[Startup Must-Know Laws] Essential Partnership Agreements When Founding Together

Why Founders Need a Partnership Agreement
Preventing Conflicts and Securing Trust from the Start

Heecheol Ahn, Attorney at Law, DLG Law Firm

When looking at successful startups, it is often the case that they began with outstanding partners rather than being built by a single individual. This was true for Steve Jobs and Steve Wozniak of Apple, as well as Travis Kalanick and Garrett Camp of Uber. However, even if the beginning is promising, it is rare for founders to remain together until the end. It is common for relationships to break down due to clashes in management philosophy, financial disputes, or disagreements over performance. In such situations, a partnership agreement?specifically, a shareholders' agreement?is essential to prevent conflicts among founders from destabilizing the company.

A partnership agreement serves to clearly define the equity structure and obligations among founding members, thereby preventing disputes. If a co-founder who started the company suddenly resigns but leaves with a significant shareholding, it becomes a major burden for those who remain. This can also negatively impact future fundraising or the maintenance of management control.

Such agreements typically include a clause requiring a minimum period of employment. Since co-founders should be committed to working for the company for at least a certain period, this is usually set at around five years. If a founder leaves before fulfilling the agreed period, the agreement stipulates that their shares must be transferred to the other co-founders. For example, if they work for less than two years, they must return all their shares; if they remain for more than three years, they return 50%; if more than four years, they return 25%; and if they stay for more than five years, they may retain all their shares even after leaving.

If a co-founder is free to transfer their shares to a third party, there is a risk that an entirely unexpected outsider could become a shareholder. To prevent this, the agreement typically requires prior consent from the other founders for any share transfer and grants the other founders a right of first refusal to purchase the shares. Clauses prohibiting holding other jobs and engaging in competing businesses are also important. Founders should devote themselves fully to the company, and if they are simultaneously involved in other ventures or work in a similar industry, conflicts of interest may arise.

Founders often postpone or omit drafting an agreement, thinking, "Everything will work out." However, a contract is not a sign of distrust but a tool for structuring trust. It is important to remember that the success of a startup depends less on ideas or capital and more on trust among the people involved?and on the contracts that safeguard that trust.