Startup teams form in many different ways. Often, the “core” founder does some homework and recruits the founding team. Sometimes, teams are, more or less, recruited by a VC who has a startup idea but needs entrepreneurs to make it a reality. Most often, however, startup teams are formed by people who either currently work together (at the company they’re planning to leave) or who have worked together in the past. In my experience, this process is usually informal and based at least in part on a (sometimes fuzzy) mixture of friendship and perceived competence. As I’ve written here , here and here, it not infrequently goes wrong because one of the founders doesn’t work out and leaves the company with an equity stake disproportionate to the value he added – to the economic detriment of the remaining founders.
There’s a flip side to this problem as well.
I call it the problem of the “forgotten founder,” and here’s how it works.
As noted above, most often startups are the result of informal “nights and weekends” discussions among friends. Not infrequently, the cast of characters changes over time, with “peripheral” people leaving and joining the core group. Early on, the group rarely has any formal legal structure. That is, the group is not usually formally established as a corporation until the founders “get serious”. Incorporation involves lawyers, and most founders don’t have “that kind of money” – certainly not to spend on lawyers.
Even after the founding team has coalesced, quit its jobs and decided to “go for it”, a VC financing can take a long time. To entrepreneurs, the VC world moves at a glacial pace, even at its best. During this part of the process, it’s also not unusual for one or more of the founding team to leave. Reasons vary. Quite often, however, the departing team member has a spouse and kids who need to be supported, and their net worth is insufficient to sustain them for long without an income.
What’s the problem?
It involves two related legal concepts: (1) what type of legal entity, if any, has been formed during the “nights and weekends” phase and (2) what ownership rights can be claimed by someone who participated in the startup discussion and brainstorming – but who didn’t stay on part of the team.
Forgotten Founder Situation #1. In the early, informal stages of forming a company, you don’t want to be deemed a “general partnership” – for a bunch of reasons. One important reason is that the rules on (1) whether a general partnership has been formed and (2) who’s a general partner (and therefore possibly entitled part of the ultimate benefits of a successful venture) are not as clear as the rules involving who’s entitled to a stake in a corporation (or possible other “formal” types of business enterprise you might choose). Believe me, you don’t want someone who participated in some portion of the early brainstorming, but who left and didn’t become part of the continuing team, to later claim that he was a “partner”, helped create your new venture and therefore is entitled to some economic stake in it.
Forgotten Founder Situation #2. The law governing who has rights in different kinds of intellectual property is not always straightforward. Moreover, the law in this area is under development because the facts are usually different in each of the cases that make the law. Who is the “co-inventor” of a patentable idea, or the “author” of a copyrightable work (e.g., software code) is not always intuitive. After several years of blood, sweat and tears to make your startup a success, I guarantee that you will not want to share the fruits of that labor with someone who claims that it was partly their idea, but who didn’t make all the sacrifices you and your co-founders did.
As a lapsed lawyer, I’m not going to give legal advice – particularly any that can be applied to a particular situation. Indeed, the final bit of advice in this post is to engage a good lawyer early (how to pay for it is also discussed). Entrepreneurs do need to know, however, that sometimes the law can have counter-intuitive results in disputes over who owns what – especially when the “what” is intellectual property.
Here’s some advice aimed at helping you avoid the “forgotten founder” problem.
First, be careful (not paranoid) about who you include in discussions and/or brainstorming sessions about your new company idea. It’s good to test your idea(s) on constructively critical friends and colleagues, but be careful about having someone whom you don’t intend to have as a co-founder deeply participate in the discussions over an extended period of time.
Second, keep notes of the discussions, including (in general terms) who said what.
Third, see a lawyer early in the process to make sure the details of your particular situation are kosher and that you’re protected (especially about how to apply my preceding two items of advice to your situation). While lawyers are expensive, most of the good ones will work for promising startups on a deferred or discounted billing arrangement. If the lawyer you’ve been introduced to won’t do this, find another lawyer. The really good ones will. To be clear, even lawyers who focus on startups can’t work forever without getting paid. So prudence and clear communication will also have to be your guides.
It’s really hard to build a successful startup, even when all the planets align. The startup process throws up plenty of unavoidable problems without any help from you. The problem of the forgotten founder is avoidable. When starting your company, do yourself a favor: avoid it.