While there is no agreement over exactly how, there is widespread agreement over the value of forming some sort of agreement among company founders — sooner rather than later in the life of the company.
The power of these sorts of agreements may be as much a function of the conversations that are had in order to put these conclusions into place as it is a function of the formal agreement/document itself. The goal of the conversation/agreement is to have an open and honest discussion of the attitudes, fears, and aspirations of, as well as the arrangements among the individuals involved with the startup in the hopes of minimizing the likelihood of debilitating surprises later in the life of the company.
The three essentials of founder’s agreement are as follows –
- Roles and Responsibilities
The matter of roles and responsibility to the venture involves answering the questions of what each individual will do, for what they might be responsible, and to what extent they might be responsible (particularly in terms of time). While it can be common for founders to play broad roles in the early days of a firm, it can still be beneficial to designate the more significant role any individual might play.
Designating Founder X as responsible for managing the finances of the firm will not, necessarily, reduce that person’s role to only the finances of the firm. This designation, however, can help support the condition that when torn between two tasks—one of finance the other of development—this individual should focus on and take responsibility for the finances while another individual should focus on and take responsibility for development.
The roles that founders play may change over time. Therefore, this initial designation of role/responsibility should not prove to be unchangeable. Instead, build into the decision-making procedures the means for redefining roles.
2. Decision-making / Operating
An important feature of this agreement covers the method through which both simple and substantial decisions should be made. In other words, which sorts of decisions can be made by a single individual and which sorts of decisions should be voted on by the group of founders. If a vote occurs, does everyone have an equal vote (regardless of their proportion of equity) or shall voting procedures align with the distribution of shares. In the case of a split vote (50% on one side of the decision, 50% of the other) will anyone have the deciding vote? If so, how is that person determined and how shall that decision be made?
One truly uncomfortable decision that should not be left uncovered revolves around the “firing” of any of the founders. If three people are involved, the risk always exists that two founders might organize and vote out the third. If possible, consider and define those circumstances under which you would all agree that the ouster of a founder ought to be on the table (e.g., the misappropriation of funds or the failure to meet certain milestones).
Beyond raw voting procedures, founders might desire to explicitly state certain values or other factors that ought be considered when making decisions.
Certain subjects of decision-making, such as hiring/firing employees or buying equipment, may be considered so likely to occur—or likely to occur regularly—that the founders may wish to just explicitly agree to their preferred course of action rather than vote upon each instance of these common issues. Alternativley, the operating procedures in the agreement might be so intertwined with the decision-making components that the two dimensions would be dealt with as if the same.
Furthermore, it can be helpful from the outset to make clear what happens in the case of certain simple, if not hopeful events—such as making a profit! Do the founders want to distribute any profits equally, or have a vote over whether profits should be further invested in the firm or distributed and how?
The question of ownership is, at the most basic level, a question of who owns how much of the initial equity in the company. That said, this equity-based measure of ownership can also signal—explicitly or implicitly, intentionally or unintentionally—opinions about who’s decision carries the most weight, and who’s actions contribute how much to the value of the venture.
Any attempt to determine the “best” way to divide ownership at the outset of the firm’s existence is most likely futile. A web search on this subject, however, will make it clear that the experience of futility has not prevented many people from believing that some “best way” does or might still exist.
Instead of shooting for the perfect split, consider the question of “Why?” and “Under what conditions?” when determining who gets what. Furthermore, leave some room for your inability to get this slitting challenge perfectly correct. Spare yourself the agony of the optimization attempt. Assume some best split might exist, but that ideal can only be known in a world of perfect foresight or unlimited do overs. Since we don’t live in that world, we might as well act accordingly.
The founders of non-profit corporations will not likely find themselves daunted by the issue of ownership of the firm, given how the assets (or the value of the assets) of these firms ought to be distributed under federal or state laws. The conditions of employment, rewards, and credit will still apply, however.