COMMENTS
Great points, very important to discuss in the early days.
Some more things to think about ...
(a) Pre-money, before you get VC investment, you may be buying stuff for new company. Is this money considered to be an investment in the company (what accountants call paid-in capital) or will you claim it on an expense report and be reimbursed from the proceeds of your first round of financing? Either strategy is acceptable, but you need to give shares in return for paid-in capital in some fair way. Discuss this. Either way, DILIGENTLY KEEP TRACK OF EVERY DIME YOU SPEND. (And DON'T buy each other fancy dinners and fine wines and attempt to claim it on your expenses or treat it as paid-in capital.)
(b) What fraction of the company's ownership will you set aside for employee stock options? Why?
(c) Will you have the same terms of employment as your future employees? That is, are you and your partners willing to sign the same exact non-disclosure and non-compete agreements as you'll ask your employees to sign? If you will vest employee options over four years, are you willing to sign something agreeing to sell a pro-rated fraction of your shares back to the company if you leave before four years have run out? (Savvy employees will care about this issues.)
(d) When you work before having any investor money or revenue, you'll be working for cheap or for free. How much of this do you expect to be repaid as deferred salary, and how much is plain old non-reimbursable sweat equity? Hint: savvy VC's DETEST paying for deferred salaries with their investment capital.
(e) What non-disclosure or non-compete agreements does each partner have with former employers or any other company? Are any of your partners expecting to bring source code, customer lists, or other intellectual property to your new company from a previous employer? If so, does your new company have the unambiguous right to use that intellectual property? Do you all understand and agree on the hazards of misappropriating the intellectual property of previous employers?
(f) What is your attitude towards wealth? If you get VC investment,you'll have a big check in your hands (a wire transfer actually) and all of a sudden you'll find bankers, furniture salespeople, stockbrokers, and other people treating you like one of Warren Buffett's daughters. Ask yourselves, "are we capable of resisting this kind of flattery?" In other words, can you be suspicious when somebody tries to get you to use your investors' money to buy Aeron chairs or other symbols of conspicuous consumption "because you deserve the best?"
Might I also add:
11) Do you have an exit plan?
This is related to item 5. (" What are our personal goals for the startup?"). This ensures that the founders are aware of the time and money they are willing (and able) to commit.
If the goals are not reached in a certain timeframe then the hard decision can be made as to what will happen to the company if it does not reach a certain level of profitability or break-even in a certain time period.
The decision to wind up the company will be extremely painful considering the time, money and passion contributed by the founders. Having an exit plan can minimize the emotion if the company does need to shut the doors.
Regards,
Scott
http://www.invoiceplace.com
Dharmesh:
this is a pretty good list. One important issue that I would add is deciding who owns the IP. The answer should always be that the company owns 100% of the IP, but everyone needs to be on the same wavelength about this and invention assignment agreements need to be in place and patents need to be in the company's name.
-Andrew
Dharmesh,
Absolutely! An associate of mine warns his clients against having "happy ears" on a sales call. Sometimes we hear what we want to hear and ignore what we don't want to hear. Asking the tough questions on the front side will prevent misunderstandings (or worse) on the backside. Incidentally, if you think about it, this list really makes sense any time we enter into any important agreement. I haven't had many "job interviews", but you should have seen the look on the CEO's face when I asked him, "OK. So what do I need to do to get fired?" during my interview and when I write an agreement with a partner, employer, or employee, I START with the termination clause.
A good rule of thumb might be, "Never say, 'We'll deal with that when it comes up.' Talk, decide, and make it part of the written agreement."
Wow, this is very thorough.
From casual observation, most partnerships seem to work because there is one dominant partner who drives the company with remaining partners who either sail along or get run out (leave) after a big fight.
First-time entrepreneur - Don't worry, I bookmarked the page.
I'd like to take a second and thank Dharmesh for this site... I must say I'm also very impressed with the level/quality of comments from outsiders, it's tough to create a blog with this level of participation. {stands and claps}
Thank you very much for this wonderful overview! {Stands and cheers!!}
Hi Dharmesh,
I am a First-time Entrepreneur. These 10 questions are the exact questions I went over with my co-founder. However, this happened over a time-period of 6 months. We could've saved a lot of thought & refinement had I gone over the list in the earlier stages.
I would like to add - my co-founder is a very long-time friend of mine, so in that sense we were fortunate. But we still had to go through the experience in order to test our commitment to the cause.
- Santosh
Good Stuff.....Very handy check list....
If the list had to shrink to one.....I'd say it should be to clearly understand the objective of each of the founder behind founding. It might need spending enough time to get beyond impressions and sometimes might even require navigation.
The only one I might add is "Can the founders closely work together for an extended period without killing each other?" If one or more of the founders has some 'tic' the others don't like or if there's some odd feelings there, it might be overlooked in the rush to include people on the team who have a particular skill or piece of the puzzle. Working on a start-up together requires some real questioning as to whether you can really work together as a team to move things forward. You might have a great idea, but you'll never get it off the ground if you feel uneasy about working with each other.
Hello,
Great points! One other question is about co-founder's paid-in capital. Typically, does the co-founder get stock that is owned (with no vesting schedule), from the point the paid-in capital is invested OR is it in the form of options that gradually vest? If these are options, then what mechanism is in place to get that capital re-imbursed in case the co-founder leaves (with or w/o cause), before any options are vested? Thanks
-som
Can one of you throw some light on finding co-founders?Some times one has a great idea and nurtures it for a while, does his/her due diligence research et.al and then scouts for a co-founder. Unfortunately once a person joins you as a co-founder he/she tends to change the vision and sometimes digress from what had been envisioned thus far.
How should such a situation be handled? Any takers?
The list is spot on~ and the few suggested additions make it complete. All of these points should be outlined with your co-founders.
I've been experiencing this vision changing/team changing phenomena for 4 months now. Every new team member wants to change the vision a bit. Those that can't get on the same page end up leaving... but this causes terrible project delays. Strong leadership with strong focus is required. I have concepts with backing and still find it difficult to get a team to stay on the same page. It is also a challenge to get team candidates to sign a Nondisclosure Agreement with any type of consequences attached. What good is an NDA without consequences???
On the lighter side( or maybe not ) one question to ask a co-founder in India -
Is he planning to get married within the next couple of years ?
Essentially what you start with is a partnership. Never give the partners equal shares of the company no matter if it's a crop., partnership or LLC. One person should have the majority of shares (ie. 51-49, 34-33-33 and so on). I have seen ugly lawsuits when the partner shares were split 50-50.
This list varies if there is an age gap between the co-Founders, since it leads to two different life styles and financial needs invariably. I would even say, partner with people your age group especially the fist time around.
Definitely do a background check, reference check and any other kind of check you can think of. The follow up questions after these should be done very maturely.
Play a couple rounds of monopoly and/or golf with them, just to see how they react to opportunity and adversity. There are of course other such ways to gauge this but don't partner without doing something outside of work with your partner as that may be revealing.
Finally, there will be a leap of faith involved. But a great partnership is a beautiful thing. When it works it’s really neat.
Hi, i would be very grateful if you could kindly advice me on the following matter. me and my friend have a small agricultural business. However, we are now planning to register our business to form a small company. However, my friend is now telling me that he want to have 51% of the shares and the remaining 49% is for me. Therefore, i would like to know how i will secure myself in the company given the fact that if he has 51% of the shares he will seems to be the majority.
Generally, you cannot secure yourself with 49% of the shares.
People usually want 51% of the shares in order to have a controlling interest in the business. Anything that others do to secure themselves will limit his control. In most cases, 51% majority means 100% control.
But, if you really want to hash it out, you could write various things into the bylaws of the corporation (or other organizational papers) to require a super-majority, say 67% of the total shares, for the corporation to do things like issue more stock, change the bylaws and other things, like sell the company. You could also issue a different class of stock with special voting rights such that he owns 51% of the shares but you still have a 50-50 split of the voting rights. You could also create and issue stock to a separate, trusted third party such that nobody owns more than 49% of the business so everybody needs at least one other party to agree with them before accomplishing something. You could write into the bylaws that the Board of Directors will contain a set number of directors, say three, one of which could not be a relative of either of you and would have to be mutually agreed.