In the second installment of our tips for a venture’s success, we’ll focus on relationships between founders – or founders and employees – and ensuring they don’t threaten the business.
The startup world is full of stories of friends, colleagues, and classmates dreaming up their own companies that don’t have a happy ending. Doing business changes an equation of personal relationships – and should those fail, they’ve been known to damage a once promising startup.
Business can cause bad blood even within a family, so strict rules and bulletproof agreements set in advance are a must that can carry a company even through tough times. Founders tend to doubt and resist some of the conditions we’re about to share, but mature individuals understand they’re here to protect them.
Reverse vesting
„Investors are wary of free riders. Co-founders who can easily quit, yet keep the full equity, are a serious red flag,“ explains Vit Hanus, Partner at Zero Gravity Capital. Reverse vesting can protect the company and investors from unpredictable moves in the company’s personnel.
All shares are available upfront, but part of the majority can be lost if the person doesn’t stay for the long run. With the reverse vesting, the shareholders can only continue holding their shares in specified proportions over a specific period of time. That is, if someone leaves earlier than agreed, they will lose some or the majority of their shares in favor of the other shareholders, enterprise stock option plan, and/or investors who usually need to find the replacement.
Vesting
No matter how much you trust your co-workers, their stock options or equity should correlate with the work they need to put in. Vesting guarantees them only after achieving pre-determined milestones, motivating those involved to contribute to the company’s success and stick around.
Non-compete
A fair non-compete clause is a no-brainer. If someone parts with the company, it protects the founders as well as investors.
IP settlement
Intellectual property, including copyrights, trademarks, source code, and patents, need to be tied to the company, not to a specific person who could leave. „Investors need to be certain the company IP belongs to the company and not individuals,“ Hanus confirms.
Bad leaver/Good leaver
Some bad endings are inevitable even in the best of relationships, and so having a contingency plan for the so-called „bad leavers“ is a reasonable precaution. Sure, sometimes leaving is inevitable without bad intentions – in cases such as health problems or vis maior events, a good leaver event shall be triggered.
The good leaver should receive the market or partial value for their shares in these cases. They could even keep partial or even full shareholding – but without the control and voting rights over the company, which is something no leaver should have.
„Bad leavers leave in a damaging way. It could be anything from breaching their contract to fraud, poor results, or misconduct. In that case, the agreement could only allow the nominal value of their shares,“ Hanus outlines.
Determining who is a good or a bad leaver and enforcing the consequences could be legally tricky, so the clearer the contract, the better.
100% commitment
„Investors will not want to risk capital on people who limit the company potential with limited effort,“ says Dusan Duffek, Partner at Zero Gravity Capital.
Number of founders
With too many founders, it’s not just about the heightened risk of someone abandoning the ship. Even the day-to-day is complicated when too many egos clash, and the simplest decisions take too long if the founders aren’t aligned.
„Statistically, more than three core founders pose a problem and might hinder success. In these cases, one clear leader should be appointed, and founders need to set up decision-making rules unanimously,“ advises Marek Zamecnik, Partner at Zero Gravity Capital.
Bulletproof contracts can not only save you money and energy but are also a good signal for investors. And in the end, these precautions can prevent ugly goodbyes and the agony of long arguments and misunderstandings.