• How-to

Most founders begin their startups with friends, colleagues or someone  they have known in the past. There are some pertinent points you need to discuss with your co-founder(s) upfront, when you are freezing on the idea and preparing to start.

Equity structure
Decide the shareholding and vesting (if a partnership firm, then contribution ratio and profit sharing). This is also related to other aspects, such as roles that each co-founder would play, the amount of cash investment, salary to be drawn by co-founders and others. There is no one formula, but generally, the person who has invested cash and also takes a very active role in the company, would obviously get a higher stake compared to the person who just invests.

Roles and responsibilities
In a startup, co-founders pretty much do everything between themselves, until they have the initial employees and some organizational structure. But still, it is necessary to have a sense of who does what and responsibilities. It not only helps in having adequate discipline amidst chaos in the initial period, but also establishes commitment and accountability.

The key take-away from this discussion would be to identify the decision-maker, would it be the CEO/Chairman of the Board/a majority shareholder. While it is great to have a consensual approach, it is imperative to have one person who will have the final say.

Broad contours of the business
While it is hard to foresee the future requirements, you can check out your co-founders flexibility/rigidity on a given idea and execution. I have seen a startup team disintegrate because the co-founders came together to build a product company and market realities forced the company to ‘also’ do services, which consumed a large portion of the startup team’s bandwidth.

Salary
Expecting a salary during the very early stages is hard. However, a discussion on the compensation structure, including performance-based incentive, is important.

When things go wrong
Discuss the ‘give-up’ strategy; that all the intellectual property developed will belong to the company; a co-founder will not continue/start/participate in a similar or competing business; a co-founder can be asked to leave if she/he is not performing; most importantly, how would the shareholding alter if a co-founder left.

(This article is for informational purposes only and is not a legal advice or opinion).

SHARDA BALAJI is the Founder of NovoJuris (www.novojuris.com), a legal consulting company focused on startups and SMEs in the technology space.

©Entrepreneur November 2010

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