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Is there basic co-founder paperwork to consider?

I am wondering if anyone here has idea about what paperworks to consider in bringing on a co-founder when starting off on a business. Kindly share your ideas or experience with me. Thank you.

6 Replies

Chicke Fitzgerald
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Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
I recommend that you read Slicing Pie and first come up with a list of milestones that matter to the success of your business. Equity must be tied to things that move the needle, whether for a co-founder or a key employee or board member.

Creating that culture of action versus just a culture of motion is essential to an early stage business' success.

First you must have an operating agreement that lays out how voting rights work and in which cases you need a majority of the share/unitholders to agree. You must also have a documented capitalization table, so that as you talk to potential key contributors about equity you can show how you are valuing the company today.

Second, you need an employment agreement that outlines any combination of cash, revenue/profit sharing and equity, but without the clear delineation of the milestones, you are setting yourself to face trouble down the line. Time based equity simply is not enough of a protector for a founder.

It is best to have an attorney draft an agreement, but before they can you have to decide on what basis to grant equity. It isn't enough just to agree that you are going to work together with the right skill sets.

I've been in a situation where my co-founder and I were putting in equal cash, but I was doing the bulk of the day to day work. I didn't get sweat equity for that on top of my cash investment and that ended up ruining a long friendship and nearly destroying the business as I tried to figure out how I was going to get the cash to buy her out. I eventually did raise money from an angel to buy her out, but we spent a lot in attorney fees at that point to dissolve the partnership. It was the loss of friendship that had the greatest impact on me, not the money, but I bring that up, as you may think you are avoiding cost to try to self-document, but I don't recommend it.


Joe Albano, PhD
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Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
What you ultimately want is an operating agreement - drafted by a lawyer. You want it sooner rather than later. You want it to be specific to your situation and the way that you and your partner(s) want to work together, not a fill-in-the-blanks form you get out of a book or online. Slicing pie is a great starting point for the conversation that you need to have ... and it is the conversation and the agreement you ultimately reach that is important, not the underlying model.
Chicke Fitzgerald
0
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Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
Joe - I totally agree with you that the Operating Agreement is essential, but most attorneys don't help entrepreneurs understand the dangers of just a flat split of the company (50/50 or otherwise).

And speaking as someone who lost my company, despite having an operating agreement and over 40% ownership on paper, unless you have the "real" agreement for how things are going to work with your co-founder, it can go sideways fast.

At the beginning when everything is rosy between co-founders, a simple time based vesting of equity seems logical and even fair.

But it is smarter to have the basis for the operating agreement be milestone based. Slicing Pie is the smartest approach that I have seen to date on ensuring that equity is truly equitable.
Joe Albano, PhD
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Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
Chicke - What you are talking about is what we call the "while we're still friends" conversation - and a big part of it is what's going to happen when things don't go according to plan - because they won't.

You are absolutely correct that the agreement (how partners and others work together and treat each other) is MUCH more important than the agreement (the piece of paper you sign).

The implementations of the Slicing Pie model that I have seen base equity on contribution of money or time (effort). That can lead to some perceived inequities. For example (based on a true story - VASTLY oversimplified) I write some code that code that doesn't work - it takes me 4 weeks. You rewrite the code (using none of my work as a base) so that it works and it takes you a week. I own 80% of the business and you own 20%.

Most readers will look at that example and say "but that's ridiculous". I work with founders all the time ... and this is the stuff that derails companies and friendships.
Chicke Fitzgerald
0
0
Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
That is why the milestone (commercial grade working code) is so important. It isn't the passage of time. That is why I never sign time and materials agreement for coding. If it doesn't work, it is worth nothing.
Apeh Omede
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Apeh Omede Entrepreneur
Researcher, Teacher, Speaker and Blogger. Student at University of New England, Australia
Thank you very much, everyone. Your contributions have made my work easier.
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