Startup founders must make many decisions during the formative stages of their company. They decide how to structure their venture and divide the ownership. How they value the equity stakes that they claim in the new venture is somewhat arbitrary in the pre-revenue days and presumes that the founders understand the relative value of their contributions to joint endeavor.
In a recent conversation with Sean Murphy, a strategic marketing consultant in Silicon Valley, attorney Pete Tormey discusses these important financial decisions that startup founders face and how they affect the harmony of the startup organization both at the time of the decision and long-term. Topics they cover include:
- Issuing and dividing stock: The challenge of distributing stock and valuing the
contribution of the founders at a time when they may not feel each other has contributed
- Defaulting to an equal split may not support founder harmony,
- Making stock available for later arriving “founders” who show a real ownership interest.
- Capitalization table: Protecting your company for future investors with a clear
capitalization table that is transparent about your relationship to early friends and family investors. Avoid side deals or dangling arrangements with unresolved terms that are not reflected in the “Cap Table”.
- Protecting equity with written agreements: All founders should have employment agreements, in writing. Terms should include:
- Performance basis for firing a founder.
- An exit strategy from the company for the founder that details how stock shares are to be handled.
- A stock vesting schedule or restricted stock option plan so the company does not lose control to a founder no longer involved with the company.
Listen to the full conversation between Pete and Sean. You won’;t want to miss their valuable legal and business insights based on over 25 years working in Silicon Valley.