Guest Article: Initial Legal Challenges for Early Stage Technology Companies

24 Oct 2017

Founder Planning

Early stage technology companies typically run into legal trouble when differences arise between founders regarding:

  • Money
  • Control
  • Time commitments
  • Vision

And founder relationships go from bad to worse because:

  • Founders delayed key formation decisions
    • Founders often don’t initiate tough conversations with co-founders because they hesitate to come off to fellow co-founders as “the one who thinks that this won’t work out”
    • Most founders want to devote their time towards more direct company-building efforts in areas they are more familiar with
  • The company has poor corporate hygiene
    • Foundational legal documents are missing or incomplete
    • After formation, the company put existing documents onto a (virtual) shelf, and did not involve counsel in ongoing decisions post-formation, such as:
      • Hiring the first non-founder team members
      • Engaging consultants
      • Early stage fundraising

Have the Hard Conversations Early, and then Document the Agreement

The best way for founders to reduce the impact of (almost inevitable) changes in founder relationships is to work with counsel to address equity and governance issues from the start. This permits company counsel to hardwire the capital and governance structure so that expectations are clear. When the result of changes in direction can be predictable, the company can avoid costly re-negotiation of structure, and reduce the likelihood of one of the most frequent and demoralizing results of deferred decision making: that a founder opting to leave the company will have leverage over those who want to stay and continue to build.

Questions to Address Upfront:

  • What is the equity split?
  • How much equity should be reserved to incentivize non-founder employees, advisors and consultants?
    • Who will hold the board seats?
    • Who will hold what officer positions?
    • What are the expectations for time commitment?
    • How will conflicts be resolved?
    • What is the vision for the company?
    • What vesting schedule will be used for founder equity?

Jeremy Raphael, Senior Attorney

P: (212) 405-9701

E: jeremy.raphael@milleregan.com


This article was featured in our free Business Insights Guide: Technology Industry