lawyer

How to Avoid Fistfights with Co-Founders: Founder Equity Split Suggestions

Fistfights with Co-Founders can be avoided!  Here are some tips for founding your company with partners, such that later on, when things get complicated (like founders quitting, etc.), ya’ll don’t kill each other.   Nothing feels more frustrating than a founder that quits, and takes a bunch of stock with him….  A big benefit of this method is also: many VCs will prefer this type of structure (vesting)!  And.. the IRS might prefer it too… so, here goes!

  1. First, decide who is bringing “value” to the company at this point… (like who is bringing ‘the idea’, or ‘some tech’, or contributing ‘some gear’, or contributing ‘some money’).  If nobody is bringing anything, skip to step 3.
  2. Set aside 10-30% of stock to give to people who ‘brought something’ to the team…   Rule of thumb: 5% for money or stuff, 10% for tech, 20% for idea.
  3. Now take the remainder (90-70%) and set that aside to distribute evenly to the whole team for “work on the business plan prior to formation”.
  4. Okay, now assign the remainder amount evenly with all founders (example 7 founders, 70% means 10% per founder).
  5. Next assign the ‘brought something’ extra stock to the given founders (example idea will have 30%, tech guy has 20%, and the rest have 10%).
  6. Agree on a vesting term (3 year, monthly vesting is common).
  7. Now, write a VERY short Memorandum of understanding with everyone’s name, the date, signature places, and most importantly the vesting terms.
  8. Pick a CEO!  (the 1 person who shall be the CEO and in the drivers seat!  All other roles could be identified too, but the CEO role is a must.).  It does not have to be the idea guys, but it’s nice if it is.

Here’s an example Memorandum (note: I’m not a lawyer, and this wasn’t written by one: use at your own discretion).  (names are made up, except mine)

Memorandum of Understanding

We, who plan to found company ______ each agree that when this founding occurs we will split the shares of the company as follows:
   Joe Smith:  30%, Whom we agree shall be the CEO of the company.
   Frank Toe:  20%
   Alan Man:   10%
   Harlan Beverly: 10%
   Sally Jenson: 10%
   Erin Klause: 10%
   Jessica Stower: 10%

We agree that these shares should have a vesting period of 3 years, whereby vesting happens evenly, monthly, over a period of 3 years.  the company shall have the right to any stock not vested in the event that any founder leaves the company (voluntarily or involuntarily).  We, agree that this vesting shall begin on this day ________.

Signed,
______________________________, Date ______________
______________________________, Date ______________
______________________________, Date ______________
______________________________, Date ______________
______________________________, Date ______________
______________________________, Date ______________
______________________________, Date ______________

That’s about it!

Now, get it done right, so that you don’t have to fight!

Later on, when you actually found the company (as in incorporate), this document will go away… and be replaced with real shareholders agreements and so forth.

Measuring Marketing: An Engineering Challenge.

Engagement is quite the word.  It means getting in touch, getting together, and the promise of a union.  To Marketers, this means getting attention.  In 2010, Marketers find Engagement to be their #1 priority.  But what will they do with this engagement?  How can we measure its effect.  Show me the money!

Engineers and Scientists have striven for hundreds of years to go about measuring things.  Measurement and observation are the keys to enlightenment.  Modeling comes next, followed by theory, and then sometimes law.  So why then do Marketers have so many theories, and so few models?  Where are the measurements?  The answer is troubling and disheartening.  Marketing, alas, is no science, yet science shall be its salvation.

My journey into Marketing through my new company Karmaback and beyond, is leading to answers we engineer-type business folks have sought for decades.  The struggle between marketing science and art WILL come to a head in our lifetimes, and maybe Karmaback will bring it there.

The $600 Billion question: does engagement lead to marriage?
E.g. can marketing lead to sales?

Engineers fear Lawyers… A Company’s First Steps are Easy

Fear: HOW DO I START A COMPANY? MANY Engineers freeze up with fear right here. They don’t realize just how easy it is to start a business these days. In Texas, everything can even be done online, and the legal part is really really simple. (NOTE: i’m not a lawyer, so do not consider this legal advice… side-note: see, even I’m afraid of lawyers).

Although this link has more detailed information and all the needed links, I’m going to try to make the process super simple in my own words.

1. Pick S-Corp or C-Corp. The only difference I can tell is that S-Corp does not double-tax dividends, but only allows investment by individuals. Most people should choose C-Corp if they plan to be invested in , and S-Corp if they are not. Don’t fret… you CAN change it later by reincorporating.

2. File appropriate form online (in Texas, that is here): http://www.sos.state.tx.us/corp/sosda/index.shtml (costs $300, so make sure your business name is unique, a simple search is available same site!)
a. Choose some amount of stock that is big enough, but not too big. I chose 10,000,000 shares to start at par of $0.001.
b. Must have at least 1 director (can be same person throughout the document).

3. Get EIN from IRS (this is needed to file taxes, which is the ONLY requirement to continue as a company): http://www.irs.gov

4. File for state tax if appropriate. Texas is here: http://www.cpa.state.tx.us/taxpermit/

5. Enjoy being a company.

Its that easy. Now that you are a company, you might want to issue some shares to yourself. If you do, make sure you file an IRS 83-b form within 30 days. http://www.fairmark.com/execcomp/sec83b.htm

As for giving yourself stock, I recommend it! And I recommend you get this stock in exchange for services rendered (such as business plan preparation, time spent in meetings/formation, etc.). A good founder split is NOT EVEN SPLIT! If there are 2 people, it should be at least 51%/49%. In fact, I HIGHLY recommend that one founder (the one who is leading the effort) get 51%. Reasons: this avoids any future problems related to who is in control/direction of company, this prevents any number of founders from ganging up on the others, and this makes good sense if you want to raise money because that founder will have enough power (hopefully) to stay on the Board of Directors and protect the other founders interest.

A simple MOU can make the above reality. If you actually issue the stock (e.g. with a directors approval or other legal mumbo-jumbo), then you will need a lawyer IMHO.

Frankly, beyond this point of a company, having a decent (fairly priced) legal counsel for the company is a good idea. (Yes, my fear of lawyers kicks in now). But you DONT have to have one to form the company, and you SHOULD wait to get a lawyer until you raise money, or start negotiating contracts/earning revenue/making sales.

Best of luck, and sometimes, fear is not a bad thing… but lawyers don’t cost that much. I have found good legal advice as low as $200-$300/hour… don’t pay more email me/message me first, I’ll give you a few referrals.

–photo credits