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I'm the sole founder of a recently launched web startup and I have someone interested in joining me as a cofounder, which I'm thrilled about. We've talked online and I'm very optimistic about our partnership, but at the same time I want to cover my bases just in case things doesn't work out.

And before everyone says "talk to a lawyer": I will, to discuss my options for both incorporating and for adding a cofounder, however I'd like to head in there with an idea of what a good outcome is.

How, for example, should we split the equity given that I've been working on it for a few months and him not at all (yet)? Or maybe we can do something with vesting?

And is there a way for him to work on it for a few weeks so we have a better idea of how we well we work together while avoiding any tricky IP issues if it doesn't work out?

We're not sure how to proceed. Any advice?

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2 Answers

up vote 1 down vote

You definitely need a founders agreement. Check out this question for more details on that.

As for equity, that is all going to depend on what type of company you form. If you form an LLC, it will be a challenge to vest since an LLC needs to be 100% owned. You can form a corporation and create stock options that vest. You will need to allocate founders stock, which does not vest, so that would most likely skew towards you owning a lot more.

As for IP, that is an excellent reason to form an entity that owns the IP. That way, whatever work gets done, gets assigned to the company. So, you might want to consider forming the company before taking this guy on.

You can also bring him on as a consultant and "pay" him in stock or whatever. That way, whatever he creates is owned by you.

In the end, the both of you have to sit down and hash out an agreement that makes sense for both of you. Be open and honest about the concerns and then get it in writing. I cannot stress that enough. Whatever you decide, write it down and both of you need to sign it.

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up vote 0 down vote

To add to Jarie’s advice:

If forming an LLC, look into setting up “Special Allocations of profits and losses”. This basically means that the company’s profits and losses are distributed among the members disproportionately from their ownership interests. I see this as a type of vesting for LLCs.

So, for example, you may decide that it’s fair to split the ownership of the company 50/50, but as a way to reward you for the extra work you’ve put in, split the profits/losses differently. Say 60/40 the first year, then 50/50 the second year. You can structure it any way you want, just make sure you talk to a lawyer about it. There are tricky tax issues involved with this type of agreement.

I’d like to emphasize how important it is that you create a Founders’ Agreement/Operating Agreement (for LLC) to avoid any misunderstandings in the future. I found a good resource to be Form Your Own Limited Liability Company from Nolo. It includes a CD with two Operating Agreement templates.

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