In a recent Google Hangout on founder equity issues sponsored by The Capital Network, Goodwin Procter partner and Founders Workbench contributor, Bob Bishop, talked about the importance of formalizing shareholder agreements during the early stages of starting a company. Once you’ve identified your core team, have incorporated – or are thinking about incorporating – and have made decisions around the overall outline of equity division, the next step is to establish the terms of your shareholder agreement.
During his presentation, Bishop highlighted three key terms co-founders should address when drafting their shareholder agreements to avoid challenges when trying to attract investors:
- Vesting of equity – It is imperative that vesting terms be established early on, otherwise it becomes a real challenge for the startup if there is a departure in the founding team. Without vesting in place, if a co-founder leaves, they have the right to keep and retain their share of the equity which has a huge impact on the company’s remaining capital over time. Investors, particularly VCs, will insist on vesting, so it is advantageous for co-founders to put terms in place upfront.
- Configuring your Board of Directors – When constructing your Board of Directors, you are essentially determining who, from a strategic standpoint, is going to “run the show” for your startup. Early on, the Board will likely be made up of the founding team, but should always be an odd number to avoid a deadlock situation when it comes to critical decision making. During equity financing, the structure of the Board will be revisited as investors expect to have a Board seat and will want independence on the Board.
- Rights of first refusal (RoFR) and co-sale rights – RoFR and co-sale rights help to manage who owns shares and ensures liquidity of shares on equal footing among co-founders. RoFR gives the company the right to purchase shares that a co-founder proposes to sell, and co-sale rights allow other founders in the company the right to sell their shares alongside the co-founder who is proposing to sell his/her shares.
To learn more about these three key terms and other terms that should be included in a shareholder agreement, watch the full Google Hangout with Bob Bishop.