Startup Founder Agreements

I have been thinking a lot recently about how to apply agile development principles to investing and key aspects of startup development such as team building. That’s also the thread connecting my two recent posts on VentureHacks. Both stem from the agile principle of delaying decisions until the last responsible moment. The first post is about agile startup fundraising. The follow-on post is about agile startup team building. If you’ve read and liked these posts, let others know.

The same question came up a few times in different forms in the comments to the second post:

@Nivi

Simeon, can you tell us how you structure ownership and control so you can fire your co-founders if necessary?

This is a complex topic that has a business and legal side to it. I’m no lawyer, so I’ll look at things from a business perspective. I will mention legal terms and example language for illustration purposes only—for details, consult a lawyer. This isn’t just CYA. There are a lot of possibilities and variations that need to be thought through and for that you need legal and tax advice.

This post addresses the lifecycle of founder agreements and the key compensation and control parameters in them. A companion post suggests ten rules for building better founding teams.

Urban legends

Let’s start by dispelling some myths:

  • There is a standard founder agreement. Well, there is and there isn’t. Every major law firm and every VC firm tends to have some type of template. These templates can have meaningful variations, some of which are founder-friendly and some of which are not. Most partners, be they lawyers or VCs, tend to tweak the standard with their own language. Even if you are an experienced entrepreneur, you’ve probably only seen a few founder agreements in your life. Almost anyone can benefit from a great lawyer or an adviser who’s seen dozens of these from different law & VC firms.
  • All founders have the same agreement. Yes, it is convenient for all founder agreements to be based on the same template with the only difference being the number of shares. Don’t confuse a convenience with a requirement. In the last four companies I’ve co-founded, there were several founder agreement types. In two cases this was because of the special role I played as a part-time co-founder. In one case the CEO had a different vesting schedule because he had spent a lot more time than the rest of the founding team on the idea. In another case, for good reasons, four founders had three meaningfully different agreement types.
  • Founder status == founder agreement. Founding status can be bestowed on anyone. That’s a decision a founding team can make for many reasons. As long as the decision is public and definitive, from an external perspective there is no issue. This can be a convenient shortcut to separate someone’s status (founder) from their role (employee or contractor or advisor, etc.) and the legal documents specifying its rights & responsibilities.

Which founder agreement?

There are several critical points in a startup’s life when founder agreements are put together.

There tend to be verbal agreements between founders for a period of time before anything is put to paper. Lawyers tell me that in many cases verbal agreements are enforceable, especially if someone did work based on the verbal agreement. It helps to communicate and set expectations clearly. It also helps to have some discoverable record of the agreement. An email would do.

At some point pre-incorporation, the founding team may create a written agreement, often in the form of a letter. It outlines key points of agreement between founders around IP ownership, equity ownership, vesting, etc. The FastIgnite one is two pages. The goal of the letter is to be simple and readable so that everyone is comfortable and aligned on the main issues. Perhaps the most important paragraph is the pre-formation agreement. It requires the various parties to behave during incorporation in a way that effects the agreement. It can be something along the lines of:

Pre-Formation Agreement.  If the addressee of this letter consists of one or more individuals, rather than a business entity, the individual(s), by his (their) signature(s) below agree(s) that they will cause any business entity formed by them within 24 months of the date of this letter agreement to conduct business in the Field of Interest to enter into an agreement with me identical to this letter agreement, whereupon this agreement shall become void.  If such individuals do not form a business entity to conduct business in the Field of Interest, but instead sell or assign their developments and technology in the Field of Interest to an unrelated party, I shall be entitled to [this will vary based on the type of founder] of the net consideration received by reason of such sale or assignment.

Pre-incorporation, removing a founder is complicated primarily by the potential lack of clarity around his or her rights and obligations and hence the consequences of the removal. For example, without a clear vehicle (a company) to contribute intellectual property into, a founder who walks away may mean that the future company won’t own its own IP. This is typically not a problem, unless the company becomes very valuable and the founder who walked away decides that she is owed something.

During incorporation, the couple of pages of this letter will be turned into somewhere between 20 and 50 pages of mostly boilerplate legalese. The number of separate documents may vary but they fall into two categories:

  • Those related to equity, typically a restricted stock purchase agreement (RSPA) and associated escrow and other agreements.
  • Those related to other matters: IP assignment, invention disclosure, non-solicitation, non-competition, termination, etc.

At this point, there is a precise, well-defined legal framework for resolving conflicts that can’t be addressed through other means. However, founder agreements are not set in stone and it is common for them to be tweaked by a little or a lot during the first financing by professional investors. How to handle that or avoid it altogether is something I’ll do a post on if there is interest. [more details]

Founder roles, agreements and removal strategies

Different founders contribute different assets and capabilities and can play multiple roles. Their agreements tend to reflect this and, hence, the strategies for a founding team to remove these founders differ. Note that investors have additional tools at their disposal but that’s a separate topic.

  • Employee. Compensation is a combination of cash (post funding) and common equity that is subject to vesting if professional investors are involved. There is some up-front vesting acceleration. The common number is 25% but, depending on the length of time and contributed resources, it can be up to 50%. (See my post on the best vesting schedule.) The rest of the equity typically vests monthly with no cliff for 3-5 years. Founders have rights as shareholders. They have voting rights which may entitle them to force or veto certain key decisions, e.g., hiring or firing the CEO, selling the company, raising money, etc. You need to understand the voting thresholds for key decisions and think very hard about whether you want to allow any one founder to have too much control. If you are the lead founder, this may not be an issue but it should be an issue for the founding team as a whole. Another issue to watch out for is any significant vesting acceleration on termination without cause outside of a change of control (an exit). A little bit is OK. A lot is unreasonable. Yet another issue is the price at which the company can repurchase unvested shares. To make this cheap for the company, you want the price to be the par value of the shares.
  • Investor. Founders who also invest get additional equity in the company with no vesting. Some get common equity for their investment. Smarter founders structure things such that they get preferred equity together with other investors. The smartest founders who put money in their own businesses put it through a separate preferred class of stock before other investors come in. As preferred shareholders they will have additional rights. With the right legalese, even a small shareholding can exert a huge influence and make it near impossible to remove the founder. The only way to remove their equity holding in the cap table is by buying them out or through a recapitalization of the company. In this case you have to consider whether they are common or preferred holders and, in the latter case, their anti-dilution protection, pay-to-play provisions and willingness to participate in the recap financing. A much better approach is to restructure their holding during an investment, at the point of maximum leverage.
  • Advisor. The structure depends on the nature of the advisory work. Very early on, if the equity ownership is small, the advisor equity may have no vesting. An example would be when someone gives you an idea and you run with it without their involvement. Typically, advisors tend to have shorter vesting periods (one or two years). If you like them and they have been helpful, you sign them up for another term. Sometimes, the vesting is milestone-based (upon the close of a financing) or performance-based (signing up customers, doing deals, recruiting). Advisors tend to have 100% acceleration on change of control. Typical advisory agreements have simple termination clauses. As long as that’s the case, there should be no major issues in removing an advisor founder.
  • Service provider. Like the advisor role, a service provider can do many different things. The difference is that there is some type of cash component or cash equivalent value associated with the services. There are multiple ways to handle this before the company has cash. It can be deferred, with or without interest, to be paid after a financing or once revenues start coming in. Alternatively, it can accrue into equity at some pre-defined price-per-share, usually the next round’s, perhaps with a slight discount. For example, you hire a consultant for five months at $10K/mo and then you raise $500K on $1.5M pre. For her services, the consultant will own common stock equal to $50K/$2M or 2.5% of the fully-diluted capitalization of the company. If equity compensation and vesting are aligned with how value is delivered, terminating a service provider founder should be no problem.
  • Board member. Board members differ from other parties in that they are purposefully difficult to remove. Therefore, they tend to worry less about vesting schedules. Founder directors often get the same initial acceleration as employee founders. They get 100% acceleration on change of control. Independent of shareholder rights considerations, whether it is easy or difficult to remove a founder board member depends on the rules of board composition. Be wary of board seats by entitlement. Rather than giving board seats to individuals, give them to (groups of) classes of equity and check whether the voting process doesn’t automatically give any one founder the right to be the board member. If a board member founder is not entitled to a seat, then there are various other processes described in the bylaws which may affect his removal.
  • Executive board member. Typically, the agreement is a mash-up of a board member and a service provider agreement. The usual role that fits this is a founding executive chairperson. Initial vesting typically matches employee founders. Further vesting accelerators are common, e.g., on follow-on financings or the recruitment of a CEO. The removal strategies are the same as for a board member.

The same person can be in multiple roles and may even have multiple agreements. While there are no “best founder agreement structures,” just as there are no best vesting schedules, there are certain principles of approaching founder agreements that can be helpful in building stronger and more agile founding teams. Read the next post in the series for ideas on how to build stronger startup teams.

Let me know what you think in the comments or on Twitter @simeons.

About Simeon Simeonov

I'm an entrepreneur, hacker, angel investor and reformed VC. I am currently Founder & CTO of Swoop, a search advertising platform. Through FastIgnite I invest in and work with a few great startups to get more done with less. Learn more, follow @simeons on Twitter and connect with me on LinkedIn.
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67 Responses to Startup Founder Agreements

  1. Do you believe that all founders must understand each others roles with in the company to ensure that no one person thinks what the other is doing is easy?

    • Brian, I certainly do hope that members of a founding team do understand what others on the team are doing, at least at a high level, and also understand why their work is valuable. The alternative is scary.

  2. Another very thoughtful post. A couple of things jump to mind.

    First, the single biggest founder issue that I see in my practice is getting rid of the non performing founder. In a typical such situation Sally offers (often in writing) Harry 10% of the company to write some code in the next six months. Everyone is happy — for a month or so. Then, Harry gets distracted by another opportunity (or it becomes clear that Harry can’t deliver in anything like a timely way). Sally now needs to bring someone new on board, and we have a mess. I always advise clients to have clear performance standards.

    Second, never underestimate the confusion that can be created around IP rights. Once you have more than one person involved, you need a company to which you can contribute IP. (If your IP is important and it is not clear that you own it, I can tell you one thing that will be clear: You will have trouble getting investors.)

    Third, once you have a company, you need to have a clear understanding around the equity (in my mind this means vesting — even if there is no VC investment intended — go back to the example of Sally and Harry).

    Fourth, be careful with service providers. I know of an instance in which an attorney got 20% of a company!! (We were able to undo this, but it cost time and money.) Your equity is one of your most valuable assets; don’t give it away cheaply.

    Finally, and I give this advise a lot, giving away “percentages” of a company is dangerous. You must be very careful to state the moment in time when the percentage is calculated (that is the denominator). Are you giving away 5% before or after your first angel investment? Before or after your first venture round? I have on horror story in which a client got to a great exit and a long forgotten “co-founder” showed up with a letter stating that he owned 2% of the company (this would have resulted in a windfall of several million dollars for zero contribution). It was so absurd that we were able to make the fellow go away readily, but it illustrates the point.

    Founder agreements have downside (and upside) but they also require thought.

  3. One more thought. I agree with you that the most savvy entreprenuers will structure their ownership to reflect some common stock and some preferred stock. Despite the obvious reaction that any venture investor will want to renegotiate the rights that the entrepreneur has granted to himself or herself, experience indicates that sometimes entrepreneurs can hang on to of these rights (or at least a portion of them). I have a couple of clients who have taken the position that, to the extent they put actual cash into the business, they should get preferred “lite” and have made it stick through the first (and later) venture round. They also use this preferred lite, as I have characterized it, as a baseline to negotiate with investors. For example, to the extent that you use fully broad based weighted average antidilution (i.e. you include the pool as well as granted options in the denominator) in the preferred lite, you have one incremental argument for it in the Series A deal. Same thing if you exclude dividends. These are little things, but they can turn into dollars at some point.

  4. Kevin Bedell says:

    Simeon,

    Thanks for this thoughtful post. It’s appreciated.

    I have a question on the situation when a primary founder brings on other founders. Your post implies that ‘founders’ who come on after the initial idea has begun to be developed should be given equity on a vesting schedule. I agree with this approach.

    But the initial founder who has the original idea, begins work, recruits other founders, funds initial expenses — should that person be on a vesting schedule as well? Should it be the same as for the other founders?

    • Vesting still applies because of the expectation of future work. I have seen cases where a “lead” founder gets higher initial acceleration but that’s not very common.

      • R. Clarke says:

        Simeon, Kevin,

        What happens if the “lead” founder(had initial, unformed idea) has funded most of the venture(Inc., Demo dev., Hosting etc.) but done approx. 25% of the “work,” (read part time commitment) while his co-founder(fulltime) has done the market research, marketing, recruiting, strategy, sales, co-developed the product etc. to develop the “idea” into a fundable business. Should the “lead” founder expect a premium? If there is no agreement between the founders who owns the IP?

        What happens if they part company? How is this resolved? Can they each pursue the business?

        Sticky situation…..no?

      • R., definitely a sticky situation.

        If I recall correctly, in the absence of an agreement about IP ownership, the default legal framework is that all parties are equal co-owners.

        Beyond that, who gets what premium, if any, depends on judgment–what is important/valuable and do the parties agree on this. That’s no different, really, than situations where everyone works full time but some people do more valuable work.

        As for the investment to push the venture forward, the general case is that a founder gets no special consideration for this. It’s part of the “sweat equity.” Founders can change this by actually making an investment into the company. This way their cash contribution will be protected.

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  8. paul petros says:

    does international private equity initiatives or funding take Africa seriously, and what is the strategy toward the continent, from your perspective?

    • I haven’t done much work in Africa so I’m the wrong person to comment. There are a number of structural issues that make investments complicated. For example, South Africa has various export restrictions around intellectual property.

  9. Josh says:

    Hi Simeon-
    Great Article.
    Question for you and thoughts. I am a founder of a company with a current market valuation of about $2mm. I have been approached by a VC/Investor who wants to provide his networking experience, business contacts and name to help build our company. He said that he would also be able to help us maybe raise some money initially his value would be to help grow the business over the next 12 months. He will not be a full time guy but will bring his experience, relationships etc to the table. He is looking to be able to share in the action should the company be able to grow, raise money etc., and wants some equity. I think he could be valuable but don’t want to be stuck with a big talker who provides no action- any thoughts on what kind of deal agreement makes sense- or any advice from the trenches you could provide.
    Thanks,
    an entrepreneur

    • Josh, VCs should be in the business of putting dollars to work. They get compensated to do that from their limited partners and should not require any additional compensation from the company. If this person is a VC, then his/her behavior is strange.

    • Sam Iam says:

      What you describe isn’t a VC, it’s a an agent or fundraiser. If he brings you investors, you could compensate him a % of the funds raised, or an equivalent amount in equity. A VC would be a guy who has money to invest; this guy claims relationships but won’t be contributing cash. To the extent he adds value outside of bringing in real investors, you could offer him an advisor arrangement in which equity would vest (or repurchase rights would tail off) depending on certain milestones (which could be largely within your discretion … e.g.: A grant of X shares, a portion to be determined by you to vest monthly depending on the value of the relationships, etc contributed by this guy).

  10. Len says:

    Simeon- Thank you for sharing the insignts!
    At this point I am a sole founder (signer) of the Inc. and have a US patent issued to my name. I want to hire employees but don’t wa t to assume all the risk of failure. want to assume all the risk of failure to build a viable business. What strategy whould you recommend?

    • Len, whether pre-existing value comes from a patent or code or smart thinking doesn’t really matter–the rules are the same.

      • Len says:

        Simeon, may be I missed what the rules say about pre-existing value. Are you suggesting that my Inc. should be broken-up into pre-money equity + option pool according to some formula and vesting schedule? How can pay my employees in equity instead of cash? Thanks again.
        Len

        • Sam Iam says:

          Len – I think Simeon is saying you can compensate employees with equity on a vesting schedule just like any other startup. Your situation doesn’t appear to be distinct.

  11. Tom says:

    Hi,
    Great post. I was wondering if you would be able to help direct me to sample founder agreements that my startup could use (3 co-founders) to put down our initial agreements in an agreement that would be recognized by law.
    Thanks!

  12. Greg says:

    Any chance you could share the FastIgnite standard agreement? It sounds like it would really help us all. I am co-founding a music startup and could use that…

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  15. Nick Sowden says:

    Thanks, very helpful!

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  17. Matt Shields says:

    This post is very informative regarding important issues surrounding the Founders Agreement. i’d love to see the 2 page FastIgnite template you referenced in the post, however, the link doesn’t seem to work. Can you send this to me?

  18. mv says:

    I’m a college student working on a startup website. I do not have a technology background, and do not know how to program. The website will include an outside licensing agreement. Currently, I’m in the process of trying to finalize a programmers license agreement, and hoping to have it for free through beta testing.
    Thats just some background. With that, I’m looking to bring a “tech” guy onboard to develope the website. If that doesn’t work, there is a local company that has expressed a desire to work with me in the development.
    So, my question is: do you have any recommendations for websites to find Non-Disclosure Agreements, and contracts for splitting equity? There is an attorney willing to read over them for me before any signing takes place, I just need to find them.
    As you can tell, being a college student and this being my first time in the field, i’m trying to be scrappy with funds.
    Thank you!

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  20. hgh says:

    I want to hire employees but don’t wa t to assume all the risk of failure. want to assume all the risk of failure to build a viable business. What strategy whould you recommend?

  21. Imtiyaz says:

    Hi,

    I am 29 years old working in Dubai. I’ve an biz idea(only founder) and I like to go back to India and start a venture, as I couldn’t invest so I am getting investment from some friends.

    I don’t know on what terms I could accept their money coz I don’t want them to act as boss because they are putting cash, and I don’t want to disappoint them as well. What will be the best agreement for mutual benefit.

    I am also taking risk of leaving job and going back to India and no my friends(investors) gona assist me except putting cash. As a founder I had started working on idea since two years back.

    Please help me in this situation

    Thanks in advance
    Imtiyaz

    • The best thing to do is to connect with a few people in the Indian startup ecosystem as they should be able to give you some ideas on what market terms are for seed investments.

      As for the investors acting like bosses, this is a bad pattern anywhere. For their cash investors get guarantees or equity, depending on the investment structure. The CEO should ultimately be in control of the business.

      • Imtiyaz says:

        Thanks for ur reply.

        Now I am CEO but latter after biz grows, their eyes starts rolling and they sack me, and for some short term gains they take some decisions which may damage biz in long terms. This idea is my brainchild and this biz is my dream, that’s why it worries me a lot. Investors are seeing it as a cash cow. How can I safeguard my position as a CEO?

      • Sam Iam says:

        That’s a little misleading; ultimately, shareholders have the right to fire the CEO, and rightly so. But broadly their job is to select management, and advise and approve of major actions, and leave the day-to-day management to the management team. It’s not easy, but the terms of an investment should give investors the right to know what’s going on with the company. The CEO can inspire confidence by being transparent, providing business milestones and achieving them or justifying why they were not achieved. Put yourself in the shoes of investors: They entrusted you with their money, on the basis of certain claims and assurances, as well as confidence in your abilities and faith in your reliability. If you do what you say you will do, you should be secure. If investors come to believe that you are not the best person for the job, you retain whatever equity you have that is vested, and the investors put someone else in your place. If you don’t like that, don’t take investor money or negotiate documents that give you the right to appoint the majority of the board (or that otherwise make it impossible for the shareholders to change management).

        • Yes, when I said the CEO should ultimately be in control of the business I meant operationally. The board & shareholder dimensions are orthogonal but no less important. Their tools, beyond reasoning, however, a fewer and blunter. The most common ones are exercising veto power around key decisions, choosing the CEO and setting CEO compensation.

  22. Raymond says:

    I have a non profit that’s been around just under a year. I started it with 4 other individuals. As with all non profits or startups, there have been ups and downs and plenty of learning experiences. Recently however, one of the co-founders has just been detrimental to the progress of our organization. Unfortunately, his name is on many of our original paperwork. Articles of Incorporation, etc. We know if we ask him to step down or leave it will get ugly. The 4 of us are hoping to keep our name, logo, and continue the buzz we’ve already created within our communities without him demanding money which we don’t have as an organization or taking the name with him. What will be the best route to go to approach this?

    • Raymond, this can be a simple or tough situation depending on the level of control over decision making that this individual has.

      Any founder can be fired from the organization. That’s an operational decision that the CEO/President can make. Standard legal & HR factors apply here. If your structure/agreements prevent this then you are in a very unusual situation and you need to consult a lawyer.

      If the person has a board seat or special veto rights the situation is more complicated and, again, you need a good lawyer to guide you through the options.

      • Raymond says:

        Thank you for your reply. It has provided myself and my team a bit of clarity to everything. What’s weird about our situation is that we’re all on equal stakes. The Board has yet to determine roles, so we’re all on an equal scale. He does not have a board seat or veto rights. We’re just reluctant to bring it up at our next meeting due to the fact that he’ll explode and we weren’t aware of the legal steps that needed to be taken in order to remove him from the organization properly without future problems turning up. Our organization has a great bit of buzz in our community and the 4 of us would hate to have to start all over because of one member.

        • Simeon Simeonov says:

          These types of confrontations are never pleasant but they are far better than the alternative. Also, you and the person you are talking to may sometimes unexpectedly discover that the conversation is a relief: it can’t be fun for them to be part of the group of four right now.

  23. Nathan says:

    We’re a new company that brings together major motion pictures, music and brands with world-first quantitative technology developed (but not yet patented) over the past 10 years by PHD scientists at a top business school in the US.
    Initially the company was formed by a 50/50 partnership between a music licensing company with a 20,000 song catalog and a film investment firm. The new company has an angel investment from an UHNW silent partner in the music licensing company but only $50k. While the mini-angel investment is small, the circle of potential investors that have opened up is deep with 5 investor groups with $250m each to invest in our industry in discussions for a $25m first round of funding.
    The problem is that the corporate structure has not yet been defined for the new co. The initial business model spoke to around 75% of revenues coming from music sources. With the new expanded business model around 25%-30% comes from music sources – the rest from film, brands, quant technology, analytics and consulting. All of these businesses have been architected and structured by the film investment partners.
    Now we have completed our pitch deck and financials (which have not yet been expressly shared with music co partners) show for a $25m investment, Y3 will generate $10m of net profit which continues to grow at an increasing rate on a y-on-y basis – making for $25m of revenue in Y5 and thus an approximate $100m firm valuation. 10 year revenues push $100m with reinvestment. The stakes are high.
    Now the angel investor is angling for a 51% stake for the music co vs 49% for film investment partners on the basis that the first major round of funding will come through his relationships and without the angel investment none of this could have happened.
    Having said this – all of the IP and 75% of future revenues, business architecture and strategy come from the film investment partners.
    Discussions on corporate structure so far have been heated and nothing has been yet resolved. Should we just accept 51/49 and build in strong protective clauses ala facebook to protect film investment founder stakes and angel equally so? Or is there a more sophisticated strategy to follow to ensure film investment partners are appropriately protected and compensated, while still balancing the interests of the angel?

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  25. Cherisse says:

    We are initiating a start-up. We have an investor who wants to completely fund us. (about 1 million dollars) What would be a general rule of thumb for division of shares between 3 founders and a single primary investor? (One of the founders also plans to buy shares). Clearly the investor would have a controlling interest in the company, but what is a reasonable allotment of shares to founders, considering intellectual property and sweat equity, before any purchasing?

    • Cherisse, it is not at all clear that the investor should have a controlling interest in the company. If he has a controlling interest this early this looks much more like an acquisition than an investment. That’s not necessarily a bad thing, if that’s what you want, but it is certainly rather unusual.

      As for the equity split, I’d recommend that you decide how the equity should be split right now, without any investment (or acquisition). It keeps things simpler.

      • Simeon,
        I have the same question. We have a start up company and decided that we would split 60/40. Now we are being told that we should split 51/20 with the remaining 29% going to investors. We were told that the one partner must have majority shares even if we initially agreed 60/40. How should we split the company, in your opinion? initially the individual came to us with an idea and we created a concept and built a company.

        • There is absolutely no rule that one partner should have majority. Again, I recommend that you separate the two issues. Split the equity without an investment anyway you decide. Then the investment will dilute every equally.

  26. Nazar Frederick says:

    Hi Simion,
    I have a question regarding IP rights.
    I came up with a concept for a new start-up and the main feature. That particular feature I came up with was during a chat to one of my start-up partners.
    The question is whose idea is it and who owns an IP for it? I feel I came up with it, but it did not happen by it self, it was triggered by conversation.
    I would like to be fair.
    Regards,
    Nazar Frederick

  27. rgouveia says:

    Simion,
    I was told to not sign an individual Founders’ Agreement with Vesting. I was instructed that It would be incorporated into the Operating Agreement. Should I fight this matter and insist on a Founders’ Agreement between myself and the other two founders? We are creating our first start up with someone who has done several.

  28. rupenp says:

    You referenced the FastIgnite Founder agreement, but I could not find it linked on the site. Would you be willing to share that or point to one you think is a good representation of what you talk about in your blog?

    • The FastIgnite agreement is a very non-standard one because I do non-standard work. I do recommend working with a lawyer on these documents. It’s the best way to ensure that all the basics are covered and important issues that founders care about are precisely captured.

  29. R Norris says:

    Sim,

    I’m looking for some advice on the equity structuring of our start-up as we launch it in new cities. We need to bring on new people to act as partners who will effectively own a portion of that city going forward. I am concerned that if we create a new LLC for each region or city in order to do this we could create a headache for VCs or anyone wanting to invest in the future.
    Do you have any thoughts/comments?

    Thank you…

    • The typical early stage VC investment vehicle is a Delaware C Corp. Many growth equity investors are used to working with LLC entities, often companies that have reached profitability without institutional investors. Private equity investors have experience with off shore tax shelters. What you are describing feels like an inverted franchise model and I’m not sure any one group of investors is going to have deep experience with it. Investors will look at issues such as exercising control (voting & drag-along rights), legal risk and tax efficiency. I’d recommend talking to a good lawyer, ideally someone with holding company and/or franchise experience.

  30. Joshua says:

    Hi Simon . great article. I had a quick question, would there be an informal agreement paper work somewhere out there that myself and my 2 co founders can use currently before our project takes off. We would use it mainly for the confidence and trust within the team and document it before we legalize everything in the next few months

  31. Evan says:

    Hi Simeon, Thanks for this post. Do you know where I may be able to find the Pre-Formation Agreement you mention in the post….I cannot seem to locate it on FastIgnite. Many thanks in advance.

  32. Evan says:

    Okay Thank you Simeon!

  33. Labo Gbadamosi says:

    HI Simeon,
    Been doing some research and came across your blogs. I need to draw up a MSA – management service agreement between myself and my partners and our company. So basically, all our renumerations/ entitlements is covered by the MSA. company pays for our services even though its our company.

  34. Hi Simeon – what is your take on a consultant that develops the company and helps raise and negotiate capital through their contacts but isn’t a broker? We want to attach performance goals such as 1% of equity per million in cash or equity but have been advised that that might not be compliant with broker regulations.
    How would you suggest we proceed? Would you say that we should make him an interim co-founder to help with capital raising? And then do we offer equity according to a vesting schedule which also has performance goals – such as 1% per millon?

    • Nathan, I’m familiar with the intricacies of broker regulations. In the non-broker world, people help companies raise money all the time and, yes, the compensation is usually set up differently using a combination of vesting and, perhaps, a single threshold amount.

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