I’m not a lawyer, but I can't count how many times I’ve urged entrepreneurs to settle the ownership issues for their start-ups before the venture starts looking like there might be something there. “No worries,” I’m told. “We’ve worked together on teams at the university, and we really trust each other.” What a joke! “Get the legal stuff settled early,” I warn them, because it’s more difficult when you’re facing the possibility of funding. Do they listen? Not as often as I’d like.
So, here’s the problem. When you’re in the conceptual stage and you’re designing your business, doing some market research, and iterating a business model, no one is really keeping track of who does what. Sara throws in $1,000 to pay for a quick prototype; James interviews some potential customers; Hector is busy writing code. In other words, everyone is doing anything it takes to get the work done, but no one has accountability for a specific task. OK, they get lucky and get to pitch to a seed capital fund and wind up garnering some interest. They can see the money already. But, wait. "We need to get our act together and define some roles and who gets what."
Now the arguments begin. Hector believes that were it not for him, there would be nothing because, after all, he does the programming, a critical task. James counters with the fact that he came up with the idea in the first place, and then Sara drops the bomb that money trumps everything. And so it goes…
Too many times, waiting to take care of the ownership issues results in at least one of the founders threatening to leave, but not without continuing to retain a stake in the company. I know of one start-up that has been stalled for two years because the partners, lifelong friends, couldn’t agree on the direction for the company. They had attracted fantastic partners and even some capital, but they couldn’t stop arguing. Eventually, they broke up, but because they owned the business 50/50, the partner who wanted to carry on couldn’t do so without agreeing to give his friend an even bigger stake, which he was unwilling to do. What a mess, and it’s still going on.
And so I say ONE MORE TIME, please settle the ownership issues with a lawyer before you get wrapped up in the excitement of start-up. It will save you time, money, and angst…and maybe even a company.