You go to a friend, someone you’ve known for years, and tell him/her about a fantastic idea for a startup. Your friend loves the idea and decides that he is ready to jump aboard with you. A few months later your friend has left town with your work, and told the world about it. He did not leave town? Oh, so he wants a raise, yet you have not brought in a cent of revenue? He wants to keep 50%, but only work part-time? Those are just a fraction of the issues that startup founders face on a daily basis with co-founders.
Is there one startup anywhere that succeeded from day one to the exit without any bickering between the founders? Probably not, and because of the existing issues we want to make sure you get some tips for a successful founders agreement (sooner rather than later).
There is a standard founder agreement, however that does not mean that you have to go by it. Most law firms and probably every VC firm have some type of template(s) sitting around the office, with some being founder-friendly and some that aren’t. Some things to be on the watch for:
- Warrant coverage: This is a bonus clause for investors that allows them to purchase more shares at a the same price per share that they paid at the said time at a later point in time – even if at the later point in time the value of the shares has skyrocketed.
- Types of shares and terms: Make sure you know what types of shares your investors are getting in on, as in the long-term this can have major effects on your business plans: ordinary shares, restricted, options, promissory notes, and preferred shares (non-participating).
- Full ratchet: this clause allows an investor to keep his/her percentage ownership the same as the initial investment.
All founders don’t have the same agreement. Sorry to burst your bubble, but being an entrepreneur is not living in a utopia that believes in exact equality between all its founders. The framework of the agreement may be similar; however the details that really matter will and probably should differ. For instance, shares (equity). Will everyone be putting in the exact same starting funds? Is everyone working full time? More than likely, not everyone will offer the same thing, and hence equity should differ. Roles should be declared – take it as a precaution. You are better off protecting your company, and with the different roles arise different results – fiscally and in terms of responsibility.
Vesting and cliffing go like peanut butter and jelly. Vesting simply means that instead of getting all of the agreed upon percent of shares immediately, the founders will gradually earn it over a fixed period of time (yearly for a few years or monthly over a few years). If a founder leaves before he/she has worked the agreed upon time for the entire venting, then they would earn the proportionate amount. With vesting, come cliffs that are a great tool that help startups bring in another founder (or employee) for a trial period, during which time if he/she leaves or is let go the entire agreed upon amount of equity will stay with the company.
Intellectual property is the company’s property. It may have begun in your head, and more than likely you won’t stay with one company forever, but that IP (intellectual property) is no longer your personal property. If the IP is not assigned to the company, then the business will struggle to keep it in their hands and use it to grow and prosper. If the company does not own the IP then it will be nearly impossible to raise funds or get sold. Wouldn’t that be lame?