Buy/Sell Agreements for Startups

One of the more important legal documents startups should have in place, especially between co-founders, is a buy/sell agreement. A buy/sell agreement basically outlines an arrangement for the company to buy back stock when an equity owner leaves the business, especially businesses that haven’t raised money from outside investors.

Think about it: if you and a co-founder go into business together planning on building a company for the next five or more years, and he/she leaves after the first year (no longer interested, passes away, retires, etc), you want to be able to buy back his/her equity. It is better to negotiate those arrangements when you are on good terms and not after a problem has arisen.

A few ideas around buy/sell agreements:

• Include one or more formulas for the value of the shares (e.g. some minimum return on investment, a multiple of revenues, a multiple of profits, etc)
• Consider the option that if one founder offers to buy out the other founder, the non-originating offer founder gets the right to buy out the originating founder’s offer (this keeps things honest and is called a “shotgun” term in the real estate investor world when two partners are at odds)
• Think though having a cliff and vesting schedule as part of the co-founder equity considerations

What else? What other considerations do you recommend for buy/sell agreements?