Legal traps in start-ups and joint ventures

“So test therefore, who join forever,” may the tie be on solid ground. Start-ups and joint ventures correspond to a marriage between business partners. In order for this to run smoothly, the business partners have to agree their terms and conditions in case of a cooperation and, above all, discuss a possible separation before tying the knot. If they fail or postpone to do so, unpleasant surprises and at worst, an ugly  divorce can occur during the cooperation.

The formation of a start-up and the start of a joint venture have numerous comparable characteristics, which is why the following explanations are applicable to both forms of cooperation: in both cases, different individuals join together to pursue common business objectives. In the preparatory phase, future partners like to see the collaboration through rose-colored glasses and forget that they are likely to face difficult times in which they may no longer agree. To ensure the cooperation flourishing even in difficult phases or it even being terminated, it must be placed on a sound legal basis in the form of a well thought-out contract avoiding to destroying jointly created values.

The right legal form

One of the most crucial questions in the regulation of cooperation is the one appropriate corporate form of the company. Relevant decision criteria are liability risks for the shareholders, advantages and disadvantages in the procurement of capital or the planned distribution of roles in the company to name a few aspects. The future business partners must also consider their own strengths and weaknesses. Already when choosing the form of the company, growth opportunities, the admission of new partners or investors as well as the withdrawal of all or individual business partners from the cooperation, must be considered. Finally, the right corporate form is also important for the determination of the will of the company where the parties must agree which decisions are made with which quorums and whether certain decisions require the mandatory consent of certain shareholders.

The financing of the company

When determining the financing of the company, it is about what has been achieved/the preserves. The financing of the company must be defined/determined in accordance to the business and investment plan. The determination of the financing defines on the one hand who invests in the company and to what extent and how the investment structure can change in future financing rounds. On the other hand, it is necessary to regulate how further cooperation is to be financed when the initial capital has been used up, whether such additional contributions come from the shareholders or third parties, and in what form or on what terms they are to be made.

Problem-solving mechanisms

As problems can arise even in the best relationship, it is essential that future business partners agree on problem-solving mechanisms in the contract to regulating their cooperation. These should contain several escalation stages with corresponding procedures and the roles of the business partners in the company. Since Swiss company law only contains rudimentary regulations on divorce of business partners or the withdrawal of a partner, the termination of the cooperation and the withdrawal from or, if necessary, the dissolution of the company must also be agreed. It is important not to forget that the business partners interconnect, both in the new company but also through additional one among themselves.

As with any relationship, business relationships may not always find common grounds. Can be a source of controversy. With a well thought-out and clear contractual framework, problems can be mitigated and solution mechanisms provided to preventing business relationships from breaking down due to any differences or to unnecessarily destroying created values. Since a relationship is always a question of the right partner, discussing the basics of the relationship helps determining whether, the partner being considered is the right one.