The Burden of Legalities

Discussing and agreeing formally to the equity distribution of your company is always something to take care of earlier rather than later.  It can be a touchy subject, especially if certain people in the venture value their contributions higher than others¹.  It can get even touchier when the venture begins to develop traction.

The best thing to do is to figure it out now.

Obviously, a large majority of this depends on the relationship of the partners before the venture was formed.  If there is even a small lack of trust, you will fail.  The venture is going to work or it’s not, and even the smallest amount of equity conflict will ensure a rocky road.

For my company, myself and the other initial partner were originally 50 / 50 on equity.  We brought on another full-time developer (a non-founding member) and agreed to grant him a third of the equity.  The venture, agreed to through email, was now 33 / 33 / 33.

Currently, because of a few transitioning factors on my team, we have currently aligned a vesting schedule with different percentages for each member, which was agreed to upon each individual’s past / future contribution to the entity.  The vesting schedule we have agreed to is 25% per year, for four years, where each member of the team will receive a 25% of their decided upon vested amount.  The remainder of equity not assigned to the current members of the team, including myself, is to be distributed to future employees, investors or agreed stakeholders.

The legalities of formal entrepreneurship can be the most boring aspect of the venture.  However, it’s also a necessary step in gaining significant traction when revenues begin to compile.

Here are a few helpful, relevant resources on vesting and forming your legal entity:

• Venture Hacks Archives (specifically the sections on equity, lawyers and vesting)
• Paul Graham’s Equity Equation
• Startup 101′s Misunderstanding Capitalization
• Sample legal documents: Operating Agreement, Employment Agreement, Consulting Agreement, Confidentiality Agreement

Disclaimer:  This is not legal advice.  This is simply a brief reflection on my experience in dealing with legalities for my venture, which includes researching and speaking with lawyers in the space.  If you’d like more details on anything I have discussed above, you can email me.

1. This should be a early red flag of problems ahead. [↩]

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