To be blunt, a simple founders’ agreement written on a napkin dividing up the equity with your co-founders is not going to suffice. When you are working with co-founders on your startup, you will want to incorporate and do your founder share purchases as soon as possible. This can have other advantages as well, such as setting the clock on founder vesting — if you don’t have a vesting schedule on your founder equity, your investors will typically demand that you add this when negotiating your first priced round).
Here are some of the issues entrepreneurs will want to discuss with their co-founders before starting to work on a startup together:
- How are you going to split equity among the co-founders? This will be codified in a share purchase agreement when you incorporate.
- Is each founder’s equity ownership in the company subject to vesting based on continuing to work on the business?
- What are the roles and responsibilities of each member of the founding team?
- What time commitment is expected out of each co-founder? Will you impose any constraints on outside commitments, like moonlighting at another company?
- How will you make key decisions for your business? Majority vote? Unanimous vote? Will some decisions be solely in the hands of the CEO?
- What assets or cash will each co-founder invest into the startup at the start?
- Under what circumstances will you consider selling the business?
- Are there any potential issues with intellectual property rights claims by past and current employers? You may want to seek legal advice and have your employment contracts reviewed by an attorney if you are working in a competitive or overlapping space as your employers, past or present.
Chances are, if you don’t have the difficult conversations around these important questions with your co-founders before you get started, your startup will likely fail for the reason that a majority of startups fail: co-founder disputes. It is only in the rare cases where a startup is a huge success — like Facebook and Snapchat — that the investors will be willing to ignore unresolved co-founder equity disputes and other legal issues.
Capbase makes it easy to incorporate your company, divide up equity with your co-founders and set vesting schedules for share grants.