MSS Posts: Founders Agreement
Disclaimer: I am not a legal professional. The hereunder is for information purposes and does not constitute advice
(1/6) : Why ?
- Putting together shared goals, visions and thoughts is beneficial ⌛📍
- Focussing on long term projections not just short term issues
- Learning how to deal with constructive arguments and criticism
- Identify areas where you don’t necessarily agree
- Are they fundamental or fringe?🥊
- Organisation and good governance are key items professional investors look out for
- Your first hires will enjoy seeing some structure [amongst the startup madness]
- Format is usually more memorandum of understanding than legally binding agreement – but that’s your decision👍👎
(2/6) : Common Mistakes
It’s about long term motivation, remember it takes 8-10 years to build a company of real value that others may want to acquire ⏰⏳
If you dilute your co-founder too early, later down the line, if you get diluted by external investors, minority founders may become demotivated at the prospect of future earnings being slim pickings
Looking at the past to evaluate the future 🔮
- Founder A has spent x months building
- Guess what? At the moment that has $0 value in the market
Putting too much value into who came up with the idea💡💣
- If you don’t value your co-founders’ input, what will external investors think of the same person?
Not being honest and clear about how key decisions are taken. Common best practice is to have a final decision maker – the CEO
Personal opinion: Equity is normally split equally (or quasi) because all the work is ahead of you.
(3/6) : do job titles make a difference?
CEO – ensures goals are being met. The buck stops with them, they carry the full weight of the business on their shoulders 🏋
- There is such thing as peace time (co-creation) and war time (autocratic) leadership during the ups and downs of startup life
- “The Hard thing about Hard things” is an excellent book on this
Other C-suite are all about decision making. You joined a startup to build things according to your vision and set of value drivers. Don’t give up on that simply because you are not CEO. The CEO appreciates confident decision making; in your area of competence you should be accountable and take responsibility. 👌
The CEO should be able to leave operations during key fundraising campaigns. Stats show that up to 80% of full time effort is taken up. This means C-suite must step in to fill the void
Determine which roles and/or responsibilities are paid a salary or are otherwise compensated. In the very early stages, this is not a given.
Human psychology dictates that titles can help with effectiveness and productivity
- Also clients and partners want to be dealing with people who are decision makers
Personal thought: bringing the right talent 👴👱👩 into your business is everything!
(4/6) : sweat equity vs monetary equity
- Monetary equity is based on a valuation and can be quantified
- Cash is key 💰: it determines where the negotiating pendulum swings
- If founder has many suitors, then sweat equity partner has stronger position
- It’s a cliche, but money is not everything. Future investors look for integrity, purpose and cohesiveness between the founding partners as clear signals to invest or otherwise
- Many times, once an external investor puts real money into the startup ($M) – this causes for a major reset of these agreements to adapt to the new scenario
Final tip: vesting is a very powerful tool to re-adjust down the line as things unfold.
- Positive vesting – is when greater contribution is rewarded with greaters rights (equity or otherwise)
- Negative vesting – is when a founder who loses interest, lacks motivation or performs objectively sub-par agrees to let go of equity interest for a nominal fee, e.g. $0.01 per share.
(5/6) : key terms
- The Names of Co-Founders and the Business
- Company purpose and goals
- Each Owner’s Roles and Responsibilities
- Decision Making: which are role based (e.g. hire marketing manager), vs which are equity based (e.g. appoint an auditor), vs which must be unanimous (e.g. add a new shareholder)
- Equity Breakdown: including division of rights amongst classes of shares
- Vesting schedules
- Intellectual Property: incl. assignment thereof
- Exit Clauses: good leaver & bad leaver
Suggested process: use trusted templates as the foundation for the agreement. Fill out the details and don’t get lost on the legalise. Ensure every negotiation point is understood by all parties involved. Include a lawyer at the final stages to wrap it up and ensure all provisions are within the law.
(6/6) : graduating to shareholder agreement
- Shareholder agreement goes beyond a memorandum of understanding, it usually covers legal aspects of doing business as a company
- Lays the foundation for future stakeholders such as investors, banks and employees (through ESOP).
- When a significant third part enters the frame, is usually the trigger for this agreement to be drawn up
- Involves third parties who are not founding partners, and who may be involved for purely commercial reasons
- Discusses the decision making levels: management, board and shareholders
- Highly recommended to be vetted by a qualified lawyer knowledgeable about startups and their future needs
Pro tip: A complex shareholders agreement can become a red flag for future investors. Keep it simple!
This series of posts appeared on Malta Startup Space a Facebook group I manage that inspires startup culture in my native country of Malta.