Eight Key Questions to Ask and Answer When Structuring Ownership: A Perspective from Three Co-Founders
Starting a boutique professional service firm is an exciting journey. Here, we’ve distilled our collective experiences into eight key questions every founder team should ask and answer when structuring ownership:
- Who owns what percentage?
Answer: Ownership stakes reflect the value each founder brings. When deciding percentages, consider factors like capital investment, skills, connections, and previous experience. It is crucial to have candid discussions about these elements and recognize where each founder adds unique value. The ownership distribution should be based on a mix of these attributes and future commitments.
- Who is in control?
Answer: Control can be different from ownership percentage. In most firms, co-founders opt for a unanimous decision-making model for major decisions. This way, despite any differences in ownership percentages, each co-founder feels their voice is heard and respected.
- Who has contributed money, how much, and when?
Answer: Keeping transparent records is paramount. Document every monetary contribution and link it to specific milestones or business needs. This approach makes it easy to see who contributed, when, and why, fostering trust and clarity among co-founders.
- Who is going to contribute time, how much, and when?
Answer: Not every founder can commit full-time initially. Discuss your individual commitments, both present and future, and noted any anticipated changes (e.g., moving from part-time to full-time). Clear agreements prevent potential resentment or misunderstandings.
- What is the incentive compensation plan for each co-founder?
Answer: Besides equity, it’s essential to consider salaries or other compensation, especially if founders have varying levels of financial commitments outside of the business. Adopt a model where early salaries are modest but are combined with performance bonuses and future equity vesting.
- What happens when a co-founder quits?
Answer: A founder leaving can be unsettling. Agree that if a founder decides to quit, their shares would undergo a vesting schedule, allowing them to retain only a portion of their equity based on the time committed. This strategy ensures that founders are incentivized to stay and contribute to the firm’s growth.
- What happens when a co-founder is forced to leave?
Answer: This is a tough but necessary discussion. Establish a framework detailing specific scenarios where a founder could be asked to leave (e.g., misconduct, not meeting agreed-upon commitments). In such cases, a buyback clause at a predetermined valuation would be triggered.
- How is a “forgotten founder” handled?
Answer: “Forgotten founders” are individuals who may have contributed in the early stages but weren’t formalized as part of the founding team. Addressing this proactively, Agree to acknowledge any early contributors either with a smaller equity stake or a one-time compensation, ensuring they’re recognized but without long-term firm obligations.
In conclusion, structuring ownership isn’t just about equity distribution. It’s about crafting a relationship framework that will endure challenges and maximize collaboration. By confronting these questions head-on and forging transparent, fair agreements, will lay a strong foundation for your collective future.
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