Many founders and partners dread to ask the right legal questions and go on to start a business without answering the most basic and crucial questions. You may not fancy answering the legal questions now but going forward, they will hunt you, you share or equity of the business and your partners.The earlier you find a lawyer to set things straight, the better especially if you started the business with a friend, colleague or even your college buddy.
If you and you co-founder are beginning to get serious about starting the business and are beginning to devote substantial time to the idea, then getting a legal advice is essential. Founders of companies often make the mistake of waiting until they have received a strong indication of interest from an investor before they decide that it is time to incorporate or talk to a lawyer or even think about how much percentage they are willing to give away.
Things will be ugly in the future if the questions below are not answered right away. Most businesses that go through incubators or startup accelerators like Paul Graham’s Y Combinator, Techstars and 500 Startups have these questions covered. If you are bootstrapping with a friend, just take time to consult a lawyer and get your legal documents sorted out.
In an initial meeting between the prospective founders and their lawyer, these fundamental questions should and must be answered.
# Who gets what percentage of the equity (founders’ stock) of the business?
# What are the vesting terms of the stock—what do you need to do going forward to earn the right to keep all of your stock?
# When are the business idea and the related IP to be transferred to the enterprise: at the outset, upon funding, or upon funding from outsiders?
# Who is to hold what office; who is to perform what function; and when should some or all of the founders be required to quit their jobs and join the new business full time?
# What happens if the business gets funded and a founder decides not to join the new company: Does that founder lose a portion of his or her founders’ stock?
# How do the founders legally extract themselves from their current employment without being sued by their current employers?
# Does a founder’s business idea really belong to his or her (former) employer?
# What is the budget for the initial phase of the business, and where is the money to come from?