Questions

I am the founder and only person running my clothing for teens with autism business. Another designer wants to come on board to help. She knows I can't pay her but we both want it to be more official and cover our bases. Is there a template that I can refer to?

I am a corporate strategy consultant with a focus on operations, corporate governance, and have been a direct or indirect investor (as an angel and VC), operator, founder, officer, Board member, advisor or consultant to 30+ startups. Cap tables and the impact over time are a particular area.

The question that first must be asked is "why do you need a co-founder?".

If you are seeking a true partner, a person who will be in the trench with you that has skills you do not have, and will keep you sane when you are not keeping them sane. it is one approach. Every startup has bleak times when this emotional, albeit business and mission-based, period occurs.

If this is for optics alone, meant to influence investors who see you need a team to make an investment, the approach is very different, but with similar implications.

If this is just as an incentive to get them to work for "free" while the product is developed and funding is in doubt, it is another approach.

A true partner/co-founder should have a stake in the firm that will reflect what the expectations will be from both of you. You may have cultured this firm to its current level, yet you need more hands and thinking to get it further. In that version, while you may retain the controlling interest, it is difficult for a co-founder to put in 80 hour weeks without a meaningful outcome for them. Should you hold 95% and they have 5%, the economic imbalance will affect the dynamic.

If it is for optics, not only does the economic imbalance apply, but investors know it and will act accordingly. They do not want a "decorative" co-founder; they want to know there is someone else there who can lead the company when the times get rough, as much for your sanity as for business reasons. If they see a 95/5 split, they treat that co-founder as an employee, not a co-founder.

If it is for economic reasons alone, you must first deduce the input/outcome expectation of the person. Assume a full partner is a 50/50 split (e.g. the two of you had teamed up at the beginning) that implies 80 hour weeks, credit card financing, and zero early compensation, you can model the equity based on the amount of time and for what period the person can commit. Commit is the key word. For example, If they can commit to 20% of a full, all-in role, you could set 10% as the target (20% of 50%).

Finally, LLCs are easy but messy for investors. You can do it, but you need a compelling business or they will force you to convert to a C-Corp (interim you can elect Sub S election). You can do multiple classes of shares and an option-like class, but this is a complexity that, unless you have a CFO and/or a crack lawyer, is more complexity that you need while building a business.

Hope this helps.


Answered 5 years ago

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