Date: 28/10/2020 | COVID-19, Corporate & Commercial
When founders start a business, if it’s going well and growing fast it’s tempting to focus on maximising returns and keeping the business heading in the right direction. It’s natural not to want to dwell on what happens if things go wrong but thinking about this is, in fact, time well spent. It’s an investment in protecting personal financial security and an important step in minimising business risk.
As businesses grow, tensions can quickly develop between founders, between founders and funders and between founders and their families. Working long hours building a business can also take a toll on health and wellbeing. Unexpected exits from a business happen all the time in tragic circumstances and in happy ones. Being prepared is crucial to avoid a serious impact on both personal finances and the financial position of the business.
So, what should founders be thinking about? The four D’s are a good starting point – death, divorce, dementia, departure. What happens to the company and to the relevant shares if any of these things happen?
Most founders first want to think about the practicalities. How can the business operate without them? Succession planning is not something most startups are thinking about but as the company starts to grow it’s important to have a plan for who will fill the role of any key person if they are no longer available for whatever reason. If the company would need to hire someone new and pay them at market rates, is it worth looking at insurance to cover that?
Next stop is to think about what happens to shares in the company if any of the four Ds happen?
It’s not possible to cover every eventuality - the pandemic has clearly shown us that - but putting in place a proper shareholders’ agreement and articles of association and sorting out appropriate insurance can go a long way to addressing many of these issues. Founders can and should take steps to deal with known potential problems. All these situations will cause professional and personal difficulties for founders and their families and having a plan in place to deal with them provides founders the freedom to focus on doing what they do best – developing the business.
If you need help working through the issues raised above or putting in place appropriate documentation to protect your investment, please contact a member of our corporate team.
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