I have built up a complete application myself, no funding/company, etc. I am bringing on a co founder who will help make this a reality. I'm willing to go 50/50 with him. But, as we've both discussed, we need to create some type of agreement (pre company formation/stock/etc) that protects me so if he can't just walk away with 50% of the company and do none of the work. How should this be set up?
Why do you think you need to give someone 50% of YOUR company? Is your product ready? How much more work will it take before you are ready for revenues? And when you are ready, how long will it take before you generate enough profit (not sales) that can support two full-time employees? Is this person an employee or a co-Founder? Are you giving this person 50% because you cannot afford to pay salary and are you giving this person 50% because you need his intellectual contribution in addition to effort? Or are you just looking for a companion? And if this is a co-Founder, will you need still outside funding (VC or angel) once the person joins you?
In other words, lawyer cannot protect you if you don't know what you want. Work the problem backwards. Think about building the company and not the product. Focus on what the company would look like six months from today, two years from today, five years from today and then think about how to get there, with or without this new partner/employee.
Think about these questions first and then worry on the legal details.
--Denny--
Denny K Miu
I am going to assume that you want some kind of legal protection in terms of liability. In other words, you don't want to do this as a general partnership, but as a corporation or sort so that as you move forward, there is no way that anyone can go after your personal property. In that case, I would suggest forming a LLC, as I have discussed in another post.
http://news.ycombinator.com/item?id=72291
Then, you just need to take a piece of paper and write down that going forward, you each own 50% of the LLC which encompasses all existing and future intellectual properties. By the way, I am really against giving away 50% since you have obviously put in a lot of effort in already but if that's what you want, you have the right to do so.
Then you price the LLC at some nominal value (say $500) and each of you write a check for $250 to buy 50% of the LLC. Then on the same piece of paper, you write down that the shares that each of you own (say 2,500 shares for $250) are subjected to a re-purchase agreement (which is the same as vesting but vesting applies only to options).
The idea is that you have the right to re-purchase the shares from your new partner at the original price at anytime. But part of the shares will be released from this re-purchase agreement either based on milestones or on time of service (four years, e.g.).
The reason that I don't suggest that you go to the lawyer right away is that you need to have this discussion with your new partner one-on-one and with plain English. And it is amazing how much you learn about the person going through this process. Going the lawyer will just put the two of you in an adverbial position from day one which is no way to build a team.
Once you work out everything in English, you can always bring in a lawyer (or not).
If you are still with me so far, then I can discuss the other issues. And there are lots.
--Denny--
Denny K Miu
I'd also recommend seeing a lawyer. Additionally, a partnership may not be the best idea if you don't know and trust this second co-founder. I'm no lawyer, but it sounds like an LLC might be a better choice. You can vest his shares over a time period that you feel is appropriate, and include a clause in the operating agreement that discharges him if he fails to perform the duties required of him.
Again, I'd go see a lawyer. It's not worth the headache later on.
What I've built is a web app. That's all it is right now. But around it needs to be built a company, a marketing plan, PR, etc. To me, bringing someone experienced who will lead handling that on board is a necessity, because, otherwise, I'll I have is a heap of code and some pretty JPGs.
The advice to do a vesting schedule (or a buyback/unvesting) is also good. You need to look beyond just this one person and think about what other "hats" or capabilities you are going to need to achieve your objectives. You may want to setup an option agreement. But you are going need to create some kind of company, and should consult with an attorney.
Denny Miu's advice to reach a "meeting of the minds" first and expressing it in plain English is spot on, don't rely on an attorney to help you reach an agreement with a partner, rely on an attorney to point out risks and issues that you may not have considered (e.g. setting up a buy-sell agreement).
Many more companies fail from a lack of customer development than product development so finding a partner who can help balance your strengths and offering them a substantial chunk of equity is not unreasonable.
I hope this helps./SeanM http://www.skmurphy.com
I have a little thing we got from Nolo press (nolo.com- the centrla cheap legal document hub), which was an original operating agreement. We have a 3-year vesting on the agreement that you can use and if he walks, he gets a small amount, but I would also build into the agreement an attachment for rights and responsibilities. We had one partner who was not performing and we had to include an addendum so that if people were not performing, bad stuff could happen. Just send me an e-mail.and I'll pass the doc over.
FYI, the number one thing that all CEOs regret is not getting rid of people who don't belong earlier. So make sure that this person you're hiring on is worthy.
