When you start a business with a co-founder or co-founders you are starting off a long-term relationship that could last 10 years or longer. Yet despite the scale and importance of this commitment, founders often rush into it without discussing what happens in the various “what if” scenarios that can pop up, many of which can be totally out of both of your control.
What if your co-founder develops a serious illness and can’t work anymore? What if they have a death in the family and need a break or need to take a different path altogether? What if your co-founder develops an addiction or simply changes his/her mind about what they want to do with their life? Each of these scenarios, and many more, don’t have obvious solutions, but addressing them early during the “good times” and at least agreeing to resolution frameworks is far better than putting it off. (Note, we’ve been there ourselves and recognize that actually having these conversations is much easier said than done! But, it doesn’t negate the importance of it.)
Co-founder prenups
A co-founder prenup is just a cute name for an agreement between partners that details the financial consequences, employment consequences, and board/voting control consequences that may arise from disagreements or changes in status of the co-founders.
One of the best resources we’ve found on this topic is written by Andreesen Horowitz, and we’ve summarized our most important takeaways here:
- Vesting - Is a four year vest the right timeframe? In 1999 the average time to exit for a startup was 4 years but by 2020 it was 8 years. A 4 year vest can create the very common issue where a co-founder leaves after fully vesting while the other stays on fighting day-in-and day out to increase shareholder value. Think carefully about what the right vesting time-frame is for your situation. Be wary of accelerated vesting clauses. The entire purpose of vesting equity is that everyone has to continually work to earn that equity. Accelerated vesting clauses upon a founder exit run opposite to that and should be
- Removing a co-founder - Under what conditions can one co-founder remove the other? In some cases this is rather simple as the CEO/founder with controlling equity has unilateral ability to remove a co-founder. If that is not the case for you then you should both agree on certain situations where a co-founder can be removed.
- Board roles - Do you want your departed co-founder to still have control on the board even after he/she has moved on to something else? Depending on your situation you may consider making the board role dependent on continued employment at the company.
- Transfer restrictions - I.e., limits on selling stock. You may consider putting some limitations on when and how much an exited co-founder can sell stock. If your exited co-founder goes out to market to unload a big chunk of his equity and you are in the process of raising a big Series C that can materially impact your fundraise.
- Detailed Roles and Expectations - You should spend time up-front detailing your roles, decision authority, and general expectations. If you run into conflict down-the-line this document that you both agreed upon will be extremely helpful in finding resolution.
References
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