Once you move from a single person to adding a co-founder, hiring your first employee, or setting up a partnership that takes your company beyond just you, it’s important to make sure you have your stockholder agreements set up correctly. There is more than one kind of stock option to share. Do you know them all and when to use them? Don’t worry, we’ll help you. This Google Hangout will cover invaluable information on structuring founder equity to avoid the pitfalls that can harm a company’s ability to attract investment capital. Expert - Bob Bishop, Goodwin Proctor

1. ©2014 Goodwin Procter LLP
Structuring Founder Relationships
Founder Equity / Relationships; Shareholder
Agreements and Choice of Entity
Robert E. Bishop

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Innovation
Goodwin Procter’s Founders Workbench
 Founders Workbench: a free, online
resource to help entrepreneurs navigate
many of the legal and organizational
challenges
 Site includes self-service tools for
generating basic company legal
documents
 Resources include significant content,
links and library of resources, Capital
Calculator, Deal Dictionary, Document
Driver, and Founders Workbench blog
2
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Top 5 U.S. Law Firm
for marketing and business development. Ranking based
on the use of technology, social media and other
communications tools; Founders Workbench featured
case study

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Overview
 Founder Equity / Relationships
 Shareholder Agreements
 Choice of Entity

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Founder Equity / Relationships
Choosing the Right Co-Founders:
 One of the most critical decisions a team has to make
 Skill set is critical but so is personality / compatibility
 Character and work ethic are essential

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Founder Equity / Relationships
How to divide the pie?
 More of an art than a science
 Pro rata is not (necessarily) right
 Considerations:
› Relative contributions (IP, commitment, intangibles, etc.)
› Opportunity costs to the Founders (what other options do the Founders
have?)
 Cash investments should (typically) be addressed separately
 Resolve this issue at the outset – do NOT “kick the can”

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Shareholder Agreements
Key terms:
 Vesting
 Composition of the Board of Directors
 RoFR / Co-sale rights

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Vesting
Importance of vesting:
 Without it, a Founding team member can leave and keep all of his or
her stock
 Most investors (particularly VCs) will insist on it
› Tactical advantage of putting something in place upfront that could
survive
› BUT the investors can always make you re-write terms

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Vesting (Cont.)
Vesting terms, etc.:
 Typically 4 years
 Monthly or quarterly vesting
 No “cliff” – different than employees
 Some vesting upfront? Maybe
 Types of acceleration
› Termination without “cause” quit for “good reason”
› “Single trigger” on a “sale event”
› “Double trigger” and “modified double trigger”
› Death / disability
 83(b)s – 30 days is no joke

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Board of Directors
 Need to determine who is going to “run the show”
 Generally tracks ownership, but not necessarily
 Use an odd number of directors to avoid deadlock (can be difficult
with 2 equal co-Founders)
 Keep it simple
 This will get revisited in connection with a financing

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RoFR / Co-Sale Rights
Rights of First Refusal
 Gives the Company / the other Founders the right to purchase
shares that a co-founder proposes to sell
Co-Sale Rights:
 Gives the other Founders the right to sell along side a co-Founder
that proposes to sell shares

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Other terms
 Post-IPO lock ups – good to get these in place at the outset
 Restrictions on transfer
 Put / Calls – sometimes in unique situations
 Amendment terms – be careful here!

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Choice of Entity
Typically 3 Choices:
 C corporation
 S corporation
 Limited liability company
Each generally provide a “liability shield” which is the primary reason
for incorporating, but there are differences…..

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C corporations
 Most common approach for high growth companies
› Simplicity / familiarity
› Most VCs have restrictions on their ability to invest in LLCs because of
certain tax implications to their limited partners
› VCs (and other entities) cannot invest in S corps
 Downside: Double taxation and other less favorable tax implications

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S corporations
 Benefits:
› Looks like a C corporation
› No double taxation
› Other tax benefits
 Disadvantages:
› Limit on number of shareholders
› Only one class of stock permitted (precludes preferred stock financings)
› Only U.S. individuals (and certain trusts) can be shareholders

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Limited liability companies
 Benefits:
› No double taxation
› Other tax benefits
› Ability to grant “profits interests”
› Maximum flexibility / “blank slate”
 Disadvantages
› Less familiar
› More complex / expensive
› Requires more sophisticated advisors