A typical startup story
A group of friends decide to go into business together. They agree to what they think is a favorable split in equity. Then the rubber hits the road and they realize that this startup journey is not as easy as they thought. What usually happens:
A subset decides they’ll work to support the others by taking on full-time jobs and/or
One or more may honestly just decide to abandon ship and/or
They may decide to bring in qualified professionals to help them develop the business so they can make money (in exchange for company shares) and/or
They may bring in an investor who takes up company shares and promises to bring in more money when the company needs it
What happens when things go wrong?
In a number of cases we’ve encountered, obligations are not met. Founders are now left with individuals who own company shares for which they “technically” haven’t worked for. Now the challenge begins. How do the founders reclaim their shares (and get rid of these shareholders – which is usually the focus as they feel cheated)?
The solution to these problems are not always simple and clear cut. It does however help significantly when due process is followed for the issuance of company shares by startup founders. Below are some guidelines (though not exclusive) for minimizing the potential for things going wrong:
Always execute shareholders agreements spelling out the basis for issuance and retention of company shares (and the basis for transfer of shares)
Use share options instead of outright issuance of shares for all non-founding startup employees (in fact I advocate using this approach for startup founders as well. Hold your shares in trust and earn it over time as you all meet your agreed upon obligations)
There are templates available for all the above but always seek professional legal advise if you can. Note though that all lawyers are conversant with these kinds of transactions and may not provide the best counsel.
Educate yourself on how to use the right legal agreements to protect your interests as well as productive relationships in your startup.
Author: Samuel Yeboah || CEO Mirepa Capital