Tag Archives: co-founders

Saks Does Not Take Restricted Stock

It’s no secret that a good founder team is an essential step for a successful startup venture. You hope that your co-founder has the mental toughness to stay strong through the bootstrapping process where short-term milestones typically go unrecognized and bank accounts dwindle. But what about your co-founder’s wife, husband, girlfriend or boyfriend?

Your Partner’s Partner

While it’s difficult for your co-founder to maintain course, it’s even more challenging for your co-founder’s significant other to continue “believing in the dream” and remain on board with the startup because:

(1) No matter how many times your co-founder explains it, the significant other can’t visualize the startup’s concept and/or monetization strategy;

(2) Like you, your co-founder is smart and can probably seek out and land a “real, paying job” (the significant other’s words, not mine); and

(3) During your startup’s bootstrapping period, 4,000,000 shares of your startup’s restricted stock won’t purchase that Prada Soft Calfskin Leather Satchel at Saks , or more importantly, put food on the table.

End of the Beginning

Your co-founder can only say “we’re almost there” so many times before his or her significant other gets restless and pressures your co-founder to find an immediate-cash-flow-positive opportunity. Once this occurs, it’s likely only a matter of time before your co-founder does.

Even if your startup put its founders on a vesting schedule, the loss of momentum from losing a co-founder can still be painful. While you can try to poach a founder from the 37signals Job Board, it won’t be a quick recovery. If you lose a portion of the team you can’t replace in a timely manner, the startup may be over.


I’m not suggesting startups should run background checks on prospective founders’ significant others. Rather, co-founders should simply realize that their partner’s partner matters.

And if your startup has significant others that stay on board, thank them. Repeatedly.

The Funded Founder Institute Posts “Class F” Startup Documents

I got a tip from @Pietari that another set of startup documents were released today. The Funded Founder Institute just released a very founder-favorable set of startup documents centered around “Class F Common Stock.”

The Class F Common offers founders various protective provisions such as:

-2 to 1 Board votes per founder relative to non-founder board members
-10 to 1 share votes relative to regular common shares
-Monthly vesting with no cliff
-Approval rights on new investments, liquidity events, increases to Board size, etc.

Why did the Institute create Class F? They answer this question on their website (www.founderinstitute.com):

Since the internet bubble burst, a number of enhanced protective provisions have been introduced into preferred stock. As an example, “participating preferred” has become commonplace since the last crash. Meanwhile, there have been comparatively few advances to protect founders, who are forced to accept historically bad investment terms and being terminated from their companies by investors in the current economic environment.

They also go on to claim:

Class F is [the] most founder-centric shares created to date, including more generous than the infamous founder agreements of Larry and Sergey at Google. Companies in the Institute also have a warrant that requires permission from the Institute when a founder is removed from the Board of Directors, or the company will suffer a financial penalty.

The set of startup documents include the Certificate of Incorporation and the Stock Purchase Agreement, along with Institute-specific Founders Agreement and Warrant. Check them out here.

Enthusiasm is Not a Substitute for Caution

This morning was my son’s first day of school and he was extremely excited to get going. In fact, he would have ran across the street to his school without looking if I hadn’t stopped him. His elation overtook his ability to evaluate peril. This reminded me of how entrepreneurs can rush into a startup without taking the time ascertain and address potential issues.

For example, co-founders can let their passion and enthusiasm for their startup (and trust in their co-founder) substitute for practices that will protect and enhance both them and the startup company. I wrote an article about issues co-founders should discuss titled “Keep Your Startup Co-Founder Closer.” Check it out if you haven’t already.

Why Your Startup’s Founders Stock Should Vest Over Time

If your startup company launches with more than one founder and your startup plans to eventually be acquired or seek venture funding, your startup’s founders stock should vest over time according to a vesting schedule.

Founding teams might not stay together. And having a missing founder or two with a nice chunk of your startup’s common stock is not a scenario your startup wants when it comes time for an acquisition or venture capital financing.

So instead of the founders getting all their shares of common stock on Day 1, the founders get their stock according to a vesting schedule. The standard vesting schedule for startup companies is four years with a one year cliff and monthly vesting thereafter until the founders reach 100%. The one year cliff means that the founders do not get vested with regards to any common stock until the startup’s first anniversary. Thereafter, the founders get vested every month at an amount equal to 1/48th of the their total common stock.

If a founder leaves before the startup’s first anniversary, the founder leaves without any common stock. If a founder leaves after 15 months, the founder will have 31.25% of his common stock vested (25% after the first year, plus the 2.083% vesting each month for 3 months). Thus, the missing founder leaves the startup with much less shares than if the founders stock had vested immediately. This makes it easier to get the necessary approval (and other issues) to go forward with an acquisition or venture capital financing…not to mention allow you to spend that repurchased equity to new hires/founders.

Keep Your Startup Co-Founder Closer

Sun Tzu is generally credited for coming up with the phrase, “Keep your friends close, and your enemies closer.” He obviously never launched a startup and got shafted by a co-founder.

Entrepreneurs often believe their startup company faces legal threats from only external sources. And that’s a big mistake. Instead of worrying solely about some 3rd-party stealing your business idea or a “slip and fall,” your startup company’s top legal priority should be the reduction of its internal legal threats: co-founder disputes.

You can start by examining every aspect of the co-founder relationship. Your startup company could be ultimately doomed by a co-founder dispute, as even small disagreements can systematically erode the core of your company. Therefore, at the earliest time possible, sit down with your co-founder(s) and talk about issues like:

(1) the goals each of you have for the startup;
(2) the goals each of you have for yourself;
(3) duties, job descriptions, and hour commitments;
(4) who pays for what;
(5) who gets paid first and why;
(6) what happens if one of you wants out;
(7) what happens if one of you wants to sell the company, raise capital, or end it;
(8) what happens if one of you gets disabled or dies;
(9) what happens if things take longer than expected; and
(10) whether launching other startups, i.e. “moonlighting,” is ok.

This is not an exhaustive list of topics and by no means whatsoever will such discussions be easy. If it is easy and everything sails through without a hitch, someone’s holding back and you’ve all wasted your time. And for the love of high-speed internet and all things Web 2.0, do not think being friends or relatives reduces the need for these difficult and/or awkward conversations. In fact, if your co-founder is a friend or relative, that should trigger even more issues and discussions. Because now you have more to lose than just a company and your (or someone else’s) money.

After you have discussed everything that needs to be discussed, DOCUMENT-DOCUMENT-DOCUMENT. Make sure your startup company documents reflect all of your discussions. Don’t leave anything out just because you and your co-founders already talked about it. Take nothing for granted because memories will inevitably differ.

Once you have discussed and properly documented your co-founder relationships and thereby protected your startup company’s core, then you can focus on external legal threats.

Why Good Communication with Your Partner is Essential from the Start

Today I’ll get right to it: You need to have good communication with your partner from the start or else you’ll fumble your initial corporate documents.

For example, if a multiple-owner corporation’s bylaws are less than 7 pages, that tells me the corporation’s co-founders did not have enough discussion about how their corporation should be managed, operated, transferred, sold, or liquidated. Or worse, they did have the requisite discussion but failed to implement their discussion into their corporate documents.

Since most startup company co-founders are entering into a venture with each other for the first time, the natural tendency is to avoid anything that may rock the boat. Who wants to squabble with their partner from day 1? Alternatively, enthusiasm and optimism for the new venture precludes the co-founders from discussing negative issues. Who wants to talk about “failure” when you are just starting out, right?

Both approaches have negative consequences for your initial corporate documents. Not wanting to rock the boat and unwillingness to talk about negative issues will prevent your corporate documents from becoming a comprehensive set of rules for your startup company. And when something happens with your startup company, your corporate bylaws may not be of any help.

So lay it all out on the table from the start. Discuss what should happen if one of you gets an offer to sell your shares. Talk about your respective roles in the corporation and how your corporate documents should reflect and protect such roles. And then implement your discussions into your corporate bylaws. Not only will such frank discussion help ensure your initial corporate documents better fit your startup company, but it will also lay the foundation for future open communication between you and your partner.