Kudos to the minority shareholders for giving up a legal entitlement graciously...
...but why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?
...but why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?
When you start working with others on a company, structure and ownership needs to be sorted out before, not after.
Yes, it ended up being a bit of a pain for this guy and his startup, but it's not nearly as painful as the conflicts over IP and equity that result when you don't hammer this stuff out before building.
Huh? They split up equity in a non-existent business that ended upcoming back to bite them on what amounts to a completely different project that the other co-founders did not participate in whatsoever. It was only through the honesty of these other co-founders that they were able to steer away from real trouble. Those co-founders could have given up nothing had they so chosen.
That's the correct way to do things? Looks to me like this is a lesson in the exact wrong way to do it.
We have laws in this country to prevent people from getting screwed. Work with people you like and trust, and focus on building a product, not on what your "stake" is.
> Work with people you like and trust, and focus on
> building a product, not on what your "stake" is.
> We have laws in this country to prevent people
> from getting screwed.
> It was only through the honesty of these other
> co-founders that they were able to steer away from
> real trouble.
> Those co-founders could have given up nothing
> had they so chosen.
The most important reason to negotiate equity early is not to avoid people getting screwed, but to avoid fundamental equity disagreements from screwing everyone.
Even if you like and trust someone, this does not mean you have compatible beliefs on equity or vesting.
If founder B joins founder A, and they move forward with founder A's idea, it's quite possible that years later, when they decide to raise money, founder A will insist that he deserves 90% of the equity, while founder B will want 40%. You'd also be surprised how much people's attitudes and allegiances can change when heavy hitters enter the picture and large amounts of money are at stake.
Laws will not prevent you from getting screwed if you don't have any contractually established rights. If you sign an assignment of IP for your work to a company, you can't later sue for equity to avoid getting "screwed."
>"If you sign an assignment of IP for your work to a company, you can't later sue for equity to avoid getting "screwed."
You most certainly can. But you will lose, because IP assignment is clearly defined. Equity in a business with no IP, no assets and no income, before any work is done, is not.
I've done government procurement in the construction industry. I understand the value and importance of contracts. You guys are talking like this is a multi-million dollar enterprise undergoing a complicated equity dispute. It's not. It was four young guys (sexist assumption!) in a dorm room with an idea. There was no business, and not a single dollar (as far as I can tell) was made based on that idea. They complicated the situation themselves.
You are cynical about the legal industry, yet you think that whatever these guys scribbled down on a piece of paper with regards to an equity split, even if notarized, will have the utmost legal standing? That if they had split the equity equally among four, and one had done all the work and decided to dispute it, that the court wouldn't look at the case objectively to determine fairness? That's simply not true.
So, yeah, I'll stick with my advice: if you're a fledgling startup, don't waste intellectual, physical, emotional and economic resources on your "stake". Earn it. Having a contract will not prevent disputes; I can speak from experience on that. Get to work and build a product. When there is something actually at stake, then worry about your share of it.
> So, yeah, I'll stick with my advice: if you're a fledgling startup, don't waste intellectual, physical, emotional and economic resources on your "stake". Earn it. Having a contract will not prevent disputes; I can speak from experience on that. Get to work and build a product. When there is something actually at stake, then worry about your share of it.
I think this is bad advice, and goes against both my personal experience and almost every bit of startup advice on the internet.
Sure, you don't need a formal contract, but you do need to make sure you are on the same page equity-wise, while being open to renegotiation. Generally, that "same page" conversation should be documented somewhere, even as a simple email. While that email IS legally relevant and possibly enforceable, the point is to get keep everyone's memory honest and provide clarity.
An email thread like: "Based on our conversation, we plan to split this company equally three ways. Is that everyone's understanding?" "Yes, sounds good" "Yep"
Can be very helpful to avoid misunderstandings both presently and in the future. The point is not to get into a lawsuit, but to avoid one.
I agree with this. But equity is a sticky thing, and at the stage we're talking, no contract will be so air-tight as to avoid disputes.
In my experience, sometimes it doesn't matter what you've written and signed. In those cases what matters is the spirit of the contract (written, verbal or implied), intent and good faith. Call me an optimist, but if you're working with honourable people (as in the article), disputes can be managed objectively, even if you violently disagree about things. I believe our system is efficient in that matter.
Nevertheless, this is terrible advice. Disputes over equity are often company-killers.
You are doing anyone who listens to you a real disservice.
It's not just my financing; it's your financing as well. I suppose you're more than welcome to have a stake in something worth nothing, of your own volition.
>"but let's not hassle with it now"
You're going to have a hell of time proving your case then, aren't you? Unless, of course, you can prove to the arbiter that you've done the work that is deemed sufficient for the stake you're claiming you deserve. In which case, I guess I shouldn't really have an issue giving you that share. Working as intended?
I'll throw one at you: we agree you take a "little equity", say, 2%. You do an assload of work for me, and I imply on occasion that I'll up your stake, but never actually do. Then I sell the company for billions. You're going to be pretty happy that you just might have a case that you deserve more than you got, in spite of our contract.
It's the obligation of the company, not the contractor/employee, to show that it has secured the rights to the work that is included their product.
If you have someone work on your product, and you don't put down in writing what their agreed upon compensation is (and/or you don't pay that compensation), you're not going to be in a good spot when someone starts doing due diligence for a financing or a sale.
Not being explicit about ownership / comp before a financing deal is on the table is a recipe for heartache.
hint: it's the "proving your case" part. in this scenario, the parties rarely go to trial or arbitration.
i don't really need a basis for a case, just a basis for a threat. 'rattling the sabres', so to speak. it's sad, but true.
By "this sort of thing", do you mean an equity dispute? No, I haven't.
But as someone part of running a mid-size company, I have been party to being threatened by baseless accusations. Guess what happens when there is "no basis for a case"? Nothing. Nada. Zip. Business as usual.
So, judging by your comment that you "don't really need a basis for a case", I can assume that you haven't been through this, either. But, if you're curious, go ahead and try to sue someone with no basis for a case, and see how the system deals with you.
Best to have a genuine agreement up front, and keep it fresh.
Seems to me that's what happened in this situation, and they ended depending on the good will of co-founders.
Where as, had they simply dissolved the relationship with the first business and started anew, we wouldn't talking about this.
You asked:
" ... why on earth is there a stringent corporate structure
and equity doled out years before there is even a concrete
idea or tangible business?"