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.
Very goods Point to keep in mind while forming partnership.
Great bolg, very helpful information! Will appreciate recieving help with the following :
I am a tech person without any startup experience. I have developed a new technology (with patents applied for) that has a promising market. I plan to partner with some one experienced in the high tech startup business, preferably an ex-CEO, to start a company and seek venture capital to commercialize the technology. I am assuming that the new partner will be a co-founder of the company. What is the typical split of company ownership for such situations? Since I am the inventor of the technology, I am assuming that I will own major shares of the company. Also, when we involve additional personnel in the future, do we give them company shares? I am currently interviewing potential candidates for the partner and will appreciate getting your feedback on this.
Thank you,
Andrew
I'd say that there is no typical split for your situation. It all depends on the individuals involved.
Although you are the inventor of the technology, you will have to attract the ex-CEO partner that you plan to recruit and you will likely use a major portion of the ownership to do that. If he is well-known in the industry, he may be able to get offers from other startups, some which may be already funded, have a technology that is more fully developed and/or be able to pay him a significant salary. You will likely have to offer him enough ownership that he will prefer your offer to any others (while being able to live with the result yourself). In addition, once you get venture capital, the venture capitalists will want additional ownership. It all depends on how much you need him versus how much he needs you as well as how good an opportunity yours is versus what he can get elsewhere.
But, if you really want hard numbers, you might expect him to accept anywhere from 35% to 80% (leaving you with 65% to as low as 20%). This percentage will decrease a lot for both of you when venture capitalists become involved.
For additional personnel, it will depend on the time. You'll probably give them stock options or, possibly, restricted stock.
Very Interesting. My only rebuttal to such questions is these questions are valid for a startup which has made it big. In early stage, if you have such questions, might be one has not found the right co-founders. Starting up with others has to be based on trust
This is not always true, especially if there are evil minded people in the team.
No one has mentioned a shareholders agreement. It determines how a company will be owned, managed, dissolved, etc. It also captures many of the above items (only in more detail and it's documented!). Don't pass go without it!
I am working on a start-up and have the following questions:
At the moment we are just discussing and planning on trials if our ideas/innovations have interest in the market , checking if our product will make it good.
Since we are located in different time zones/geographies, we have regular phone-calls/chats and exchange lot of documents/ information/ideas etc.
(1) What should and what can one do to protect these ideas/ innovation? For ex: Who knows if the information is extracted from one and the others back-off and they could productize it. Basically want to be cautious though we have faith in each other.
(2) Does it make sense to register a company and then formally have agreements like non-compete, NDA etc?
(3) Does it make sense to bring up topics like:
(a) What role each of us is looking forward to in the company if we form one?
(b) Ask other important relevant questions list described here on the blog?
Thanks
(1) If it were me, I'd only protect the ideas with a non-disclosure agreement with a no-use clause. Maybe I'd also have a copyright assignment to make the copyright to all code to be shared by all. But, really, frankly, most people are skeptical enough that they wouldn't rip off your idea even if they knew and wouldn't want to maintain or even figure out how to build your code even if you gave them full access.
(2) Until you have money coming in, I wouldn't register the company. I'd recommend just getting boilerplate NDAs and other agreements off the Internet: even if they are flawed, you can fix them later when you have the money to do it. Others will recommend spending a bunch of money up front on lawyers and custom agreements: that's not my choice but it might be best for you.
(3a) Yes, it makes sense to discuss roles and expectations. A few hours should be enough.
(3b) Yes and no. If you follow all the advice on this blog, it would take you 10 years and 1 million dollars to do everything that makes sense. But, spending a few hours with each person to get a sense of their expectations, desires and demands, is sensible.
Great article and great advice. As the founder of a new startup I have involved a friend in this new venture. While I hold the intellectual property and the entire concept, business model, etc was created by me, he has been there to bounce ideas off of and help me refine the concept. He is a talented salesman and I want to include him in the company but am unsure what role to give him. A partner makes sense but I have concerns about his role later on when we begin to secure VC funding. Since I am the sole proprieter (though no formal prorietership or corp is established), with no employees, is it better to make him say a VP of sales with me as CEO or a co-founder or partner with a small share, say 25%?
I think that you are being too generous. If you really mean what it sounds like when you talk about bouncing ideas off of and refining the concept, I'd say that he's earned a nice dinner. Look: you appreciate his input but it's pay for play. If he is committed and makes some sales, then, yeah, offer him the VP of Sales.
Wow, this was a great article. Thanks!
From long experience, I think that you should "learn to fly with each other" before you work on a startup together.
Do some consulting, volunteering, a side project (like a little startup business for a friend) and learn how they work and what their approach to work is. Then you can learn if you really work well together.
In response to other comments, I'd recommend using warrants to reward an outside CEO you want to bring in. That way, you can continue to control the board.
If the CEO of any company Removes any one, There are lot of Jobs are there to work as a Freelancers.
Dear Johnson,
I saw your article at the Nature Bioentrepreneur and was wondering if you have some advice to the following issue.
I started a biotech business in march of 2007 with a Friend of mine while PhD students - we have it incorporated as an LLC. As we were both scientists, we brought in a MBA student as our CEO, with the same timeline that we had to finish. Now that we are finishing our PhD and our CEO his MBA, I will be forced to leave the company. I tried to negotiate staying in US because of the company, but as my scholarship was from my home-country, they didn’t accepted my offer and I’ll be forced to come back now after the completion of my PhD.
During this 2 years we had secured a state grant, and hired a posdoc working in our prototype under my supervision with recent great progress. We had also developed other patents (3-4) in addition to the one we filed and licensed from our university, which will be filed as soon as we secure VC investment - we are in due diligence right now.
As I will have to leave, we are looking for reasonable figures for the equity split that would not hurt the company. I’ll continue as a scientific advisor after leaving. Our timeline for commercialization and a possible acquisition/exit is in 18-30 months from now.
Me and the other PhD started with equal amounts of the shares, and the MBA is vesting 10% over 5 years.
Sorry for the huge question, with a lot of variables but any insight or reference where I could look for would be really appreciated.
Nobody else has answered so I'll answer, even though you didn't ask me.
When you get venture capital, the talk about percentages doesn't really work out. The VCs will likely want you to issue private stock and that private stock given out over time to new VCs, new employees and what not. So, if you're not at the company while everybody else is, they, including the VCs, will earn more stock over time while you'll stay the same. The net result is that your percentage will decrease, probably a lot, over time.
I'd suggest that you try to remain involved in any way that you can, including working from your home country, either remotely (using something like Skype) or by opening a branch office or lab in your country. Don't settle for being a consultant or freelancer; be involved.
But, that said, the VCs will likely take 50% to 80% of your company. If you currently have 45% and the other PhD has 45% and the MBA has 10% of the remaining 20% to 50%, that sounds ok. That works out to 9% on the low side for you. But, like I said, if you aren't involved, that 9% might dwindle to 3-4% or even 1%.
Fact of the matter, nobody gets a guaranteed percentage.