It happened because it all seemed legit -- we were both going all-in, we had the exact share split in writing, did reverse vesting, received founders stock, etc. I even noticed that the shares seemed to exceed the total, and my business partner sent minor corrections, explicitly affirming I had the most shares of anyone. You have to trust your business partner at some point.
Legally speaking, my business partner secretly created a small equity pool for all co-founders excluding himself. There was no reason to believe we were in a pool, since co-founders split the entire pot.
This caused the percentages to seem about as expected. To the best of my knowledge, there were only two tells in the written contract:
1. The total shares were listed as ~1M, which at the time sounded perfectly logical. Unbeknownst to me, this was only the shares in the pool. I now know that startups often first allocate 10M shares, apparently for psychological reasons.
2. The vesting documents were titled an "equity incentive plan". At the time, this made perfect sense to me; the entire reason for us all reverse vesting is to provide incentive to stay. However, I now know this specific phrase often indicates an equity pool.
I recommend all founders speak with the lawyers jointly, instead of delegating it to the CEO. Ideally, also pass the contract by a startup-savvy lawyer. (In our case, one of our co-founders showed a CPA who said everything looked normal.) I recommend not signing until the exact cap table with zero errors is jointly signed. (As I mentioned above, I pointed out a mistake to my business partner then signed after he replied I had the most equity.) I also recommend contacting your business partner's references if you haven't worked together, especially since they will be providing those to VCs later.
Every communication referenced was in writing. The equity was only one of many very unsavory things that happened, and I eventually had to hire a lawyer. He suggested we sue and took the case on contingency, but by that time the company had minimal assets.
Perhaps I was too nice. Most VCs recommended dropping/settling the case, since
(1) it was only a year and many startups go bust anyway;
(2) the best people spend their energy on the future, not the past; and
(3) regardless of the facts, many people are wary of working with someone who sued his business partner personally. (As Trump shows, portraying yourself as the victim of a baseless lawsuit often elicits sympathy, while justifying bringing a lawsuit often requires a careful factual explanation.)
Even if it didn't help you personally, having pursued it more vigorously would have been a public good as it would ensure a documented record of the misdeed which future prospects could use to avoid the bad actor, as well as discouraging new bad actors from developing as they would see the loss rate as exceeding the win rate etc.
As long as everyone keeps letting shit go, letting bad actors off without penalty just because it would take more effort than it was personally worth, then we will continue to see these behaviors manifested and likely at an increasing rate as it proves it's effectiveness.
The short answer is always, always have your own lawyer review these things.
The lawyer preparing the corporate documents is the corporation’s lawyer. That person cannot also be your lawyer. Every founder should have their own lawyer review and advise them on the paperwork.
Legally speaking, my business partner secretly created a small equity pool for all co-founders excluding himself. There was no reason to believe we were in a pool, since co-founders split the entire pot.
This caused the percentages to seem about as expected. To the best of my knowledge, there were only two tells in the written contract:
1. The total shares were listed as ~1M, which at the time sounded perfectly logical. Unbeknownst to me, this was only the shares in the pool. I now know that startups often first allocate 10M shares, apparently for psychological reasons.
2. The vesting documents were titled an "equity incentive plan". At the time, this made perfect sense to me; the entire reason for us all reverse vesting is to provide incentive to stay. However, I now know this specific phrase often indicates an equity pool.
I recommend all founders speak with the lawyers jointly, instead of delegating it to the CEO. Ideally, also pass the contract by a startup-savvy lawyer. (In our case, one of our co-founders showed a CPA who said everything looked normal.) I recommend not signing until the exact cap table with zero errors is jointly signed. (As I mentioned above, I pointed out a mistake to my business partner then signed after he replied I had the most equity.) I also recommend contacting your business partner's references if you haven't worked together, especially since they will be providing those to VCs later.