Mumbai | 07 Nov, 2017 (1 year, 6 months ago)

Contracts and Legal Documentation

What equity share to be divided between Co-Founder -1 & -2 and Investors & Team

Before launching of new startup for smooth run of e-commerce what ratios of equity share to be divided with Co-Founder 1 & 2 and Investor and working Team. What Tag / Clause to must be added in contract agreement to avoid any dispute.
Answers
07 Nov, 2017 | 18:03

Hi,
Ideally, the co-founders should execute a co-founder's agreement to decide their respective rights, duties, and obligations. This would also include important aspects such as responsibilities in relation to the business, demarcation of roles, etc. The ratio of division of shares can depend on such responsibilities. Ideally, it should be equal, but, it can be skewed in favour of the co-founder providing greater input in terms of either expertise, or time, or intellectual property, or capital. The equity ratio is completely at the discretion of the co-founders.
Next, for the working team, you would need to consider whether they are so critical to the startup that they should be given equity upfront, or, whether they can be provided equity through a vesting option in the form of an Employee Stock Option Plan. Each method has its advantages and disadvantages. Again, this would be determined primarily by the role played by the working team and their leverage.
An investor, on the other hand, would ideally take a share depending on his risk appetite and the future potential of the startup. For early stage investments, owing to the higher risk factors, an investor would consider seeking a greater share of the equity. However, it is critical that a startup not be forced to provide a significantly high percentage to the investor with the hope of receiving funding, and for that, the startup must be able to resist any offers that may potentially take away control of the company from them.
The clauses in agreements can be drafted only after significant discussions and negotiations with the concerned parties. You may connect with me through LinkedIn and I would be happy to assist you in any aspect concerning the strategy, structure, negotiations, and drafting that may be involved at any stage in your growth.


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