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Operating agreement not in place…

Been hard at work for the last year as co-founder of a start-up. Looks like we may be getting our first client. 1) Should I be worried that there is no operating agreement in place.  The CEO keeps telling me he is working on it. 2) the CEO has been fronting his money to pay the majority of the business costs: rent, Internet, etc.  I pay my own expenses: training, parking, etc.  CEO has been talking about needing to open up a “company” checking account if we get this new client.  I know his name will be on the account, but should mine also since I’m the other partner? We also have a verbal agreement of 60/40 ownership; I have the 40.

This is my first startup, any advice would be appreciated.  Thanks in advance.

 

  • Try to get this done ASAP.

    Download a free operating agreement from Docracy (or one of the other free legal template sites) and familiarize yourself with it. Understand it well. Then give him a copy and say you will take care of operating agreement for him. Make him get this done.

    You should have some type of corporate entity, esp before getting the bank account and customer contracts. I would not want to be a “40% owner” in what really is a sole proprietorship.

    Reply

  • Well, why dont you make your verbal agreement written? Just write it down on a piece of paper and you and your co-founder both sign it! Simple as that.

    Reply

  • Definitely get your name on the account so you can keep an eye on the financial health of the startup.

    The CEO may just consider the paperwork a distraction, or maybe he’s planning to screw you out of your shares.

    If he’s a dishonest POS no amount of paperwork is going to save you. Bail. If you trust him, then don’t worry too much about the legal stuff. It’s important, but it’s nowhere near as important as getting the business off the ground first. There are tons of CEOs who are great visionaries and salespeople, but lousy in Operations.

    However, the 40/60 equity deal is somewhat suspect, because it means the CEO planned to keep full control of the company from day one. Specifically, the right to kick you out at any time without having to justify himself to anybody. In that light his other behavior is suspect too. So there is reason for concern. If you’re not treated as a full partner (e.g. CEO keeps things from you, doesn’t involve you in important decisions) then the CEO isn’t planning to keep you around long term.

    You’re not going to get a definitive answer from anybody here. Trust your gut on this one.

    Reply

    • “because it means the CEO planned to keep full control of the company”

      That statement is so false. He can have only 60% control of the company. Minority shareholders can still make life like hell.

      And if the CEO plans to get investors he’ll have to give up some equity in exchange for investment cash, meaning that the 40% will get a bigger power over time.

      I think no serious CEO (doesn’t matter how many shares the CEO has) in this world will kick out a 40% (!) company owner.

      Reply

  • Get it done ASAP or risk being left with a big fat zero. It has happened to me and then you wouldn’t know what to do to save your ass. you might see my already submitted question come up on the site soon, maybe that will help you see the future.

    Reply
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