Big News: FounderDating is joining OneVest to build the largest community for entrepreneurs. Details here
Latest Notifications
You have no recent recommendations.
Name
Title
 
MiniBio
FOLLOW
Title
 Followers
FOLLOW TOPIC

Question goes here

1,300 Followers

  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur

Founders legal agreement � acceleration and anti-dilution

I?ve been reading about the set of legal documents during the formation of
a startup, specifically the founders agreement and wanted to get the team?s
opinion about a couple of topics.
I?m interested to hear your opinion (good/bad), how important it is, how
common it is and whether there are better alternatives.

The topics are:
1. Acceleration of shares in case of involuntary termination ? in several
places founders have added a clause stating that in case of involuntary
termination their vesting will be accelerated by a certain period of time
(e.g. 6-12 months). This applied only for the founding team.
2. Anti-dilution clause ? protect founders that leave (or let go) the
company from the board immediately issuing and allocating additional 10M
shares (by doing so they significantly dilute the former founder?s share).

Thanks!
Shlomi

17 Replies

Jacob Kojfman
0
0
Jacob Kojfman Entrepreneur • Advisor
Experienced technology and corporate lawyer, focusing on SAAS

Hi Shlomi,

I practice corporate law in Canada for tech companies.

We don't have vesting of shares usually for founders.  Usually, there are
clawback provisions so if a founder/employee leaves, depending on the terms
of their employment agreement or shareholder's agreement, that
employee/founder may have to gift/sell back to the company the shares.

For options, some employment agreements call for an acceleration of options
if a founder is terminated by the board.  This is usually to act as a
disincentive for the board to make a wholesale change.

Depending from whose perspective it is:  from the company's perspective,
acceleration clauses for departing members are not good. It leaves a whole
bunch more shares floating around with someone who is not involved in the
work needed to make the company a success. From the founder's perspective,
it's a great deal for them.

As for the anti-dilution clauses, even from the company's perspective, it
is not good to just have shares floating about.  From a good governance
point of view, the director's have to justify why they issued the shares.
If it is because the company needed the capital, then the dilution of the
founder is an unfortunate side effect.

Regards,

jacob

On Wed, Jan 23, 2013 at 3:10 PM, shlomi.dinoor <shlomi.din...@gmail.com>wrote:

Cedric Dussud
0
0
Cedric Dussud Entrepreneur
coding

I don't have any direct experience with this, but I've heard of some companies taking a slightly different approach.
Instead of acceleration of shares the agreement stipulates that the company buy some portion of the unvested shares for cash. I think it's more often done when there's a vesting cliff in place so that the founder gets something if he/she is terminated in the first year. The advantage is that the company isn't weighed down by shares owned by someone no longer associated with them.

Date: Wed, 23 Jan 2013 15:47:23 -0800
Subject: Re: [FD Members] Founders legal agreement ? acceleration and anti-dilution
From: kac...@gmail.com
To: shlomi.din...@gmail.com
CC: [removed to protect privacy]

Hi Shlomi,
I practice corporate law in Canada for tech companies.  

We don't have vesting of shares usually for founders.  Usually, there are clawback provisions so if a founder/employee leaves, depending on the terms of their employment agreement or shareholder's agreement, that employee/founder may have to gift/sell back to the company the shares.

For options, some employment agreements call for an acceleration of options if a founder is terminated by the board.  This is usually to act as a disincentive for the board to make a wholesale change.

Depending from whose perspective it is:  from the company's perspective, acceleration clauses for departing members are not good. It leaves a whole bunch more shares floating around with someone who is not involved in the work needed to make the company a success. From the founder's perspective, it's a great deal for them.

As for the anti-dilution clauses, even from the company's perspective, it is not good to just have shares floating about.  From a good governance point of view, the director's have to justify why they issued the shares. If it is because the company needed the capital, then the dilution of the founder is an unfortunate side effect.

Regards,
jacob

On Wed, Jan 23, 2013 at 3:10 PM, shlomi.dinoor <shlomi.din...@gmail.com> wrote:

Ryan Jackson
1
0
Ryan Jackson Entrepreneur • Advisor
Founder at Paid

My two cents:

This is actually a very important subject.  I'll admit I don't have a ton
of experience here, but I have myself had to exercise these terms and help
those who had founder problems.

That said, as people often say, one of the largest reasons startups fail is
founder issues.  In this sense, it is during founder formation that you
should focus on the *company first*, rather than the standard founder-first
mentality.

My recommendation, a standard 4 year vesting schedule with a 1 year cliff,
no anti-dilution clause.  Here's my reasoning:

1.  A founder leaving in the first year is usually more detrimental than
they have been help.  Rewarding them for that seems foolish.

2. Depending on the amount of acceleration, you can be setting your company
back with investors because you have given away a significant part of your
company to someone who no longer contributes.

3. If you set your company up to buy back shares (at whatever point), this
price may seem silly up front, but choosing the wrong number (which is
easy) can leave you owing more money than your company has in the bank.

4. Standard dilution is a sign of growth.  Growth is good.

5. If you are worried that your cofounders will dilute the shit out of you
when you leave, my thoughts for you are:

- Why are you planning to leave?

- You should probably not start a company with anyone you don't fully trust.

Contracts and terms are only as good as those who keep them.  I'm not a big
fan of working with people who are optimizing for their departure.  I
understand that people make sacrifices to start a company, and sometimes it
doesn't work out.  But tough luck.  That's the startup risk, one that you
willingly sign up for.

Equity is not the same as cash and shouldn't be treated as such.  Equity
represents a long-term investment that drives long-term value for a
company.  Think about it.  Every (standard) party who receives equity, even
when it's all up front as is the case of investors, is expected to
contribute over a LONG period of time (aka the entire life of the company
pre-IPO/M&A).  Treat equity with founders the same.  It is meant to be a
long-term incentive to adding/driving value to your startup.  So why a
cliff?  Mostly for the reasons above.  But frankly, it's all about
expectations up front.  You want to incentivize everyone (not just
founders, but employees, investors, partners, advisors, etc.) to contribute
at least a minimum to your company.

And if you are that person considering leaving a founding team, as all my
investors have told me and my peers: "Just leave."  If structured correctly
up front, no single founder is entitled to money or IP, as it belongs fully
to the company.

Best,
->Ryan

How do you chat? http://optionize.com/nul1a

Shlomi Dinoor
0
0
Shlomi Dinoor Entrepreneur
Entrepreneur

Thanks guys for your insights, certainly good points to take into
consideration during the formation.

On Thu, Jan 24, 2013 at 5:23 PM, Ryan Jackson <ryanwjack...@gmail.com>wrote:

Daniel Coyle
0
0
Daniel Coyle Entrepreneur
Founder/Instructor at Coyle Outdoors

This is a great discussion for me.  I am currently writing a service for equity admission for a friend who wants 20% of the company I founded.   I do trust him AND I want to have as many eventualities addressed as possible to make any unexpected future issues less complicated to deal with.  I am reverse vesting him so that he will have enough ownership immediately so that the company will not be responsible for Worker's comp and salary/wages.  I am trying to write up a buyout clause for him as well.  Initially he was not excited about this (this is all very new to him, a l little more familiar to me.)  I don't want the company to be forced to allow him to keep his shares should things go south between us or if a bigger investor comes along after he is gone and is not comfortable investing with an inactive minority owner on the books (is this a reasonable concern generally?)  I had considered writing up an option for phantom shares as a replacement for equity shares he would lose in a forced buyout.Any thoughts are helpful.

Daniel Coyle
Owner - Coyle LLC541-760-0774PO Box 2389 Corvallis, OR 97339

 Date: Fri, 25 Jan 2013 20:11:15 -0500
Subject: Re: [FD Members] Founders legal agreement ? acceleration and anti-dilution
From: shlomi.din...@gmail.com
To: ryanwjack...@gmail.com
CC: cdus...@hotmail.com; kac...@gmail.com; [removed to protect privacy]

Thanks guys for your insights, certainly good points to take into consideration during the formation.

On Thu, Jan 24, 2013 at 5:23 PM, Ryan Jackson <ryanwjack...@gmail.com> wrote:

Tony Rajakumar
1
0
Tony Rajakumar Entrepreneur
Founder/CEO at SnugBoo

Protective provisions are very important - something first-time founders
often don't fully grasp the importance of. I would get a lawyer who deals
with exec employment agreements and they can frame something suitable. If
the company fades away, these provisions don't matter. But if it takes off
and the company becomes valuable, you'll be surprised at who pulls out the
knives and how fast they do so. It's human nature at its worst, but having
these provisions will save you much angst and legal fees.

However, it's a balance as well. What if the other founder isn't working
out? That's why 1 is usually a fair compromise between the two poles. 2 on
the other hand seems to be overly protective, and can lead to negative
effects.

Also, keep in mind that professional investors will as part of an
investment push to unwind these provisions, because they would like maximum
flexibility to replace people. So if you're planning for VC investment,
make sure you have enough leverage (and multiple term sheets) so that you
can push back with vigor.

--Tony

On Wed, Jan 23, 2013 at 3:10 PM, shlomi.dinoor <shlomi.din...@gmail.com>wrote:

Barnabe Geis
0
0
Barnabe Geis Entrepreneur

Hey, depending on at what phase you are in and before spending money on
legal agreements, I would encourage you to download and read the book
Slicing Pie and consider using a dynamic equity split, or "grunt fund".

Sent from phone
On Jan 28, 2013 6:01 PM, "Tony Rajakumar" <to...@snugboo.com> wrote:

Max Avroutski
0
0
Max Avroutski Entrepreneur
eCommerce, Software Developer, Usability, Marketing & Product Creation consulting services.

Dynamic equity allocation that mentioned in Slicing Pie book, is not
optimal for some ventures and requires a lot of management of timekeeping
and specific legal agreements that book doesn't provide, but at least it is
shining a light on this advanced way of equity allocation. I also think
that what described in the book also have some economics errors.

Dilution is not bad, unproportional dilution is. So, anti-dilution should
be set as proportional dilution between all equity holders - non alterable
in future agreement changes (without it once you are in minority they can
completely change agreement on you) and persist in M&A. Fired for listed
causes (no more vesting), fired without a cause a full vesting. Left - no
more vesting.

You should start with maximum pro founder agreement and if any VC would
offer to change the agreement then you have a decision to make whether to
alter the agreement or find another VC. VC that not smart enouth to ask you
to change founder's agreement if they need it is probably not a best VC to
go with, so having strong pro founder agreement shouldn't be an issue.

Should I put up a site that does a quiz, explains every provision of a
founder's agreement and creates that proper founder's agreement? Would that
be useful?

Max

Seth Kaplan
1
0
Seth Kaplan Entrepreneur • Advisor
Healthcare Technology Executive, Product Manager, Enterprise Architect, IT Strategist and Intrepreneur

If you're joining a company you can ask for a "look-back" too.  It's
protects you in the event your shares become diluted just before a big sale
or big investment, for example.  Tell your lawyer you want a 12-18 month
look-back. That means that if the company sells for more than your stock is
worth at the time you acquired it, you get the difference.  It prevents
asshole partners/investors from using their majority to dilute you just so
they can sell of your shares.  The point of 12-18 months is because most
investors tend to lose interest after a couple of months if they can't get
what they want - rarely will an investor hang out for over a year for your
20%.  Cold feet is more likely.  So you're protected.

--
Seth Kaplan | shttp://www.linkedin.com/in/sethkaplan>[image:
Twitter]<http://twitter.com/superflytnt>[image:
Facebook] <http://www.facebook.com/kickme>

Max Avroutski
0
0
Max Avroutski Entrepreneur
eCommerce, Software Developer, Usability, Marketing & Product Creation consulting services.

Ryan,
you are way off on many things here.

1)
"I'm not a big fan of working with people who are optimizing for their departure." - as long as those people do more than just "optimizing for their departure" but actually contribute then it's a pity that you don't understand them. Unless it's a small or family owned or lifestyle or non-profit venture then every founder should be optimizing for exit because sooner or later he/she will exit or will be pushed off. Only few very talented founders can grow themselves with the company's needs for them and still be fulfilled working there after some years. So don't count on working there if it's not one of the few mentioned above; count on exit or you will be carried out when it becomes mature company or bankrupt.

2)
"...people make sacrifices to start a company, and sometimes it doesn't work out.? But tough luck.? That's the startup risk, one that you willingly sign up for." - In most cases "willingly sign up for" means you were stupid enough to signup for bad deal and if you were smarter you would have negotiated a better deal or found another deal.

?I was also stupid to signup for some things in the past and then I learned on my mistakes and now I don't make the same mistakes. [I make other stupid mistakes. :) Just not as often.] Just because there is a risk involved doesn't mean that you have to risk everything all the time, besides smart people work on minimizing their risk of starting a company like thinking about what can go wrong and how it could be mitigated.

3)
"Every (standard) party who receives equity, even when it's all up front as is the case of investors, is expected to contribute over a LONG period of time (aka the entire life of the company pre-IPO/M&A). " - investors that buy equity are NOT obligated by contract NOR expected by social norms to buy more equity or continue to contribute in other ways, unless it's some very weird or rare arrangement.

Anyway, don't want to continue picking on where else you are wrong here. I will just set a record straight.

1)
"Risk" in a new venture is in venture succeeding and should not be in loosing all or large part of your cash or "sweat equity" investment in the venture while others absorb the value you loose.
Therefor, leaving your prosperity to goodness of people is just stupid.
At a sale of the company, would you dilute out your bastest best friend so that you could get more equity that you absolutely need, if you legally could, in order to pay for ransomed or cancer treatment for your mom or dad that would save them? If you wouldn't do it, do you think that your friend wouldn't ?
That is why you should always get it in the contract.

Anyway,
2) A lot of founder agreements are bad because they copied over from completely different venture by lawyers that don't know much about the venture or economics. Founder's agreement will change depend on many specifics of a business and particular founder's negotiating ability.

It's 2:30am, I am too tired to explain why but here it is, if you ask, then I will explain.

The generic that should be a starting point is: 2-8 years (depending on venture) vesting on monthly or quarterly bases after one month cliff aka "free month". Anti-dilution set as proportional dilution between all equity holders - non alterable in future agreement changes and persist in M&A. Fired for listed causes (no more vesting), fired without a cause a full vesting. Left - no more vesting.

That way if some one have to quit 10 month after investing their work into a venture they don't loose everything, but don't own too much that any VC will complain.

So, in a team of 4 initial founders with equal equity and no monetary compensation if one quits after 10 month of 4 years vesting with one month cliff and 20% set aside for employes and advisory, he only got ~ 3.75% at that time, with 3 round of funding in the next 3+ years his share may be ~ 1.78% or less. Should a family of a guy that invested 10 month of his life into your venture and was killed by a drunk driver and left 5 kids get nothing? (forget for a moment whether or not he had insurance)

You should start with maximum pro founder agreement and if any VC would offer to change the agreement then you have a decision to make whether to alter the agreement or find another VC. VC that not smart enouth to ask you to change founder's agreement if they need it is probably not a best VC to go with, so having strong pro founder agreement shouldn't be an issue.

Now it's 3am. Maybe I put an app that does a quiz and creates proper founder agreement.

Max

--- On Thu, 1/24/13, Ryan Jackson <ryanwjackhttp://optionize.com/nul1a

On Thu, Jan 24, 2013 at 1:12 PM, Cedric Dussud <cdus...@hotmail.com> wrote:

Join FounderDating to participate in the discussion
Nothing gets posted to LinkedIn and your information will not be shared.

Just a few more details please.

DO: Start a discussion, share a resource, or ask a question related to entrepreneurship.
DON'T: Post about prohibited topics such as recruiting, cofounder wanted, check out my product
or feedback on the FD site (you can send this to us directly info@founderdating.com).
See the Community Code of Conduct for more details.

Title

Give your question or discussion topic a great title, make it catchy and succinct.

Details

Make sure what you're about to say is specific and relevant - you'll get better responses.

Topics

Tag your discussion so you get more relevant responses.

Question goes here

1,300 Followers

  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
Know someone who should answer this question? Enter their email below
Stay current and follow these discussion topics?