This is an anonymous post from an Elpha member.

PLEASE HELP: Crafting Founders Agreement

Carolynn33·Aug 26, 2020

Posted in:Advice Favors Compensation Startups Money

Hi Elphas,I co-founded a startup with a friend. He currently works on it full time. I still work full time, so I invest evenings/weekends and any downtime to work on the startup. However, I am planning to take a sabbatical soon and based on the traction we get during that time, I will decide whether to join full time or not. I have several questions that I really need advice on. - He suggested that we build a partnership agreement ASAP. Is it typical to have it this early considering the stage that we are in? - What do you think is a fair equity split, considering he works full time and I don't (at this point), but I am planning to dedicate the next three months to do it full time (during the sabbatical)? He seems to suggest that since he's been working full time on it for several months, that he should get more equity. - For context, we don't have a product built yet. We are talking to a few companies and based on the pilot, will build the product accordingly. Please help.... Thank you!

DianePrince·Aug 26, 2020

Hi, I think he's correct that you need an agreement in writing asap. You might not need a lawyer yet, but I've learned to have contracts from the very beginning. But as you point out, you must first decide on your equity split. I'm happy to have a phone call to talk this through with you.

LVLUPLegal·Aug 27, 2020

Hi - my name is Shermin Lakha and I am the Managing Attorney of LVLUP Legal (www.lvluplegal.com) a law firm dedicated to startups, digital companies, and entrepreneurs. I agree with your partner that you should get things in writing ASAP. Generally, I would suggest that the founder maintains the largest amount of equity, but at a minimum the split should be 51/49. You should outline each of your roles and both of you should be on a vesting schedule. If you would like to set up a consultation to learn more, please feel free to reach out to me at [email protected].

TiffJung·Aug 27, 2020

It sounds like, at this point, you two need to discuss and agree on what a fair equity split would look like at the end of your 3-month sabbatical.What is fair will take into account your individual contributions so far and your expected individual contributions going forward. Not all contributions are equal and can include time, effort, money, and ideas (and other intangibles).It sounds like he thinks that his greater contribution of time (sometimes called "sweat equity") so far should be recognized by granting him a greater percentage of ownership, but it could also be accounted for by having his portion of ownership vest sooner than yours or by valuing his time contribution as a shareholder loan/deferred salary (that would be repaid in cash when you start earning money from your product). If you decide not to join full-time, your expected contributions going forward would presumably be lower than his and that would also influence what is considered a fair equity split.At the end of your sabbatical (if you decide to join full-time), that might be a better time to go through the rigamarole of discussing & negotiating other headline issues. You may not need a long-form partnership agreement even then, but a "term sheet" can be a good tool to have discussions about important points such as control, responsibilities, & decision-making, as well as memorialize what you've agreed on. #notlegaladvice