What is a Memorandum Of Understanding (MOU)?
A Memorandum Of Understanding is a written document that outlines the relationship between two or more parties. The parties concerned will often define the terms of that relationship, including the parties’ responsibilities and requirements. A MOU drafted for start-up co-founders will often include the objective and purpose of the founders’ project, their managerial roles, their initial monetary contributions, and so forth.
When should start-up co-founders ask for a MOU?
An MOU should generally be entered into by co-founders during the initial steps of their venture. Founders considering a MOU should have a general objective for their project. At that stage, a MOU is preferable over a standard shareholder agreement, for two main reasons. First, drafting a MoU is almost always cheaper and faster than drafting a shareholder agreement. Also, a MOU is generally non-binding.
MOU: Binding vs Non-Binding
Memoranda of Understanding are generally non-binding. Why? First, when a MOU is considered, the founders may not know much about one another. As the start-up grows, new matters, which weren’t considered in the MOU, will inevitably arise such as the addition of an employee, an investment by a sophisticated investor, or a material change in the business operations. A MOU, if drafted before those events, might not be flexible enough to accommodate the new situation. Hence, MOU are generally non-binding and will often include a non-binding clause, like the following:
“This Memorandum of Understanding is not intended to create any legally binding obligations on either Founder but, rather, is intended to facilitate the Project.”
MOUs: Binding In Some Circumstances
If the founders of a start-up are in desperate need of a binding agreement (under the pressure of investors, to legitimize the company, to conclude a deal, etc.), they should consider a binding MoU. That memorandum of understanding should be binding, but subject to a sunset clause. That sunset clause could be the execution of a deal, the addition of an investor, etc. Once that landmark is reached, the parties should be under the obligation to negotiate and execute a final agreement, such as a shareholders’ agreement.
Boris Degas is a 3rd year student at the University of Calgary's Faculty of Law. He is working with the BLG Business Venture Clinic for the 2017/2018 academic year.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.