Questions

As a solo founder can I create "Founder Shares" to keep negotiations w/ potential co-founders just about equity (not control)? Potential downsides?

I had a not so positive experience where my potential co-founder wanted a similar amount of equity, but didn't care that much about control. We ended up going separate ways due to major differences of opinion and I am sure that if we had continued down the same path he would have used his share to block any important decisions, whereas if the deal was only about percentage and not votes from the start, my position would be much more protected. I have been working and investing on my startup for the past 2,5 years, and would hate to see my company destroyed due to founder fighting. Thanks!!!

4answers

A couple of things:
1) Picking a co-founder should be treated as seriously as picking your wife or husband. So the best way to avoid conflicts is to really date as long as possible.
2) 50/50 splits almost *never* work between co-founders. Unless you are already very close friends with a lot of arguments and challenging scenarios behind you, I think co-founder scenarios that are most healthy are where there is a decisive difference in equity (in excess of 60% to the one Founder).
3) 4-year vesting & shareholder agreements ensure that if a Founder leaves or is fired, the remaining unvested shares are cancelled.

The idea of a class of shares specific only to you is a *really* bad idea. It makes you appear unfavorably to others (especially potential investors) and absent massive traction, a deal-breaker for anyone but incredibly unsophisticated investors.

I would also be remiss if I didn't answer your question by asking you to reflect deeply on your own involvement as a leader and whether the differences of opinion could and will be handled differently with other employees and co-founders. The best founders I know encourage differing points of view and are willing to change their own opinions when presented with stronger options than their own.

Obviously, I don't know you so or the individual(s) you were involved in but ultimately, every move a startup makes is the Founder's responsibility.

Happy to talk in a call if you have any questions.


Answered 6 years ago

Short answer: Yes
Long answer: maybe

The legal ramifications of this are highly dependent on the jurisdiction, legal documents, etc.

However, you might consider making yourself a director, and not allowing him a board seat. Typically, Directors have more control over the business than minority shareholders. Again, this is not true for every situation.

If another person has 50%, or holds a majority share in the company, they can do things like call a quorum (which actually can be done with less shares).

Potential downside might be that you are complicating things rather early. Perhaps better to vest his shares over time, and handle this when you have serious cashflow, investment.

You could create a separate class of stock for them, but what is the point? In all likelyhood you will still control the business.

Control over a business involves more than just % of shareholding. Who controls the company includes things like bank signatory control, IP, even webdomains or hosting accounts.

Once you take on venture capital, all of this should be properly assigned to the company (if the VC's know what they are doing, this will all be covered by legally binding paperwork).


Answered 6 years ago

Simple answer:

For now, use an LLC. That way rather than having control be about majority/minority shares, etc. You can spell everything out in the Operating Agreement.

Obviously, when you take on capital you'll most likely transfer assets to "Newcorp," which should generally be an Scorp, but it does away with the obstacles you're facing.

I've done this multiple times successfully.


Answered 6 years ago

Hi,
You raise a good. 2 important points before the answer itself:
1. Co-founders should be seen as adding value to the venture/business, and not as people who are taking part of your cake (the shares). It is better to have less of a bugger cake, than more of no cake/a smaller cake.
2. Selecting the right co-founder/s is one of the most important stages. Research done by CBInsights found that the thirst most common reason that startups failure was “not the right team”. To add to this, one of the most common agreements that I draft is a ‘separation agreement’ between founders.
Regarding the allocation of shares – 2 parts: (1) The amount of shares each founder should get, and (2) how this division should be implemented (vesting etc…).
1. The amount of shares:
- 50%-50% is the worst option possible (assuming you have 2 founders). Stay away from this option at all costs.
- A good tactic in negotiations (and this is a negotiation) is to first try and find out what the other founder/s wants. It may just be that the other founder/s was expecting a percentage that you are happy to give, in which case there is no problem (I would even give more than he/she asked in this case). So first try and understand how they value themselves (equity wise).
- Assuming that the other founder does want a larger/equal percentage of shares, consider creating 2 types of shares (if this is legal in your country): one share type for equity/profits, and one share type for decision making/nominating representatives on the board. Although it is simpler to have one type of share, this option may solve your problem as you will maintain control of the decision making, whilst your co-founders will have an equal split in the equity/profits. [*** I personally less like this option as your co-founders will eventually get frustrated with you making all the decisions, which might lead to a breakup. It may also less look good in the eyes of investors. Lastly, consider if this is the type of partnership (inequality) that you want to start with?***]
2. How to implement the division of shares: regardless of the amount of shares each founder gets, be sure to use a REVERSE VESTING mechanism. This means that the founders ‘get’ all the shares from day 1 (signing of the founder's agreement), but the shares are subject to a reverse-vesting mechanism which means that if they leave (or get fired) before the agreed upon vesting period (usually 3-4 years), they only get a relative percentage of the shares (relative to how long/much work they stayed/did). This mechanism prevents founders from leaving with all their shares after just a few months.
I've successfully helped over 300 entrepreneurs. I'd be happy to help you. Good luck


Answered 5 months ago

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