Founders

Allocating equity among founders

Equity allocation discussions among founders can be emotional and difficult, but it is critical to have an honest and robust discussion about founder equity early. Allocating too little equity to a founder whose role will be key to the venture creates an obvious challenge. However, allocating too much equity to a founder whose ultimate contributions will be less significant than others can have equally devastating consequences, as doing so has the tendency to create a lot of ill will among the other founders over time (“I have more responsibility than he does, so it isn’t fair that he has the same ownership stake as me”). So it’s important to think through these allocations very carefully. Read More...

Vesting restrictions on shares held by the founders

Founders should put vesting restrictions on their shares. “Vesting” means that you need to “earn” your shares before you are allowed to keep them if you leave the company. Investors will insist that the founders’ shares are subject to vesting, because it is important that the team they are investing in is motivated to stay with, and build value in, the company.  Read More...

Vesting terms that make sense

Equity is often the primary financial motivation for taking risk in a new venture. To be a proper incentive, the reward of equity should be tied to each person’s contribution to the success of the venture. In an ideal world this would mean milestone-based vesting over several years. However, the reality is that few can predict what milestones will be most important beyond a few months in advance with any accuracy, and therefore most equity award vesting is time-based. Shares held by founders typically vest over a four- to five-year period on a monthly or quarterly basis. Most non-founder employees vest over a four- to five-year period with a one-year cliff (25% vests after the first year) and monthly or quarterly vesting thereafter for the remaining three or four years. The cliff period gives the company time to determine whether the employee is working out before the person gets to keep any of his or her shares. Sometimes founders’ shares do not have a cliff.   Read More...

Accelerating vesting on a sale or termination

You may want the vesting of your shares to accelerate if you are fired or the company is sold. Is that a good idea? Will your investors agree to this? Read More...

Tax implications related to shares that vest

If your shares are subject to vesting, how and when you are taxed on those “restricted shares” is governed by Section 83 of the Internal Revenue Code. Specifically, the tax consequences depend upon whether you make an election—known as a “”—under Section 83 or not. Read More...

Rules for foreign founders in the US on a student visa

A foreign student is permitted to own equity in a company and to serve on the of a company. A foreign student may not perform work for a company without obtaining appropriate authorization from the foreign student office at his/her university. The rules are no different for “founders." Read More...

Who owns your IP

To successfully launch a new , the company needs to own, or have a license to use, the intellectual property that will be used in the business. This aggregation of IP does not happen automatically and requires careful planning with your legal counsel. Read More...

Non-competes with former employers

On October 1, 2018, significant changes to the law governing non-competition agreements in Massachusetts became effective. If you are considering such an agreement, please consult with an attorney. For a summary of the new law, see this WilmerHale Client Alert. Read More...

Take a good idea with you when you leave a company

Even if you finish conceiving of or developing your idea after quitting your job, your employer could still own the rights to your idea. You should have an employment attorney review your current employment contract to determine any rights your employer may have in your idea.  Read More...

Retaining a license to your IP

It may seem logical and fair that the founders contributing IP they invented to launch a new should retain a license to that IP should the company fail or should the founders identify other uses for the IP outside those contemplated by the company. After all, the founders developed the idea and invented the IP prior to forming the company. Read More...

Founder compensation

Although this is ultimately a state law issue, founders are typically deemed to be “employees” who must therefore be paid at least minimum wages just like other employees in accordance with federal and state laws.

Founder employment agreements

Founders of technology-based and life sciences do not generally enter into “employment agreements” with their companies. Employment agreements typically provide the employee with rights to severance and other employment-related protections. Because of the large equity stake the founders have in the company and the importance of cash to a startup, investors will generally not agree to provide contractual severance rights to founders. Read More...

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