When you start a venture scale business, you are building it to be owned by other people (not just the founding team). This means you need to plan on a healthy and fair ownership scheme that includes a plan for everyone to earn their share of ownership.
Should a founder have their full stake in the business for coming up with the idea? How about after signing the first customer? How about after building the MVP? At what point have all founders truly contributed to building the business? When would it be too early in the company’s life for a founder to walk away with their full equity stake?
The reality of building businesses is that sometimes life gets in the way. Many times a founder wants to leave well before the company has been built. Too often, they walk away with more than their fair share of the business simply because that was the agreement. Some might say, hey if that’s the agreement you should stick to it. You know what, I’m of the same opinion. However, I don’t think a good agreement is one where all founders instantly own their share of the biz. Maybe it’s a new job offer, new baby, they decide they can’t stand the other founders, hate the new direction of the biz, or any other variety of reasons. If they walk away with 20-50% equity of the company and don’t have to put in any more effort, this sucks for the other founders as they’re continuing to work for their equity. This also hurts employees and investors as there is less equity to give out… but the same amount of work to do.
Enter founder vesting and a timeline that spans many iterations of the product (5yrs is reasonable), they should still have more equity than others, but they should earn that ownership based on their execution and not because they were present when the idea turned into a business. Often it is at the time of incorporation, which may go through a few restructurings over time… LLC -> C-corp or moving the registration from your home state to Delaware. This is another reason to work with a great startup lawyer who has experience building companies. They can offer specific guidance for your situation.
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Great points Josh. I agree that this is a real risk. In our company, which is different than your typical tech startup, we have ‘force out’ options so that if one of the founders wants to walk, the company is valued and they are paid out but keep no direct equity in the businesses. We may change this later as we grow if the company has a very large forward projection, but that is the mechanism we have in place right now. The idea is it forces the founders to ‘stay honest’ and work for the company. The other point I will add to this is your shareholder agreement can and likely should be a living document. Depending on where you are at with a company, the mechanisms can and should change. We built our agreement specifically so if someone wanted to walk away, they got value, but they don’t get value from other people’s efforts. This is slightly different than what you are talking about above as the only equity owned is by the two founders, but an interesting example of how you can think about these situations. A good attorney and really open honest communication is key to getting this ‘right’.
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