OnStartups
One thing I have learned in my experience with startups is that if you are not careful, you are as likely to experience as many challenges with your co-founder(s) as you are with the business itself.
The following are some of the most important questions that should be resolved as early in the process as possible. In most cases, these issues only get more difficult over time.
Top 10 Critical Startup Co-Founder Questions
1. How should we divide the shares? There are actually multiple parts to this. Here, I’m primarily interested in the economic impact. Basically, the question is really simple: Who gets what percentage of the company? This question is often the most difficult to answer (and the right answer is rarely “divide them equally amongst the co-founders”).
2. How will decisions get made? This is often tied to the number of shares (from #1 above), but not necessarily. You can have voting and non-voting shares. You can setup a board. You’ll need to decide what kinds of decisions get made by the board, and which ones don’t. Common areas to address are decisions around capitalization, executive hiring/firing, share issuance (dilution) and M&A.
3. What happens if one of us leaves the company? Though it may seem like a bad idea to be talking about this when you’re starting the company – it’s not. In the evolution of any startup, there will be good times and bad times and there will always be times when one or more co-founders are simply not happy and not committed. You should decide how to treat this situation early (when it is easier and everyone is at least semi-rational). The last thing the company needs is a co-founder that is no longer engaged but is hanging around out of guilt or ambiguity.
4. Can any of us be fired? By whom? For what reasons? Yes, that’s right. Even co-founders can be terminated. Too many people mix the notion of being a shareholder in a startup and having an operating role. These two things should be thought of as somewhat separate and distinct. The company should have a mechanism for gracefully terminating the operating role of a co-founder if that’s the right thing to do. This is often not fun, but should be discussed up front.
5. What are our personal goals for the startup? Though this can change over time, its helpful to at least get a sense of what each of the co-founders wants to get from the company. If you have one co-founder that wants to build a sustainable business that is spinning off cash and run it forever and another one wants to shoot for high growth and some type of liquidity, it’s better to get that out in the open early and talk it through.
6. Will this be the primary activity for each of us? Lots of co-founder conflict can stem from misunderstandings around how committed everyone is. Will one of the co-founders be keeping her day job until the company gets off the ground? Will one be working on another sideline business?
7. What part of our plan are we each unwilling to change? Not all startups need to change their plans during the course of their evolution. Just the ones that want to survive and succeed. Having said that, there may be elements of the plan that you don’t want to change. This could be around the product being built, the market being addressed or some other aspect of the company. For example, if one startup is fanatically obsessed with wanting to create an enterprise software company, then friction may be created if the model needs to shift to a consumer product.
8. What contractual terms will each of us sign with the company? One of the best examples of this is a non-compete agreement. Will each of the co-founders be signing some sort of contract with the company (outside of the shareholder agreement)? If so, what will the terms of this be?
9. Will any of us be investing cash in the company? If so, how is this treated? It is very likely that one or more co-founders will be putting in some cash in the early stages of the company. It is critical to decide up front how this cash will be treated. Is it debt? Is it convertible debt? Does it buy a different class of shares?
10. What will we pay ourselves? Who gets to change this in the future? This can be a touchy issue. Risk tolerance varies by individual, and it is a good idea to factor this into determining the compensation plan for the founders. The issue can be clouded sometimes when one of the founders is investing significant cash into the enterprise. (Though in theory, it shouldn’t matter where the cash came from when determining comp. plans).
What have I missed? What other types of things should co-founders be discussing in the early days of a startup and getting clarity on? Would love to hear your thoughts. If you’re a first-time entrepreneur (or thinking about becoming one), I’d bookmark this page and save it for future reference if I were you. By keeping this checklist handy, you’ll save yourself and your co-founders a lot of angst.
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Posted by admin_onstartups.com admin_onstartups.com on Sat, Sep 16, 2006
COMMENTS
Great points, very important to discuss in the early days.
Some more things to think about ...
(a) Pre-money, before you get VC investment, you may be buying stuff for new company. Is this money considered to be an investment in the company (what accountants call paid-in capital) or will you claim it on an expense report and be reimbursed from the proceeds of your first round of financing? Either strategy is acceptable, but you need to give shares in return for paid-in capital in some fair way. Discuss this. Either way, DILIGENTLY KEEP TRACK OF EVERY DIME YOU SPEND. (And DON'T buy each other fancy dinners and fine wines and attempt to claim it on your expenses or treat it as paid-in capital.)
(b) What fraction of the company's ownership will you set aside for employee stock options? Why?
(c) Will you have the same terms of employment as your future employees? That is, are you and your partners willing to sign the same exact non-disclosure and non-compete agreements as you'll ask your employees to sign? If you will vest employee options over four years, are you willing to sign something agreeing to sell a pro-rated fraction of your shares back to the company if you leave before four years have run out? (Savvy employees will care about this issues.)
(d) When you work before having any investor money or revenue, you'll be working for cheap or for free. How much of this do you expect to be repaid as deferred salary, and how much is plain old non-reimbursable sweat equity? Hint: savvy VC's DETEST paying for deferred salaries with their investment capital.
(e) What non-disclosure or non-compete agreements does each partner have with former employers or any other company? Are any of your partners expecting to bring source code, customer lists, or other intellectual property to your new company from a previous employer? If so, does your new company have the unambiguous right to use that intellectual property? Do you all understand and agree on the hazards of misappropriating the intellectual property of previous employers?
(f) What is your attitude towards wealth? If you get VC investment,you'll have a big check in your hands (a wire transfer actually) and all of a sudden you'll find bankers, furniture salespeople, stockbrokers, and other people treating you like one of Warren Buffett's daughters. Ask yourselves, "are we capable of resisting this kind of flattery?" In other words, can you be suspicious when somebody tries to get you to use your investors' money to buy Aeron chairs or other symbols of conspicuous consumption "because you deserve the best?"
Some more things to think about ...
(a) Pre-money, before you get VC investment, you may be buying stuff for new company. Is this money considered to be an investment in the company (what accountants call paid-in capital) or will you claim it on an expense report and be reimbursed from the proceeds of your first round of financing? Either strategy is acceptable, but you need to give shares in return for paid-in capital in some fair way. Discuss this. Either way, DILIGENTLY KEEP TRACK OF EVERY DIME YOU SPEND. (And DON'T buy each other fancy dinners and fine wines and attempt to claim it on your expenses or treat it as paid-in capital.)
(b) What fraction of the company's ownership will you set aside for employee stock options? Why?
(c) Will you have the same terms of employment as your future employees? That is, are you and your partners willing to sign the same exact non-disclosure and non-compete agreements as you'll ask your employees to sign? If you will vest employee options over four years, are you willing to sign something agreeing to sell a pro-rated fraction of your shares back to the company if you leave before four years have run out? (Savvy employees will care about this issues.)
(d) When you work before having any investor money or revenue, you'll be working for cheap or for free. How much of this do you expect to be repaid as deferred salary, and how much is plain old non-reimbursable sweat equity? Hint: savvy VC's DETEST paying for deferred salaries with their investment capital.
(e) What non-disclosure or non-compete agreements does each partner have with former employers or any other company? Are any of your partners expecting to bring source code, customer lists, or other intellectual property to your new company from a previous employer? If so, does your new company have the unambiguous right to use that intellectual property? Do you all understand and agree on the hazards of misappropriating the intellectual property of previous employers?
(f) What is your attitude towards wealth? If you get VC investment,you'll have a big check in your hands (a wire transfer actually) and all of a sudden you'll find bankers, furniture salespeople, stockbrokers, and other people treating you like one of Warren Buffett's daughters. Ask yourselves, "are we capable of resisting this kind of flattery?" In other words, can you be suspicious when somebody tries to get you to use your investors' money to buy Aeron chairs or other symbols of conspicuous consumption "because you deserve the best?"
posted on Saturday, September 16, 2006 at 1:44 PM by Ollie
Dharmesh:
this is a pretty good list. One important issue that I would add is deciding who owns the IP. The answer should always be that the company owns 100% of the IP, but everyone needs to be on the same wavelength about this and invention assignment agreements need to be in place and patents need to be in the company's name.
-Andrew
this is a pretty good list. One important issue that I would add is deciding who owns the IP. The answer should always be that the company owns 100% of the IP, but everyone needs to be on the same wavelength about this and invention assignment agreements need to be in place and patents need to be in the company's name.
-Andrew
posted on Sunday, September 17, 2006 at 5:26 AM by Andrew
Dharmesh,
Absolutely! An associate of mine warns his clients against having "happy ears" on a sales call. Sometimes we hear what we want to hear and ignore what we don't want to hear. Asking the tough questions on the front side will prevent misunderstandings (or worse) on the backside. Incidentally, if you think about it, this list really makes sense any time we enter into any important agreement. I haven't had many "job interviews", but you should have seen the look on the CEO's face when I asked him, "OK. So what do I need to do to get fired?" during my interview and when I write an agreement with a partner, employer, or employee, I START with the termination clause.
A good rule of thumb might be, "Never say, 'We'll deal with that when it comes up.' Talk, decide, and make it part of the written agreement."
Absolutely! An associate of mine warns his clients against having "happy ears" on a sales call. Sometimes we hear what we want to hear and ignore what we don't want to hear. Asking the tough questions on the front side will prevent misunderstandings (or worse) on the backside. Incidentally, if you think about it, this list really makes sense any time we enter into any important agreement. I haven't had many "job interviews", but you should have seen the look on the CEO's face when I asked him, "OK. So what do I need to do to get fired?" during my interview and when I write an agreement with a partner, employer, or employee, I START with the termination clause.
A good rule of thumb might be, "Never say, 'We'll deal with that when it comes up.' Talk, decide, and make it part of the written agreement."
posted on Tuesday, September 19, 2006 at 6:42 AM by Rick Roberge
Wow, this is very thorough.
From casual observation, most partnerships seem to work because there is one dominant partner who drives the company with remaining partners who either sail along or get run out (leave) after a big fight.
From casual observation, most partnerships seem to work because there is one dominant partner who drives the company with remaining partners who either sail along or get run out (leave) after a big fight.
posted on Tuesday, September 19, 2006 at 8:54 PM by Dan Howard
First-time entrepreneur - Don't worry, I bookmarked the page.
I'd like to take a second and thank Dharmesh for this site... I must say I'm also very impressed with the level/quality of comments from outsiders, it's tough to create a blog with this level of participation. {stands and claps}
I'd like to take a second and thank Dharmesh for this site... I must say I'm also very impressed with the level/quality of comments from outsiders, it's tough to create a blog with this level of participation. {stands and claps}
posted on Tuesday, September 19, 2006 at 9:28 PM by Loud Is Relative
Thank you very much for this wonderful overview! {Stands and cheers!!}
posted on Wednesday, November 15, 2006 at 9:50 PM by Dave
Hi Dharmesh,
I am a First-time Entrepreneur. These 10 questions are the exact questions I went over with my co-founder. However, this happened over a time-period of 6 months. We could've saved a lot of thought & refinement had I gone over the list in the earlier stages.
I would like to add - my co-founder is a very long-time friend of mine, so in that sense we were fortunate. But we still had to go through the experience in order to test our commitment to the cause.
- Santosh
I am a First-time Entrepreneur. These 10 questions are the exact questions I went over with my co-founder. However, this happened over a time-period of 6 months. We could've saved a lot of thought & refinement had I gone over the list in the earlier stages.
I would like to add - my co-founder is a very long-time friend of mine, so in that sense we were fortunate. But we still had to go through the experience in order to test our commitment to the cause.
- Santosh
posted on Saturday, November 18, 2006 at 12:42 AM by Santosh Dawara
Good Stuff.....Very handy check list....
If the list had to shrink to one.....I'd say it should be to clearly understand the objective of each of the founder behind founding. It might need spending enough time to get beyond impressions and sometimes might even require navigation.
If the list had to shrink to one.....I'd say it should be to clearly understand the objective of each of the founder behind founding. It might need spending enough time to get beyond impressions and sometimes might even require navigation.
posted on Friday, December 01, 2006 at 10:24 AM by Prashant Bhaskar
The only one I might add is "Can the founders closely work together for an extended period without killing each other?" If one or more of the founders has some 'tic' the others don't like or if there's some odd feelings there, it might be overlooked in the rush to include people on the team who have a particular skill or piece of the puzzle. Working on a start-up together requires some real questioning as to whether you can really work together as a team to move things forward. You might have a great idea, but you'll never get it off the ground if you feel uneasy about working with each other.
posted on Tuesday, December 05, 2006 at 10:21 PM by rand
Hello,
Great points! One other question is about co-founder's paid-in capital. Typically, does the co-founder get stock that is owned (with no vesting schedule), from the point the paid-in capital is invested OR is it in the form of options that gradually vest? If these are options, then what mechanism is in place to get that capital re-imbursed in case the co-founder leaves (with or w/o cause), before any options are vested? Thanks
-som
Great points! One other question is about co-founder's paid-in capital. Typically, does the co-founder get stock that is owned (with no vesting schedule), from the point the paid-in capital is invested OR is it in the form of options that gradually vest? If these are options, then what mechanism is in place to get that capital re-imbursed in case the co-founder leaves (with or w/o cause), before any options are vested? Thanks
-som
posted on Sunday, February 25, 2007 at 11:53 AM by Som
Can one of you throw some light on finding co-founders?Some times one has a great idea and nurtures it for a while, does his/her due diligence research et.al and then scouts for a co-founder. Unfortunately once a person joins you as a co-founder he/she tends to change the vision and sometimes digress from what had been envisioned thus far.
How should such a situation be handled? Any takers?
How should such a situation be handled? Any takers?
posted on Friday, March 16, 2007 at 1:39 PM by AK
The list is spot on~ and the few suggested additions make it complete. All of these points should be outlined with your co-founders.
I've been experiencing this vision changing/team changing phenomena for 4 months now. Every new team member wants to change the vision a bit. Those that can't get on the same page end up leaving... but this causes terrible project delays. Strong leadership with strong focus is required. I have concepts with backing and still find it difficult to get a team to stay on the same page. It is also a challenge to get team candidates to sign a Nondisclosure Agreement with any type of consequences attached. What good is an NDA without consequences???
I've been experiencing this vision changing/team changing phenomena for 4 months now. Every new team member wants to change the vision a bit. Those that can't get on the same page end up leaving... but this causes terrible project delays. Strong leadership with strong focus is required. I have concepts with backing and still find it difficult to get a team to stay on the same page. It is also a challenge to get team candidates to sign a Nondisclosure Agreement with any type of consequences attached. What good is an NDA without consequences???
posted on Tuesday, May 22, 2007 at 1:57 AM by MM
On the lighter side( or maybe not ) one question to ask a co-founder in India - Is he planning to get married within the next couple of years ?
posted on Saturday, November 24, 2007 at 12:41 PM by binny bansal
Essentially what you start with is a partnership. Never give the partners equal shares of the company no matter if it's a crop., partnership or LLC. One person should have the majority of shares (ie. 51-49, 34-33-33 and so on). I have seen ugly lawsuits when the partner shares were split 50-50.
posted on Wednesday, November 28, 2007 at 2:55 PM by Dale
This list varies if there is an age gap between the co-Founders, since it leads to two different life styles and financial needs invariably. I would even say, partner with people your age group especially the fist time around.
Definitely do a background check, reference check and any other kind of check you can think of. The follow up questions after these should be done very maturely.
Play a couple rounds of monopoly and/or golf with them, just to see how they react to opportunity and adversity. There are of course other such ways to gauge this but don't partner without doing something outside of work with your partner as that may be revealing.
Finally, there will be a leap of faith involved. But a great partnership is a beautiful thing. When it works it’s really neat.
Definitely do a background check, reference check and any other kind of check you can think of. The follow up questions after these should be done very maturely.
Play a couple rounds of monopoly and/or golf with them, just to see how they react to opportunity and adversity. There are of course other such ways to gauge this but don't partner without doing something outside of work with your partner as that may be revealing.
Finally, there will be a leap of faith involved. But a great partnership is a beautiful thing. When it works it’s really neat.
posted on Friday, December 14, 2007 at 2:13 PM by Paroon Chadha
Hi, i would be very grateful if you could kindly advice me on the following matter. me and my friend have a small agricultural business. However, we are now planning to register our business to form a small company. However, my friend is now telling me that he want to have 51% of the shares and the remaining 49% is for me. Therefore, i would like to know how i will secure myself in the company given the fact that if he has 51% of the shares he will seems to be the majority.
posted on Tuesday, January 29, 2008 at 3:31 PM by shailesh
Generally, you cannot secure yourself with 49% of the shares.
People usually want 51% of the shares in order to have a controlling interest in the business. Anything that others do to secure themselves will limit his control. In most cases, 51% majority means 100% control.
But, if you really want to hash it out, you could write various things into the bylaws of the corporation (or other organizational papers) to require a super-majority, say 67% of the total shares, for the corporation to do things like issue more stock, change the bylaws and other things, like sell the company. You could also issue a different class of stock with special voting rights such that he owns 51% of the shares but you still have a 50-50 split of the voting rights. You could also create and issue stock to a separate, trusted third party such that nobody owns more than 49% of the business so everybody needs at least one other party to agree with them before accomplishing something. You could write into the bylaws that the Board of Directors will contain a set number of directors, say three, one of which could not be a relative of either of you and would have to be mutually agreed.
People usually want 51% of the shares in order to have a controlling interest in the business. Anything that others do to secure themselves will limit his control. In most cases, 51% majority means 100% control.
But, if you really want to hash it out, you could write various things into the bylaws of the corporation (or other organizational papers) to require a super-majority, say 67% of the total shares, for the corporation to do things like issue more stock, change the bylaws and other things, like sell the company. You could also issue a different class of stock with special voting rights such that he owns 51% of the shares but you still have a 50-50 split of the voting rights. You could also create and issue stock to a separate, trusted third party such that nobody owns more than 49% of the business so everybody needs at least one other party to agree with them before accomplishing something. You could write into the bylaws that the Board of Directors will contain a set number of directors, say three, one of which could not be a relative of either of you and would have to be mutually agreed.
posted on Tuesday, January 29, 2008 at 8:12 PM by Dan Howard
Very goods Point to keep in mind while forming partnership.
posted on Tuesday, September 23, 2008 at 6:48 AM by kanhaiya kale
Great bolg, very helpful information! Will appreciate recieving help with the following :
I am a tech person without any startup experience. I have developed a new technology (with patents applied for) that has a promising market. I plan to partner with some one experienced in the high tech startup business, preferably an ex-CEO, to start a company and seek venture capital to commercialize the technology. I am assuming that the new partner will be a co-founder of the company. What is the typical split of company ownership for such situations? Since I am the inventor of the technology, I am assuming that I will own major shares of the company. Also, when we involve additional personnel in the future, do we give them company shares? I am currently interviewing potential candidates for the partner and will appreciate getting your feedback on this.
Thank you,
Andrew
I am a tech person without any startup experience. I have developed a new technology (with patents applied for) that has a promising market. I plan to partner with some one experienced in the high tech startup business, preferably an ex-CEO, to start a company and seek venture capital to commercialize the technology. I am assuming that the new partner will be a co-founder of the company. What is the typical split of company ownership for such situations? Since I am the inventor of the technology, I am assuming that I will own major shares of the company. Also, when we involve additional personnel in the future, do we give them company shares? I am currently interviewing potential candidates for the partner and will appreciate getting your feedback on this.
Thank you,
Andrew
posted on Tuesday, November 04, 2008 at 7:04 PM by Andrew Smith
I'd say that there is no typical split for your situation. It all depends on the individuals involved.
Although you are the inventor of the technology, you will have to attract the ex-CEO partner that you plan to recruit and you will likely use a major portion of the ownership to do that. If he is well-known in the industry, he may be able to get offers from other startups, some which may be already funded, have a technology that is more fully developed and/or be able to pay him a significant salary. You will likely have to offer him enough ownership that he will prefer your offer to any others (while being able to live with the result yourself). In addition, once you get venture capital, the venture capitalists will want additional ownership. It all depends on how much you need him versus how much he needs you as well as how good an opportunity yours is versus what he can get elsewhere.
But, if you really want hard numbers, you might expect him to accept anywhere from 35% to 80% (leaving you with 65% to as low as 20%). This percentage will decrease a lot for both of you when venture capitalists become involved.
For additional personnel, it will depend on the time. You'll probably give them stock options or, possibly, restricted stock.
Although you are the inventor of the technology, you will have to attract the ex-CEO partner that you plan to recruit and you will likely use a major portion of the ownership to do that. If he is well-known in the industry, he may be able to get offers from other startups, some which may be already funded, have a technology that is more fully developed and/or be able to pay him a significant salary. You will likely have to offer him enough ownership that he will prefer your offer to any others (while being able to live with the result yourself). In addition, once you get venture capital, the venture capitalists will want additional ownership. It all depends on how much you need him versus how much he needs you as well as how good an opportunity yours is versus what he can get elsewhere.
But, if you really want hard numbers, you might expect him to accept anywhere from 35% to 80% (leaving you with 65% to as low as 20%). This percentage will decrease a lot for both of you when venture capitalists become involved.
For additional personnel, it will depend on the time. You'll probably give them stock options or, possibly, restricted stock.
posted on Wednesday, November 05, 2008 at 9:25 AM by Dan Howard
Very Interesting. My only rebuttal to such questions is these questions are valid for a startup which has made it big. In early stage, if you have such questions, might be one has not found the right co-founders. Starting up with others has to be based on trust
posted on Thursday, November 20, 2008 at 4:05 AM by KhannaRohit
This is not always true, especially if there are evil minded people in the team.
posted on Monday, December 15, 2008 at 9:07 AM by WebTime
No one has mentioned a shareholders agreement. It determines how a company will be owned, managed, dissolved, etc. It also captures many of the above items (only in more detail and it's documented!). Don't pass go without it!
posted on Monday, March 16, 2009 at 9:31 PM by Barry
I am working on a start-up and have the following questions:
At the moment we are just discussing and planning on trials if our ideas/innovations have interest in the market , checking if our product will make it good.
Since we are located in different time zones/geographies, we have regular phone-calls/chats and exchange lot of documents/ information/ideas etc.
(1) What should and what can one do to protect these ideas/ innovation? For ex: Who knows if the information is extracted from one and the others back-off and they could productize it. Basically want to be cautious though we have faith in each other.
(2) Does it make sense to register a company and then formally have agreements like non-compete, NDA etc?
(3) Does it make sense to bring up topics like:
(a) What role each of us is looking forward to in the company if we form one?
(b) Ask other important relevant questions list described here on the blog?
Thanks
At the moment we are just discussing and planning on trials if our ideas/innovations have interest in the market , checking if our product will make it good.
Since we are located in different time zones/geographies, we have regular phone-calls/chats and exchange lot of documents/ information/ideas etc.
(1) What should and what can one do to protect these ideas/ innovation? For ex: Who knows if the information is extracted from one and the others back-off and they could productize it. Basically want to be cautious though we have faith in each other.
(2) Does it make sense to register a company and then formally have agreements like non-compete, NDA etc?
(3) Does it make sense to bring up topics like:
(a) What role each of us is looking forward to in the company if we form one?
(b) Ask other important relevant questions list described here on the blog?
Thanks
posted on Sunday, March 22, 2009 at 8:31 AM by ew
(1) If it were me, I'd only protect the ideas with a non-disclosure agreement with a no-use clause. Maybe I'd also have a copyright assignment to make the copyright to all code to be shared by all. But, really, frankly, most people are skeptical enough that they wouldn't rip off your idea even if they knew and wouldn't want to maintain or even figure out how to build your code even if you gave them full access.
(2) Until you have money coming in, I wouldn't register the company. I'd recommend just getting boilerplate NDAs and other agreements off the Internet: even if they are flawed, you can fix them later when you have the money to do it. Others will recommend spending a bunch of money up front on lawyers and custom agreements: that's not my choice but it might be best for you.
(3a) Yes, it makes sense to discuss roles and expectations. A few hours should be enough.
(3b) Yes and no. If you follow all the advice on this blog, it would take you 10 years and 1 million dollars to do everything that makes sense. But, spending a few hours with each person to get a sense of their expectations, desires and demands, is sensible.
(2) Until you have money coming in, I wouldn't register the company. I'd recommend just getting boilerplate NDAs and other agreements off the Internet: even if they are flawed, you can fix them later when you have the money to do it. Others will recommend spending a bunch of money up front on lawyers and custom agreements: that's not my choice but it might be best for you.
(3a) Yes, it makes sense to discuss roles and expectations. A few hours should be enough.
(3b) Yes and no. If you follow all the advice on this blog, it would take you 10 years and 1 million dollars to do everything that makes sense. But, spending a few hours with each person to get a sense of their expectations, desires and demands, is sensible.
posted on Tuesday, March 24, 2009 at 11:24 AM by Dan Howard
Great article and great advice. As the founder of a new startup I have involved a friend in this new venture. While I hold the intellectual property and the entire concept, business model, etc was created by me, he has been there to bounce ideas off of and help me refine the concept. He is a talented salesman and I want to include him in the company but am unsure what role to give him. A partner makes sense but I have concerns about his role later on when we begin to secure VC funding. Since I am the sole proprieter (though no formal prorietership or corp is established), with no employees, is it better to make him say a VP of sales with me as CEO or a co-founder or partner with a small share, say 25%?
posted on Thursday, April 02, 2009 at 11:49 AM by Mark
I think that you are being too generous. If you really mean what it sounds like when you talk about bouncing ideas off of and refining the concept, I'd say that he's earned a nice dinner. Look: you appreciate his input but it's pay for play. If he is committed and makes some sales, then, yeah, offer him the VP of Sales.
posted on Friday, April 03, 2009 at 9:25 AM by Dan Howard
Wow, this was a great article. Thanks!
posted on Friday, April 24, 2009 at 3:44 PM by Jamie Varon - techVenture
From long experience, I think that you should "learn to fly with each other" before you work on a startup together.
Do some consulting, volunteering, a side project (like a little startup business for a friend) and learn how they work and what their approach to work is. Then you can learn if you really work well together.
In response to other comments, I'd recommend using warrants to reward an outside CEO you want to bring in. That way, you can continue to control the board.
Do some consulting, volunteering, a side project (like a little startup business for a friend) and learn how they work and what their approach to work is. Then you can learn if you really work well together.
In response to other comments, I'd recommend using warrants to reward an outside CEO you want to bring in. That way, you can continue to control the board.
posted on Saturday, April 25, 2009 at 11:54 AM by QuietType
If the CEO of any company Removes any one, There are lot of Jobs are there to work as a Freelancers.
posted on Wednesday, April 29, 2009 at 2:14 AM by Medical Tourism
Dear Johnson,
I saw your article at the Nature Bioentrepreneur and was wondering if you have some advice to the following issue.
I started a biotech business in march of 2007 with a Friend of mine while PhD students - we have it incorporated as an LLC. As we were both scientists, we brought in a MBA student as our CEO, with the same timeline that we had to finish. Now that we are finishing our PhD and our CEO his MBA, I will be forced to leave the company. I tried to negotiate staying in US because of the company, but as my scholarship was from my home-country, they didn’t accepted my offer and I’ll be forced to come back now after the completion of my PhD.
During this 2 years we had secured a state grant, and hired a posdoc working in our prototype under my supervision with recent great progress. We had also developed other patents (3-4) in addition to the one we filed and licensed from our university, which will be filed as soon as we secure VC investment - we are in due diligence right now.
As I will have to leave, we are looking for reasonable figures for the equity split that would not hurt the company. I’ll continue as a scientific advisor after leaving. Our timeline for commercialization and a possible acquisition/exit is in 18-30 months from now.
Me and the other PhD started with equal amounts of the shares, and the MBA is vesting 10% over 5 years.
Sorry for the huge question, with a lot of variables but any insight or reference where I could look for would be really appreciated.
I saw your article at the Nature Bioentrepreneur and was wondering if you have some advice to the following issue.
I started a biotech business in march of 2007 with a Friend of mine while PhD students - we have it incorporated as an LLC. As we were both scientists, we brought in a MBA student as our CEO, with the same timeline that we had to finish. Now that we are finishing our PhD and our CEO his MBA, I will be forced to leave the company. I tried to negotiate staying in US because of the company, but as my scholarship was from my home-country, they didn’t accepted my offer and I’ll be forced to come back now after the completion of my PhD.
During this 2 years we had secured a state grant, and hired a posdoc working in our prototype under my supervision with recent great progress. We had also developed other patents (3-4) in addition to the one we filed and licensed from our university, which will be filed as soon as we secure VC investment - we are in due diligence right now.
As I will have to leave, we are looking for reasonable figures for the equity split that would not hurt the company. I’ll continue as a scientific advisor after leaving. Our timeline for commercialization and a possible acquisition/exit is in 18-30 months from now.
Me and the other PhD started with equal amounts of the shares, and the MBA is vesting 10% over 5 years.
Sorry for the huge question, with a lot of variables but any insight or reference where I could look for would be really appreciated.
posted on Tuesday, June 02, 2009 at 3:32 PM by Laura
Nobody else has answered so I'll answer, even though you didn't ask me.
When you get venture capital, the talk about percentages doesn't really work out. The VCs will likely want you to issue private stock and that private stock given out over time to new VCs, new employees and what not. So, if you're not at the company while everybody else is, they, including the VCs, will earn more stock over time while you'll stay the same. The net result is that your percentage will decrease, probably a lot, over time.
I'd suggest that you try to remain involved in any way that you can, including working from your home country, either remotely (using something like Skype) or by opening a branch office or lab in your country. Don't settle for being a consultant or freelancer; be involved.
But, that said, the VCs will likely take 50% to 80% of your company. If you currently have 45% and the other PhD has 45% and the MBA has 10% of the remaining 20% to 50%, that sounds ok. That works out to 9% on the low side for you. But, like I said, if you aren't involved, that 9% might dwindle to 3-4% or even 1%.
Fact of the matter, nobody gets a guaranteed percentage.
When you get venture capital, the talk about percentages doesn't really work out. The VCs will likely want you to issue private stock and that private stock given out over time to new VCs, new employees and what not. So, if you're not at the company while everybody else is, they, including the VCs, will earn more stock over time while you'll stay the same. The net result is that your percentage will decrease, probably a lot, over time.
I'd suggest that you try to remain involved in any way that you can, including working from your home country, either remotely (using something like Skype) or by opening a branch office or lab in your country. Don't settle for being a consultant or freelancer; be involved.
But, that said, the VCs will likely take 50% to 80% of your company. If you currently have 45% and the other PhD has 45% and the MBA has 10% of the remaining 20% to 50%, that sounds ok. That works out to 9% on the low side for you. But, like I said, if you aren't involved, that 9% might dwindle to 3-4% or even 1%.
Fact of the matter, nobody gets a guaranteed percentage.
posted on Saturday, June 06, 2009 at 9:09 AM by Dan Howard
This is been a great resource for me when looking for advice on Small Business Star Ups. My business partner and I had discussions about most of the questions in the Top 10 Critical Start Up Questions blog post but never put anything down for them all. Our mistake! We are now in a position where my partner is leaving our Small Business to go back to school to complete his Graduate work. A few of the issues we are facing are:
1. we are 50/50 partnership LLC and are trying to figure out how we can let him leave and I can still own and run the business
2. we do have a few assets purchased by the company like our computers. We are not sure what happens to the computer he is using. I am not sure how it works if he wants to take the computer with him?
3. When he leaves what are my options for the LLC?
Any advice would be great! Thanks for the blog.
-Jon
1. we are 50/50 partnership LLC and are trying to figure out how we can let him leave and I can still own and run the business
2. we do have a few assets purchased by the company like our computers. We are not sure what happens to the computer he is using. I am not sure how it works if he wants to take the computer with him?
3. When he leaves what are my options for the LLC?
Any advice would be great! Thanks for the blog.
-Jon
posted on Tuesday, July 14, 2009 at 3:01 PM by Jon
He gives up all stock.
He gets a warrant to purchase 10% of the company at acquisition time.
His percentage of revenue declines 8% per month until it reaches 10% of revenue. After two years, the payments cease.
He gets a warrant to purchase 10% of the company at acquisition time.
His percentage of revenue declines 8% per month until it reaches 10% of revenue. After two years, the payments cease.
posted on Tuesday, July 14, 2009 at 6:01 PM by The Editor;
This is an awesome blog with quite impressive comments.
Having presided over several corporations as employee, and vice presidents I noticed some things that are very telling to what businesses make it and those that don’t. First thing is revenues. Always look to revenues first not venture financing. No one wants to invest in an untried possibly disruptive product or concept. Having revenues completes one of the areas of due diligence that your product or service actually does have a market. When you have revenues you take the pressure off needing that starved notion of Angel or VC funding early on. The information in this blog is right on, any startup for anything will have very little equity left if the startup is starved for income and seeks investor funding early on.
How does this all apply to a small business? First look to fund your company on the cheap with a lot of shares. Founders get paid from sweat equity and they are motivated through stock plans.
My recommendations:
1. Only use the C Corp with its common and preferred stock. It simply is the only style of company investors will invest in. The exception is an agribusiness startup, that you will also use the cooperative in the C Corp but again with common and preferred stock; and one raises capital the same way. The LLC is novel, but too hard to market member certificates.
2. Revenues first then seek investor funding.
3. Become an expert with the SBA. The resources for small businesses are immense. Did you know the SBA funds some Venture companies? Do you know who they are? Do you know how much you give up with these companies’ verses traditional VC’s? Did you know that if you are a wholesale manufacturer with 99 employees you are a small business?
4. Make sure of your market and show that with a pilot (small market) business plan. Another words, the biggest killer of any business is marketing too wide and losing contracts because you cannot grow too big, too fast. If you do take these massive contracts, you risk losing the whole company if something goes wrong. My advice establish your market first then get some capital behind the company so when it does become time to take on a substantial contract you already have the experience and the resources to handle that situation.
5. Get your companies Dun and Bradstreet rating up to snuff early on. This allows a company to establish lines of credit where you won’t starve when those big lurches come along in the business. You survive those lurches and grow with liquidity; you have done what 95% of all companies fail at. It is this top 5% I would advise founders strive for. Otherwise that other 95% is not a happy place to be. It is full of heartburn and sleepless nights.
6. Sweat equity first until revenues justify a paycheck. And yes it is an ethical question: what level of income is right for a founder when they own stock that can make them fabulously wealthy. And yes restricted stock always. Last thing you need in a startup is someone who takes the company with them if they leave. I guarantee you will be hating life sitting in your attorney’s office with the VC’s proposal in front of you, as this snag is reducing the equity in the company.
7. Make sure your IP is perfect (provisional patent’s, and NDA’s with liquidated damages clauses) and as said earlier in this blog, the company owns all of it. This is non negotiable. If a founder refuses to sign a NDA that is someone you probably cannot work with.
8. Remember the goal is to own enough founders stock that when the IPO happens you come out smelling like a rose. It is not about being a control freak and hording the assets of the company.
In conclusion, all companies basically start in the same path. All sole operators should incorporate early on to establish corporate lines of credit verses personal lines of credit. Look online for at least three complementing plans whether it is articles of incorporation or founders agreements and use them. When you make money through your gross revenues then seek to deal with your legal issues. If you are smart and did everything 99% right it won’t be too big a deal to straighten out the remaining legal issues.
I am willing to found with anyone. My personal belief is that with proper planning from the outset, and an unselfish commitment to the company (you leave your personal life out of it); I can work with just about anyone.
Cheers!
Having presided over several corporations as employee, and vice presidents I noticed some things that are very telling to what businesses make it and those that don’t. First thing is revenues. Always look to revenues first not venture financing. No one wants to invest in an untried possibly disruptive product or concept. Having revenues completes one of the areas of due diligence that your product or service actually does have a market. When you have revenues you take the pressure off needing that starved notion of Angel or VC funding early on. The information in this blog is right on, any startup for anything will have very little equity left if the startup is starved for income and seeks investor funding early on.
How does this all apply to a small business? First look to fund your company on the cheap with a lot of shares. Founders get paid from sweat equity and they are motivated through stock plans.
My recommendations:
1. Only use the C Corp with its common and preferred stock. It simply is the only style of company investors will invest in. The exception is an agribusiness startup, that you will also use the cooperative in the C Corp but again with common and preferred stock; and one raises capital the same way. The LLC is novel, but too hard to market member certificates.
2. Revenues first then seek investor funding.
3. Become an expert with the SBA. The resources for small businesses are immense. Did you know the SBA funds some Venture companies? Do you know who they are? Do you know how much you give up with these companies’ verses traditional VC’s? Did you know that if you are a wholesale manufacturer with 99 employees you are a small business?
4. Make sure of your market and show that with a pilot (small market) business plan. Another words, the biggest killer of any business is marketing too wide and losing contracts because you cannot grow too big, too fast. If you do take these massive contracts, you risk losing the whole company if something goes wrong. My advice establish your market first then get some capital behind the company so when it does become time to take on a substantial contract you already have the experience and the resources to handle that situation.
5. Get your companies Dun and Bradstreet rating up to snuff early on. This allows a company to establish lines of credit where you won’t starve when those big lurches come along in the business. You survive those lurches and grow with liquidity; you have done what 95% of all companies fail at. It is this top 5% I would advise founders strive for. Otherwise that other 95% is not a happy place to be. It is full of heartburn and sleepless nights.
6. Sweat equity first until revenues justify a paycheck. And yes it is an ethical question: what level of income is right for a founder when they own stock that can make them fabulously wealthy. And yes restricted stock always. Last thing you need in a startup is someone who takes the company with them if they leave. I guarantee you will be hating life sitting in your attorney’s office with the VC’s proposal in front of you, as this snag is reducing the equity in the company.
7. Make sure your IP is perfect (provisional patent’s, and NDA’s with liquidated damages clauses) and as said earlier in this blog, the company owns all of it. This is non negotiable. If a founder refuses to sign a NDA that is someone you probably cannot work with.
8. Remember the goal is to own enough founders stock that when the IPO happens you come out smelling like a rose. It is not about being a control freak and hording the assets of the company.
In conclusion, all companies basically start in the same path. All sole operators should incorporate early on to establish corporate lines of credit verses personal lines of credit. Look online for at least three complementing plans whether it is articles of incorporation or founders agreements and use them. When you make money through your gross revenues then seek to deal with your legal issues. If you are smart and did everything 99% right it won’t be too big a deal to straighten out the remaining legal issues.
I am willing to found with anyone. My personal belief is that with proper planning from the outset, and an unselfish commitment to the company (you leave your personal life out of it); I can work with just about anyone.
Cheers!
posted on Tuesday, July 21, 2009 at 10:02 AM by Chris
actually I have a question that is related to starting business with my friends, about being co-founder or not.
should the person who has the co-founder title have percentage of the company, as partner? or it could be just the person who participated in the establishment process before the company start work and added important value to the company, and works in the company as one of the directors?
Ill be thankful if you answer me as soon as possible.
should the person who has the co-founder title have percentage of the company, as partner? or it could be just the person who participated in the establishment process before the company start work and added important value to the company, and works in the company as one of the directors?
Ill be thankful if you answer me as soon as possible.
posted on Saturday, September 19, 2009 at 4:50 AM by Motea
actually I have a question that is related to starting business with my friends, about being co-founder or not.
should the person who has the co-founder title have percentage of the company, as partner? or it could be just the person who participated in the establishment process before the company start work and added important value to the company, and works in the company as one of the directors?
Ill be thankful if you answer me as soon as possible.
should the person who has the co-founder title have percentage of the company, as partner? or it could be just the person who participated in the establishment process before the company start work and added important value to the company, and works in the company as one of the directors?
Ill be thankful if you answer me as soon as possible.
posted on Saturday, September 19, 2009 at 5:00 AM by Motea
A title, even the "co-founder" title, is independent of ownership. Being called a "co-founder" is just like being called a "CEO": you might own 0%, 1%, 25% or 100% of the company.
Yes, it could be a person who works at the company as a director. But many directors have 0% ownership in the companies that they work for so being a director, even a long time one, even joining at or before the company was founded, doesn't mean that the person has ownership.
Yes, it could be a person who works at the company as a director. But many directors have 0% ownership in the companies that they work for so being a director, even a long time one, even joining at or before the company was founded, doesn't mean that the person has ownership.
posted on Saturday, September 19, 2009 at 10:03 AM by Dan Howard
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