Founder Equity Agreements – required but only if you want to start making money when establishing a new startup.

startup_foundersLets say that you get a brilliant business idea with your friend. You will establish a company 50-50, change the world, earn a lot of money in the process and live happily ever after. Statistics have shown that plans like this usually don’t work out. It is fairly common to have changes in founding team. If there is also money involved and everything is not clearly written down beforehand then major problems can happen.

Its clear that everyone in the company must be compensated according to his value. Simplest way to compensate is with salary – you will work and I will give you money. For entrepreneurs the compensation is also in form of the shares. Entrepreneur will work and get the shares in a company as a result. Funded company founders usually get mix of shares and salary.

It is fairly uncommon to pay workers 3-4 years salary upfront when joining the company for obvious reasons. Similarly business partners should not receive full amount of company ownership immediately on the day of establishing company when building full company takes at least 3-4 years.

There are different approaches of how the shares are earned by the entrepreneur. Common thread is having vesting schedule with contribution requirement, for example both founders will get 1% of the shares every month of full time contribution. When investors are involved then they are very interested in long term partnership which may add condition to term sheet that minimum vesting period is 1 year. If founder leaves the company before first year then he is considered compensated only with the salary he got an no equity is received.

One example of reasonable and popular founders collaboration agreement can be downloaded from http://www.seedcamp.com/2011/09/seedhack-founders-collaboration-agreement.html. Read also http://www.inno-hub.com/wiki/view/20 for in-depth analysis of Equity agreements.


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