Questions

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!!!

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 a year ago

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