Over the past several months and on separate occasions, I have come across founders, consultants, advisors, and employees who’ve suffered because they were not given the equity they were promised by the startup they were working with.
The Reason? They did not sign a document governing either their relationship or their equity grant with the startup.
Sounds familiar?
As a corporate lawyer, my practice frequently involves dealing with issues pertaining to startups, in particular the structuring and formation of the business entity, representing the company in financings, etc.
Nothing pains me more than to see that someone lost out on their promised equity because:
- they were unable to carve-out time to hire an attorney to document the oral agreement;
- they tried to save on legal costs;
- or some other reason – and now the company is worth a lot!
At least three (3) or four (4) out of ten (10) I have come across have incorporated their entity through a Registered Agent, with no further paperwork evidencing the company’s ownership (and sometimes even lacking director and officer election).
Always, always, ALWAYS document what is agreed upon, when working with a company. NEVER leave loose ends untied.
Let’s take the issues apart to understand their implications.
1. Founder Stock Ownership:
Read my previous blog here, where I talk about founders and why it is crucial for founders to issue stock to themselves. In short, relying on oral agreements with no documentation can lead to unintended consequences or even disagreements about who was supposed to own how much. Such fundamental disagreements may damage the value of your company. Therefore, it is highly recommended to document the stock ownership so it is clear who owns the business and how much of it they own.
Know that if you are running a business without proper ownership of the business, you may actually be running a general partnership or a sole proprietorship and not an incorporated entity. What that means is that your business and you are not separate legal entities – thereby potentially exposing each co-founder jointly and severally to unlimited liability in case of business related debts and claims by customers, vendors, etc. If this is your situation, you must immediately discuss with an attorney how to document your ownership and complete the formation steps of your startup.
2. IP Ownership:
Read my previous blog here, where I discuss why it is vital that founders assign their IP to the business. In short, formally assigning founder IP to your company is an important step for the success of your business.
If the company is not the legal owner of the IP, and if disagreements arise among the co-founders, one co-founder may walk out of the business with the IP jointly owned by the outgoing founder. This may diminish the value of the business because now the company does not fully own the IP that pertains to the product. Moreover, potential investors and acquirers may be turned away knowing that the IP is not wholly owned by the company.
For these reasons, it is important that the IP is assigned to the Company.
What You Should Do
Either contact a startup lawyer who can help you set up your company or sign up with a DIY website such as Clerky, Firstbase, etc. (though nothing beats talking to an attorney one-on-one).