How to make sure my co-founder doesn't wreck our business?

[janjon]

I'm wondering what clauses and assurances can be put into contracts when incorporating so that the business doesn't completely implode if me and my co-founder break up. We met only recently with the express purpose of forming a start-up, and we don't have any personal history.

Even though we have agreed that I will be CEO, I'm not at all sure how to structure the board and such to make sure I can make the final call on potentially tough decisions. Should we not split the equity 50-50 if I am worried about this? Any other precautionary suggestions?

[aditya]

* Read the equity equation (http://www.paulgraham.com/equity.html), and founder's pie (http://www.andrew.cmu.edu/user/fd0n/35%20Founders%20Pie%20Ca...) for the equity question.

* Make sure you have standard founder vesting, 1 year cliff, 4 year vesting. Also, founder's get equity not options (ie. they don't have an option to buy stock in the company, they already have the stock, so if they leave before the vesting period is over, the company has to buy back the stock from them).

* Make sure you communicate well with your founder, a lot of startups die because of lack of communication between the founders.

[coryl]

1) How big a startup is this; two full time engineers giving up their jobs at Apple, or two undergrads doing a summer project?

2) Your talking about a board already, but you just met this guy. Are you already funded?

[janjon]

-It's a little about two undergrads (we've graduated) but way below two full time engineers

-When incorporating, don't you have to form a board?

[CyberFonic]

Who else would be on the board?

What value are you bringing to the business? and your intended partner?

[janjon]

-No one yet...could i put anyone on the board? -we are splitting all the legal costs and that's it for now

[CyberFonic]

If you have such concerns now, then I would suggest that your gut is smarter than your head! Why not get out now? Being a small business and trying to act like a big one is common mistake. There are many good articles on the net about how you don't impress anyone by being the CEO of a two person shop.

Another angle: why don't you own 100% and hire this guy? Then you can make all the calls!

Please read: http://www.paulgraham.com/really.html - especially the bit "Be Careful with Cofounders"

[robdimarco]

Good question. One easy answer to get you started solving them.

TALK TO A LAWYER. They will guide you through these questions. Do not cheap out on the lawyer now, you are asking important questions that will fundamentally affect the ability of your business to succeed. These are common questions and a lawyer will work it out.

[gruseom]

Not necessarily. It's well-known in the entrepreneurial community that most lawyers don't understand startups and will take an inappropriately heavy and expensive approach to these questions. Also, few embryonic startups can afford much in the way of legal fees. Hint: a good startup lawyer will typically agree to defer fees based on the level of funding the company's level of funding, i.e. you pay a certain amount at $100K, more at $250K, etc.

If I were the OP I would do as he/she has done and ask questions of other entrepreneurs first. For the record, I agree with aditya that vesting is the main technical answer here. Maybe you'll get lucky and grellas will chime in!

[janjon]

I'm talking with a start-up focused lawyer now who seems really sharp and reasonable with fees. we already agreed to vesting of course.

i guess my question is generated by my anxiety about having a long term agreement but not having distinct divisions of power. if anyone has done it before and lived to tell could chime in that would be awesome!!!

[gruseom]

"Distinct divisions of power" strikes me as an idea that might be more trouble than it's worth.

Either there's something about your partner that's bothering you -- in which case you should address it explicitly and not put it off -- or you might be bringing worries about power, conflict, etc., into this situation that actually originate elsewhere, in which case you should get aware of that and make sure it doesn't poison your relationship. Either way, the technical legal level is probably the wrong way to approach this. If you can't trust each other, no document is going to save your business.