I learned valuable lessons building and selling a bar chain as co-founder and operations lead—here are a few. Small and medium-sized enterprises (SMEs) frequently forgo the services of professional lawyers in their early stages. However, even with informal agreements, certain organizational nuances demand attention. While addressing every point below immediately may prove challenging, open discussion is crucial to prevent future complications.
Dividend Policy Profit generation is paramount for any commercial entity; however, profit and dividends are not interchangeable. Venture capital success often hinges on tenfold company growth, not simply a 20% return. Traditional businesses differ, prioritizing profitability and payback periods. Nevertheless, profits fuel reinvestment and growth. A poorly structured dividend policy hinders even the most successful businesses. Therefore, early agreement on dividend policy—including its determinants—is crucial, alongside investment amounts and equity distribution.
Company Valuation Method Along with defining each partner's equity, a valuation method must be agreed upon. This is essential for future investment rounds and for any partner exiting through a share sale. Numerous approaches exist; proactively selecting one is vital.
Proportional Rights in Future Funding Rounds While we won't examine liquidation preferences typical of venture capital (less relevant for SMEs due to lower investor risk and less reliance on external funding), SMEs still require additional financing for growth or continued operation. Existing investors should secure clearly defined preemptive rights over potential new investors.
Governance and Information Rights Beyond investment amounts, the extent of potential investor influence requires definition. Early clarification of partner responsibilities is essential. Procedures for making strategic decisions and the participating partners should be documented. Information rights encompass providing investors with financial reports and other key company data.
Preemptive Purchase Rights This standard provision mandates that any partner seeking to sell their shares first offer them to existing founders and investors. This safeguards company equity within the existing ownership group, preventing hostile takeovers.