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My question is regarded to a startup's equity sharing. Basically, the Startup will be very demanding in terms of operation and we are 4 partners, but 1 partner will be out of the country studying for one year. All the partners will put the same money, and we agreed in sharing the equity equally. However, we believe that the partner that is going to study abroad should be penalized somehow. Whether it is options, money or equity I would like to ask if there are any good options for our dilemma? |
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Very nice! A new company, long roads ahead of you, and your first worry is how to penalize one of the founders/investors? A traditional approach would be that each investor would own a set number of shares of stock, in equal value to their investment. Then ALL founding employees would get a stock option grant vested over some period of time. If you're not actively working, your shares do not actively vest. If you leave the company for any reason, unvested and unexercised shares are forfeited. |
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You could reward the 3 people working with stock options or restricted stock awards (if a Corp) or profits interest (if an LLC) to recognize the enhanced involvement of the 3. The 4th could then get in the same arrangement along with everyone the following year, but would not have gotten the first year equity reward at the lower valuation. Depending on valuation, dollar amounts, etc, this could certainly meet your needs. |
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Hard work and certainly capital investment should be rewarded, but if your startup hits it big while the 4th is off in a foreign land, they shouldn't look upon it as an free ticket or instant job. Give the 4th a measure of vested stock, say 10 - 15% of whatever you've set aside for the founders. But make it clear the stock does not equate future involvement and the 4th is no longer a part of the organization. (This works both ways, if the startup runs into trouble, you can't expect the 4th to bring up the slack.) When the 4th finishes their education, the vested stock should offer a draw to rejoin the startup, and they will certainly be viewed as a potentially valuable asset to the company. If the fit is not right, the remainder of their vested stock can be made immediately available. Either way, their investment is returned and they weren't legally slapped in the face. The person might personally view it another way, but they are out-numbered in this case. |
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