Cover All the Bases: Building a Great Founders Agreement with Catherine Stanton, Stanton Law Firm LLC Moderated by Krista Morgan, P2Binvestor Small Business Bootcamp Webinar Series Friday, July 17, 2015
2 Before we get started This webinar is designed to cover the key considerations founders need to make when building a founders agreement and managing relations with cofounders. Our goal is to leave you with answers to common questions, solutions to challenges, and a better understanding of best practices that will help you build and protect your business. The content of this webinar is provided for informational purposes only and should not be construed as legal advice.
3 Introduction Presenter: Catherine Stanton, Stanton Law Firm LLC Moderator: Krista Morgan, CEO of P2Binvestor
4 What is a founders agreement? Timing Before you leap As things change Documentation General Partnership = Founders Agreement LLC = Operating Agreement Corporation = Shareholders Agreement +
5 What goes into a founders agreement? Roles & Responsibilities Who does what? How will we get paid? Decision Making Developing a process Guiding principles & vision Ownership Who gets what? What if.happens? Rules of the Game Intellectual property Competition Confidentiality
Roles & Responsibilities Know your startup; know yourself. One of the most important things you can do for your company and your team is to determine who does what and how.
7 Know your role CFO CEO COO
8 Role = responsibility Define each founder s role within the company at the outset. Title Areas of responsibility Decision-making powers Expectations re: time and performance How the founder can be fired Determine if and how founders will be compensated Be realistic about what you need to survive Be flexible Consider employment agreements Re-examine your roles regularly to optimize functionality.
9 Who is your startup? Have a conversation about your vision, mission, and values. What is your vision? Think lofty ideologies. Big ideas. Industry disruptions. How will your company change the world. What is your plan? Develop a good old-fashioned business plan. Approve it officially. Treat it like your company s road map. How will you operate? Determine your guiding principles for day-to-day operations. What will be your priorities? How will you interact with one another? This does not all have to be part of the founders agreement document. But do include the deal-breakers and standard procedures.
Making Decisions Establish a decision-making hierarchy to avoid paralyzing your startup. Place responsibility for different decisions at different levels.
11 Decision-making responsibilities Who gets to make what decisions? CEO Own the vision & the culture Find good people Procure capital Delegate & oversee CFO Balance the books Money manager Tax matters CTO Lead development Be realistic COO Manage the people Manage the process Be the man on the ground Operational decisions flow logically from roles.
12 Decision-making hierarchy Shareholders/Members/Partners The fate of the company (M&A, IPO, selling additional equity) Directors/Managers The big(ger) decisions (Important agreements, major hiring decisions, employee comp & benefits, delegating power to act as the company) Executive Officers The daily grind (How business gets done) TIER I TIER II TIER III
13 Tie-breakers Who decides when you just can t decide? The CEO or the manager/chairman Appoint a go-to tie breaker. Maybe the CEO for the sake of vision. Or, maybe the non-employee chairman/manager. Third-party tie breaker A trusted advisor or minority equity holder. Supermajority Require a supermajority for big decisions so it is harder to get hung up. Odd is good Don t have an even number of board members or shareholders with even amounts of shares. Mediation Commit to non-litigious avenues first to avoid paying big money for big disappointment.
14 Guiding principles for decision-making Know who you are as a company What is your vision? What are your goals? Know what you don t know Be educated Include an obligation that the decision-makers be fully informed before deciding Know where your (legal) loyalties lie The board has a legal duty to shareholders Public benefit corporations
Ownership The allocation of ownership interests should reflect individual contributions and vest accordingly. Making practical rules about ownership can keep your company together in tough times.
16 Who gets what? Serving up the pie Control: Whose idea was it? What are you rewarding? Who is the ultimate decision-maker? Value-added: Capital contributions? Sweat equity? Salary sacrifice? Reserves: Set aside for future employees? Anticipate investors? Aim for equitable not equal. There are other ways to compensate founders and give credit where it is due. Remember that your starting % will be diluted every time you add new equity holders. Look ahead.
17 How do we get it? Leave a paper trail! Not only will this ease the due diligence period for investors, but it will help establish your basis in your equity and your relationship to the company. Documentation Equity: You need a purchase agreement appropriate for your entity type Options: You need an equity plan and a stock-option grant agreement Employee incentives (equity and equivalents): You need an equity plan and an award Remember your resolutions. Have your board or equity holders officially approve everything: sales, grants, plans, and documentation
18 How do we get it? Vesting Vesting means that you are entitled to receive equity or options, but you have no rights in them until they vest Vesting can be time- or milestone-based A cliff is a period of time where no equity vests sort of a trial period An acceleration provision vests all unvested stock automatically upon a trigger event Ensures that a founder who leaves early or fails to perform doesn t walk away with a large chunk of the company
19 What happens when a founder leaves? Include a pre-nup for your startup Can the company repurchase vested shares? Are there transfer restrictions? Sale of shares ROFO, ROFR, Buy-Sell, Tag-Along, Drag-Along Divorce & death Buy-back (voting rights, set price), trusts Spousal consent Key man insurance Plan enough to be comfortable with the risks, but avoid overkill.
Rules of the Road Tie up loose ends regarding expectations around ownership of work product, competition, and confidentiality.
21 Intellectual Property Assign pre-existing IP as part of your equity purchase Domain names Code/software Trademarks, logos, copyrights, patents, licenses Plans, development notes, customer lists Assign company-related IP pre-emptively Work for hire / invention assignment Use of company time or tools Relation to job description
22 Competition Issues & Confidentiality Non-compete prevents participation in a competing business during employment and for a certain period after Non-solicit prevents solicitation of the company s employees or customers after departure Non-circumvention prevents going around the company to engage directly with a customer or take an opportunity Non-defamation prevents negative public commentary on the company and/or the founder Confidentiality both a present and ongoing obligation Confidentiality & non-compete are standard for founders and key employees.
23 Ask us anything! Please use the chat feature on the left of the screen to enter your questions. Presenter Catherine Stanton @Startupwards catherine@stantonlawfirmllc.com stantonlawfirmllc.com (303) 800-8212 Moderator Krista Morgan @krismtl @p2binvestor hello@p2bi.com p2bi.com (720) 361-1500
Thank you 899 Logan St Ste 210 Denver, CO 80203 720.361.1500 hello@p2bi.com facebook.com/p2binvestor We are always interested in partnership opportunities, and we reward referrals. Building a Great Frounders Agreement @p2binvestor