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I'm in the process of trying to establish my first startup. At the moment I'm working with a friend of mine on developing the idea, and we had already created a prototype for our product on a mobile device.

We are not satisfied with how we progress with our code and design, and so we would like to add a few more people to work with us on this project.

Me and my friend got an unwritten agreement of us splitting our shares 50/50, if a day comes and we become profitable.

For now we keep our day job, and we plan that it will stay this way for the next few months until we could show a concrete version to a VC and hopefully get some funding. Only then we could quit our day jobs, because now we just don't have the money to risk for this little adventure.

So we would like to progress as fast as possible and for that we need more people to work with us. We were thinking about adding 2-3 more people to work with us on our spare time, but we are not sure on which status we could add them. We can't pay any salaries, and to be honest I think that at this stage we will need people that will be as determined as we are for this project, and I'm not sure that people on pay will be the same. But I also don't think we can offer them shares without seeing how they progress, or if we get along and etc..

I also don't have the money to pay for fancy legal agreements and all kinds of lawyers services, and to be honest I think that if I'll start with all of these legal agreements I would never have the time to actually focus on the real product.

So how would you guys suggest approaching my friends? What should I offer them? Can our own agreements (with no lawyers support) suffice for this stage?

I know my question is a little complicated, but I hope some of you could still help me out. Every piece of information is crucial at this stage.

Thanks!

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before answering your question I would like to know if your start-up is a registered company or not? This will enable me to guide you appropriately. Thanks. – Ms. Vidyut Feb 21 '12 at 11:59
Hi Ms. Vidyut, thank you for your response. No we haven't registered anything yet. We don't even have any written agreements between us. – Orchestrator Feb 21 '12 at 16:06

2 Answers

up vote 1 down vote accepted

Since you havent registered an entity, it will not be possible for you to offer ESOPS or plain vanilla equity to the people you want to bring on board. Typically, if a start-up does not have money to pay to initial members, equity in exchange of services can be given as initial compensation. Giving equity can be a good way to encourage team members to defer their compensation. ESOPS is a good example of this. You concern on giving equity can be reduced by ensuring that you continue to keep a majority and offer minor stakes to the new members. I dont see what else you could offer them at this stage. You can check if they are willing to buy into the idea of a profit share, if and only if the business makes a profit.

As far as agreements are concerned, I would strongly advise you to consult a lawyer. The structuring of agreements with differed compensation will require appropriate legal expertise.

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up vote 1 down vote

Having seen, on many occasions, the efforts of startup entrepreneurs who have put together their own agreements, I will offer the following thoughts:

  1. There is some likelihood that you can put together an agreement that expresses reasonably accurately the parties' intent with respect to ownership of the business and remuneration. ("Some" likelihood reflects the fact that some people are better, and some are worse, at expressing themselves in an organized, coherent fashion.)

  2. There is virtually no likelihood that you can put together an agreement that properly assigns ownership of the product and associated intellectual property rights.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

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