Unorthodox Startup Formation

Two other founders and I are planning to start an S-class tech firm. All of us have a government background and are new to the process: one founder is the notional CFO and has thus far handled the business planning and the incorporation; another is the notional CTO and has been doing the lion's share of the back-end coding; I'm the notional COO and have had a hand in managing both of these and have also focused on the front-end.

We are trying to decide on firming up responsibilities and equity allocations; we have tentatively agreed to a 1/3, 1/3, 1/3 distribution of equity and responsibilities.

Is there a precedent for this kind of division, given that we are essentially establishing co-CEO-ship among the founders? Are there obvious responsibilities that will (or should) accrue to any of us given our positions thus far?

It's common for equity owners to split the company equity equally, especially when their contributions are, roughly, going to be equal. You will want to make sure that all of your equity is subject to vesting over a reasonably long time period (like 3-4 years). A common mistake among startups is issuing a big chunk of equity to somebody who ends up not working out.

It's a little less common for you to not have a CEO/President. That may work for you now, but you will eventually end up needing one. Chances are, that will be closer to when you're ready to launch your product.

Define what is expected of everyone and have something in the contract on what to do if obligations and commitments are not kept. You don't want to build up the value of the company only to find someone with a 33% share has not made any contribution. You may all be trustworthy and hard working people, but "life happens" and illnesses, other jobs, families and financial obligations can get in the way.

Who is doing the selling? If one of you brings in a lot of money, they should get a higher percentage.

The most important thing is to have your prenuptial agreement all set up, now.

You are trying to decide on firming up responsibilities and equity allocations. But you should also start thinking at what will happen when your company will grow:

• What if you will disagree on direction?
• What if someone will leave?
• What if that person will not perform so well?

And you must decide now who will be the CEO. As Mark Suster once said,

In many businesses you end up needing to make tough decisions. Consensus does not always build.

So, there is a big risk: not finding an agreement AFTER you’ve sunk in years and hard-earned $$$. This is why I suggest you to setup your prenuptials now.