Introduction to Structuring Co-Founder Terms
When co-founding a startup, two key aspects to address are the terms of ownership and responsibilities, especially when one founder contributes the initial seed investment. This article explores the ways to structure co-founder terms in such a scenario, ensuring clarity and fairness for all parties involved. Whether you are an experienced founder or a tech enthusiast, understanding these principles can be invaluable.
Establishing Initial Equity Allocation
The foundational step is to establish the present unfunded value of the company. From there, determine the appropriate ownership based on each founder's contributions and roles. Making an equal split is unrealistic and potentially hazardous, as one founder may inherently bring more value due to experience or the seed capital provided. However, for fairness, it is crucial to allocate a greater percentage to the founder who invests the initial seed capital or brings more value to the table.
Consistency in Equity Allocation
It is important to maintain consistency in how the initial seed capital is viewed within the company's equity structure. Whether you choose to treat the investment as a convertible note or as an increase in the valuation of the company, the core principle remains the same: the founder who invests should receive a larger portion of equity.
Options for Treating Initial Seed Investment
When a founder invests the initial seed capital, there are several options for how to handle this investment within the company's equity structure. Here are three common methods:
1. Convertible Note
A convertible note is a flexible investment vehicle that allows the founder to defer repayment until a future event, such as a successful Series A round or an acquisition. This method is beneficial because it protects the initial investor's rights and can defer the exact terms of repayment until the company has more stability.
2. Equity Allocation Based on Invested Capital
Another option is to allocate new shares based on the amount of cash invested, which simultaneously increases the company's valuation due to the capital infusion. This method is straightforward and transparent, making it easier to determine the distribution of equity among founders.
3. Hybrid Approach
A hybrid approach might combine elements of both convertible notes and equity allocation. For example, a convertible note could be modified to pay back the founder in equity shares if specific milestones are met, further aligning the interests of all founding members.
Deciding on the Right Method
Choosing the right method depends on the specific circumstances of the startup and the preferences of the founders. There is no one-size-fits-all answer, and each option has its pros and cons. However, the key is to ensure that the method chosen reflects fair and transparent allocation of equity based on contributions and roles.
Conclusion
When one founder provides the initial seed investment, structuring the co-founder terms requires careful consideration. By understanding the principles of equity allocation and the various methods for handling the seed capital, founders can ensure a fair and legally sound agreement. Whether through a convertible note, equity allocation, or a hybrid approach, the goal is to maintain transparency and ensure that the company's equity structure accurately reflects the contributions of all founding members.
Keywords
#co-founder terms, #seed investment, #startup valuation