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I have written an ominous-sounding article (entitled "Mistakes Founders Make - Ill-Documented Relationships") that describes some of the risks here. (http://www

by grellas 17y ago

I have written an ominous-sounding article (entitled "Mistakes Founders Make - Ill-Documented Relationships") that describes some of the risks here. (http://www.grellas.com/faq_business_startup_009.html http://www.grellas.com/faq_business_startup_009.html) For the venture: the IP developed by the loosely-affiliated team will belong to its individual members and not to the venture. Solution: need simple work-for-hire agreements (promise of future equity alone is OK as the "consideration"). For the individuals: getting stiffed on the promised equity. By all means, do document this at least informally with a founder's term sheet. By no means should you attach a money value to the services performed. If you do, and it gets audited, you will all have tax problems (generally, your services would constitute immediately taxable compensation even though all you would get is a piece of paper for it at the end). Keep all discussion on this framed solely as "x will get _% of equity in exchange for [whatever]" but without reference of any kind of money value. Do remember to describe the attributes to be associated with any equity (e.g., "100% immediately vested," or "20% immediately vested with balance to vest ratably over 48 months subject to repurchase by company at cost upon any termination of holder's service relationship with the company" or whatever fits your team's expectations). This kind of situation is inherently nebulous and can easily lead to problems with a far-flung team. Best advice: keep everything on a short leash. That way, if someone gets burned, hurt will be minimized. When trust is established, and company seems viable, get it documented legally ASAP.

dpnewman 17y ago
very good info. this is extremely helpful as is your article. "Do remember to describe the attributes to be associated with any equity (e.g., "100% immediately vested," or "20% immediately vested with balance to vest ratably over 48 months subject to repurchase by company at cost upon any termination of holder's service relationship with the company" or whatever fits your team's expectations)." this part i will need to research a bit to fully grok. it's great though to have a starting point here.
- grellas 17y ago
  I didn't intend anything fancy by this statement. If someone is doing a piece of the development by which they will get, e.g., 1% of the company (whether in stock or in options exercisable at a nominal price), and if this is fully earned once that piece is done, then the language would say that he gets that piece (without strings and without vesting requirements). If others, however, will be true founders once the company is formed, will get larger equity pieces, and will anticipate earning out their larger equity pieces over time, then this needs to be specified so that it is not simply assumed that someone's 20% piece, for example, is fully earned at inception simply because that was the size of the equity grant promised as a founder's percentage. In such cases, the general terms of the vesting should be described as well as the size of the stock piece. This is just another way of saying that, even when put into a term sheet, the terms should be clear on what is to be granted and, if there are to be vesting conditions attached to the grant, they should be made clear (normal vesting for founders is at a rate of 1/48th per month over 48 months, i.e., four years, but there is no rule about this and it can be anything the founders agree to, e.g., 1/36th/mo over 36 months or even no vesting at all).

by grellas 17y ago

dpnewman 17y ago

very good info. this is extremely helpful as is your article. "Do remember to describe the attributes to be associated with any equity (e.g., "100% immediately vested," or "20% immediately vested with balance to vest ratably over 48 months subject to repurchase by company at cost upon any termination of holder's service relationship with the company" or whatever fits your team's expectations)." this part i will need to research a bit to fully grok. it's great though to have a starting point here.

grellas 17y ago
I didn't intend anything fancy by this statement. If someone is doing a piece of the development by which they will get, e.g., 1% of the company (whether in stock or in options exercisable at a nominal price), and if this is fully earned once that piece is done, then the language would say that he gets that piece (without strings and without vesting requirements). If others, however, will be true founders once the company is formed, will get larger equity pieces, and will anticipate earning out their larger equity pieces over time, then this needs to be specified so that it is not simply assumed that someone's 20% piece, for example, is fully earned at inception simply because that was the size of the equity grant promised as a founder's percentage. In such cases, the general terms of the vesting should be described as well as the size of the stock piece. This is just another way of saying that, even when put into a term sheet, the terms should be clear on what is to be granted and, if there are to be vesting conditions attached to the grant, they should be made clear (normal vesting for founders is at a rate of 1/48th per month over 48 months, i.e., four years, but there is no rule about this and it can be anything the founders agree to, e.g., 1/36th/mo over 36 months or even no vesting at all).