Pre-incorporation founder’s agreements

startup founders

I’m currently working on a couple of speculative projects where a non-trivial (more than a weekend) amount of unpaid work is necessary up-front to prove out the business. It’s important – especially when you’re working with new people – to flesh out everyone’s expectations in the beginning (and way easier than down the road). However, too much discussion is a waste of time before you’ve created a product that’s worth something.

Here are a few key questions to be answered.

  1. How much time and money will be invested by each founder?
  2. What are the specific roles and responsibilities of each founder?
  3. What is the scope of the Version 1 product we’re working towards, or hypotheses we’re testing?
  4. What is the definition of success? What outcome would keep each team member working on this project at the same or greater level of effort?

From there, you can negotiate.

  1. The percentage ownership split. What percentage will each founder get if the project is sold?
  2. The percentage profit split. What percentage of earnings will each founder get?
  3. How will decisions be made? Is there one CEO, or is a majority vote sufficient? Can a majority of founders kick out another founder?
  4. What happens if the project fails, there is a disagreement, or interest fizzles out? Who keeps the IP (code) and branding (name) – subject to the others buying it from them?

After the Version 1 milestone is reached, if your project is a success – congrats (this is rare)! You should actually incorporate. Hopefully all founders will be on good terms based on the expectations set at the beginning (and reasonable with the most-likely changed requirements and direction of the business). If you haven’t hit it out of the park, re-evaluate, re-negotiate, and take another shot (or move on).

Here are a few templates for putting your pre-incorporation founder agreement in writing.

Please leave a comment below if I’ve forgotten anything, or if you have another resource I should add.

Aside: when researching this, I thought Startup Weekend surely must have a FAQ about this, and they do (in particular about IP and ownership). This is a great answer for a project where the initial investment is just a weekend.

Startup Weekend: How do teams address the issue of IP/ownership? While it doesn’t hurt to be clear about your individual expectations from the start, we’ve found that teams who don’t spend time addressing this issue until it actually matters (i.e., there is a tangible product to have ownership of) are much more productive and successful than those who do.

Related: Ideas are inevitable, why I don’t sign NDAs and laugh at stealth mode




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Ideas are Inevitable

“…the essential quality of the technium: this idea of a self-reinforcing system of creation.” – Kevin Kelly, What Technology Wants

Every week I get a phone call or request to meet from an entrepreneur with a big idea. I am all too familiar with that uneasy feeling you have when an idea takes over your brain. You start to feel like you are a slave to the idea, that the implementation is inevitable. You feel burdened with the realization of the idea. You have to do it.

The problem is, ideas truly are inevitable. In fact, that’s WHY people are so passionate about their ideas. they think because it is inevitable – that THEY have to be the one to do it. Our brains are part of a biological, social, and technical evolutionary system that naturally removes in-efficiencies and synthesizes new stuff. Most are bad ideas that don’t survive, many are good ideas whose time has not come, and a few are good ideas that explode. It is easy to under-estimate the passion required to bring even the best (most-inevitable) idea to fruition.

I’m writing this for my own benefit. Ideas are inevitable, timing is critical, and execution makes all the difference. I want to be better at identifying ideas that just need execution, and be better at executing them.

Say you invented a better weight loss pill. One pill a day and you never put on weight. How will people find out about it? How will you get them to trust you enough to buy it? How will you fund your first batch of it, get it approved for market, differentiate it from your competitors? “One person will be so impressed that word of it will spread and then it will be on Oprah” is not a good answer.

Entrepreneurship is about partnerships. Creating value for everyone involved. That’s the execution of an idea. Ideas are inevitable, but they don’t come to fruition automatically.