After Formation, Corporate Governance Concerns

Yesterday I had the pleasure of offering an educational program for members of DC’s Affinity Lab, a business incubator that provides shared office space, tools and a rich, vibrant network for budding entrepreneurs.

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I’ve been working with Affinity Lab for several years now and love being a part of their exciting mission to support DC entrepreneurs.

In the first of what will be quarterly workshops at the lab, I did a quick presentation and offered one-on-one consultations along with Manning Sossamon attorney Vicky Husband and our Senior Legal Assistant, Amanda Delgado. We had a great time talking with people from some remarkable up-and-coming businesses!

The workshop\’s topic was crucial—and often overlooked—considerations for young businesses after formation. Specifically, I focused on important provisions to include in Shareholder and Operating Agreements.  Carefully drafted agreements contain restrictions on:

  • transferability,
  • rights of first refusal forthe Company and/or other shareholders,
  • valuation protocols, and
  • contingency provisions for death or disability of key shareholders.

No wonder founders often neglect to prepare careful documentation at formation. Who wants to stop to consider his mortality or the quality of his relationship with his business partner when there’s so much work to be done getting the business off the ground?  At this thrilling, hectic time, careful documentation can feel like a nuisance or something that can safely wait until the business is more successful.

Unfortunately, putting off these issues can create serious problems on down the road.   I see these situations more often that I would like! A company we know created its initial governing documents without the assistance of an attorney.  While they hit most of the important points in their drafts, they failed to include a strong buy-sell provision that would require a departing founder/employee to offer his or her shares back to the company for purchase.

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A good buy-sell provision ensures that only those founders actively involved with the company retain a significant equity stake in the company.  In this instance, the founders wound up in a heated dispute about the company’s direction and parted ways. This left one founder at the helm, while the other split—and still controls almost 40% of the Company’s equity.

Do you feel like you might have missed something like this in your corporate governance documentation? Don’t wonder. Pull it out and have a read. It’s a good idea to discuss any concerns with your attorney. Depending on the circumstances, it may be possible to correct certain oversights now. I’m always glad to help; you can call me at (202) 973-2682.

Mendi Sossamon