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Kudos to the minority shareholders for giving up a legal entitlement graciously... ...but why on earth is there a stringent corporate structure and equity dole

Kudos to the minority shareholders for giving up a legal entitlement graciously... ...but why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?

ColinWright 14y ago
Because if you don't do it at the start when there's really nothing to bid for and nothing at stake, you have to do it later when there's lots at stake, and the negotiations become difficult and unpleasant. Best to have a genuine agreement up front, and keep it fresh.
- tatsuke95 14y ago
  >"Best to have a genuine agreement up front, and keep it fresh." Seems to me that's what happened in this situation, and they ended depending on the good will of co-founders. Where as, had they simply dissolved the relationship with the first business and started anew, we wouldn't talking about this.
  - ColinWright 14y ago
    Knowing when to dissolve a "previous business" is really hard. And it's even harder if you don't have formal or semi-formal arrangements in place from the start. You get to what is effectively (to you) a new business, and the early founders, now no longer involved, can start saying - "But part of that is ours." You asked: " ... why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?" ... and I answered. You have it to avoid the problems of not knowing what everyone else believes. Formally dissolving the previous business would have been the right thing to do, but even then, having the formal structure definitely helps.
gyardley 14y ago
Because they did it correctly. When you start working with others on a company, structure and ownership needs to be sorted out before, not after. Yes, it ended up being a bit of a pain for this guy and his startup, but it's not nearly as painful as the conflicts over IP and equity that result when you don't hammer this stuff out before building.
- tatsuke95 14y ago
  >"Because they did it correctly." Huh? They split up equity in a non-existent business that ended upcoming back to bite them on what amounts to a completely different project that the other co-founders did not participate in whatsoever. It was only through the honesty of these other co-founders that they were able to steer away from real trouble. Those co-founders could have given up nothing had they so chosen. That's the correct way to do things? Looks to me like this is a lesson in the exact wrong way to do it. We have laws in this country to prevent people from getting screwed. Work with people you like and trust, and focus on building a product, not on what your "stake" is.
  - ColinWright 14y ago
    > Work with people you like and trust, and focus on > building a product, not on what your "stake" is. Sounds great, until there's money involved, and people have different opinions about what their holding should be. Shares and equity is the proper way of keeping up front and above board everyone's understanding of who owns what. > We have laws in this country to prevent people > from getting screwed. Take it to court and only the lawyers win. > It was only through the honesty of these other > co-founders that they were able to steer away from > real trouble. No, it was working with people they like and trust, as you advocate, and having formal agreements about who owned what, that enabled them to understand the position and negotiate openly and cleanly. > Those co-founders could have given up nothing > had they so chosen. Correct. Imagine, then, how much messier it would have been had those co-founders claimed that they owned 30% each.
  - aneth3 14y ago
    > We have laws in this country to prevent people from getting screwed. Work with people you like and trust, and focus on building a product, not on what your "stake" is. The most important reason to negotiate equity early is not to avoid people getting screwed, but to avoid fundamental equity disagreements from screwing everyone. Even if you like and trust someone, this does not mean you have compatible beliefs on equity or vesting. If founder B joins founder A, and they move forward with founder A's idea, it's quite possible that years later, when they decide to raise money, founder A will insist that he deserves 90% of the equity, while founder B will want 40%. You'd also be surprised how much people's attitudes and allegiances can change when heavy hitters enter the picture and large amounts of money are at stake. Laws will not prevent you from getting screwed if you don't have any contractually established rights. If you sign an assignment of IP for your work to a company, you can't later sue for equity to avoid getting "screwed."

ColinWright 14y ago

Because if you don't do it at the start when there's really nothing to bid for and nothing at stake, you have to do it later when there's lots at stake, and the negotiations become difficult and unpleasant. Best to have a genuine agreement up front, and keep it fresh.

tatsuke95 14y ago
>"Best to have a genuine agreement up front, and keep it fresh." Seems to me that's what happened in this situation, and they ended depending on the good will of co-founders. Where as, had they simply dissolved the relationship with the first business and started anew, we wouldn't talking about this.
- ColinWright 14y ago
  Knowing when to dissolve a "previous business" is really hard. And it's even harder if you don't have formal or semi-formal arrangements in place from the start. You get to what is effectively (to you) a new business, and the early founders, now no longer involved, can start saying - "But part of that is ours." You asked: " ... why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?" ... and I answered. You have it to avoid the problems of not knowing what everyone else believes. Formally dissolving the previous business would have been the right thing to do, but even then, having the formal structure definitely helps.

gyardley 14y ago

Because they did it correctly. When you start working with others on a company, structure and ownership needs to be sorted out before, not after. Yes, it ended up being a bit of a pain for this guy and his startup, but it's not nearly as painful as the conflicts over IP and equity that result when you don't hammer this stuff out before building.

tatsuke95 14y ago
>"Because they did it correctly." Huh? They split up equity in a non-existent business that ended upcoming back to bite them on what amounts to a completely different project that the other co-founders did not participate in whatsoever. It was only through the honesty of these other co-founders that they were able to steer away from real trouble. Those co-founders could have given up nothing had they so chosen. That's the correct way to do things? Looks to me like this is a lesson in the exact wrong way to do it. We have laws in this country to prevent people from getting screwed. Work with people you like and trust, and focus on building a product, not on what your "stake" is.
- ColinWright 14y ago
  > Work with people you like and trust, and focus on > building a product, not on what your "stake" is. Sounds great, until there's money involved, and people have different opinions about what their holding should be. Shares and equity is the proper way of keeping up front and above board everyone's understanding of who owns what. > We have laws in this country to prevent people > from getting screwed. Take it to court and only the lawyers win. > It was only through the honesty of these other > co-founders that they were able to steer away from > real trouble. No, it was working with people they like and trust, as you advocate, and having formal agreements about who owned what, that enabled them to understand the position and negotiate openly and cleanly. > Those co-founders could have given up nothing > had they so chosen. Correct. Imagine, then, how much messier it would have been had those co-founders claimed that they owned 30% each.
- aneth3 14y ago
  > We have laws in this country to prevent people from getting screwed. Work with people you like and trust, and focus on building a product, not on what your "stake" is. The most important reason to negotiate equity early is not to avoid people getting screwed, but to avoid fundamental equity disagreements from screwing everyone. Even if you like and trust someone, this does not mean you have compatible beliefs on equity or vesting. If founder B joins founder A, and they move forward with founder A's idea, it's quite possible that years later, when they decide to raise money, founder A will insist that he deserves 90% of the equity, while founder B will want 40%. You'd also be surprised how much people's attitudes and allegiances can change when heavy hitters enter the picture and large amounts of money are at stake. Laws will not prevent you from getting screwed if you don't have any contractually established rights. If you sign an assignment of IP for your work to a company, you can't later sue for equity to avoid getting "screwed."