allies. Our role is to equip you with the insights and tools needed to not just survive but thrive, transforming potential crises into opportunities for growth and innovation."
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