Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Alyssa Royse
“I met these amazing people and they are so smart and creative and we all love this idea and get along so well and we are like totally great together and are for sure going to have like the world’s most successful company and live happily ever after.”
“Great. What’s your operating agreement like? Vesting Schedule?”
“Oh, we don’t need that, we like totally trust each other and we all bring different things to the table but we totally value them equally.”
Someone, call the divorce attorney; this is going to get ugly. As soon as the pool-boy stops bringing the Pina Coladas, you’re gonna wish you had a prenup. Or, as we like to call them in the real world, an operating agreement.
I am an unbridled optimist. I am one of those people who can literally look at a pile of shit and see nothing but the world’s largest tomatoes growing out of it. But I still believe in being prepared, and the time to get prepared is before you wish you had gotten prepared.
Here are many issues – legal and personal – that you need to address and codify very early on, (and how my newly-formed and totally-in-love team of four is handling them):
Partnership / Vesting
It is really tempting to believe that, as founders, you are all contributing equally and just grant everyone equal shares from day one. DON’T DO IT. Despite our best intentions, people’s lives change and they may not stick with it for the long haul. If they’ve vested all of their founder shares on day one, and leave on day two, the rest of you are hosed.
- Come up with a list of deliverable outcomes for each founder. This should be tied to growth milestones for the company.
- Come up with a vesting schedule for EVERYBODY, as well as the mechanisms by which vesting is evaluated.
What We Did: We have agreed on expected deliverables for each partner as well as a vesting rate and schedule for all of us. We decided on quarterly vesting, and meetings to discuss vesting. At each meeting, we will self-evaluate whether or not we feel like we hit our targets and earned the full shares we’re eligible for in that vesting quarter. If we all agree, cool. If not, the other 3 partners will evaluate and decide.
Hours / Vacation
What We Did: We’re not tracking hours, vacation or sick days, at all. We expect people to get their jobs done, and think rationally about finding work / life balance.
Dating
Ah, the no-fraternization policy. Fuck it. This is another good place to look at outcomes rather than rules. If someone’s personal life is impacting their work, then it’s a problem – no matter what, or who, they are doing in their personal life. If it’s not, then it’s not. Either way, it’s about the work.
What We Did: Simple Policy: No photos. (Come on, it’s me, and we’re building a site about women’s sexuality, you didn’t expect me NOT to be flippant, did you?) Seriously? I don’t think that anyone’s personal life is my business, and neither to the people I work with. (Though we all share everything with each other. Our meetings are long, what with all the story-telling. You should all pray for the one guy on our team!)
Founder Investing
In general, it’s a good idea to look at “granted” founder shares and “purchased” investor shares as two different things. Depending on your investors, the shares will each have different rules. Not all shares, for instance, have voting power over operating decisions. Be clear about the difference between the shares, and be consistent.
What We Did: All four of us are on the same vesting schedule for our founder shares. Some of us are also investing cash, and those shares are purchased with the exact same rules as any other investor. (Generally, more financial upside, but little or no decision making power.)
Giving / Selling / Inheriting Shares
This is an easy one to overlook, but what happens if Billy and Susie are totally in love when you found the company, so Susie gives Billy 50% of her shares – with voting rights and everything. Then things go very badly, and you’re stuck with Billy as a major shareholder. You need to clearly define the rules of giving / selling founder shares.
What We Did: No gifts. Our shares cannot be gifted to anyone else without express consent from the rest of us. If someone wants to sell their shares, which we can’t legally stop them from doing, then we have the right of first purchase. If we can’t or don’t want to buy them, then that person can sell them. If someone dies (heaven forbid) then the shares stay with the estate (legally, they have to) but with the same rules.
Exiting
Most of u s have an end game of some sort in mind. (Google will buy us, right?) This discussion at least needs to be had, if not resolved. Is there a price you’d be willing to sell for? At what stage? Or do you picture yourself running this company and handing it down to your kids? Or going public? Most of these questions are hypothetical at this stage, but it’s important to have the discussion.
What We Did: Wrote our acceptance speeches for the Pulitzer and Nobel Peace Prize, picked out vacation homes on every continent and practiced shaking Oprah’s hand while graciously saying, “thank you so much for making this possible, we promise to fill your very big shoes with the same passion and vision for which you are so loved.”
Depending on your corporate structure, your board or investors may have a say in how your operating agreement operates. But regardless of who is making these decisions, they need to be made now, while you’re still in love and still believe that the future is paved in rose-petals. Because when the going gets tough, it’s really tough not to have a working map.
___________
Alyssa Royse has the greatest business partners ever, and is reasonably confident that she will still feel that way when they are deciding whether to sell to Google or go public. She’ll see the rest of you at StartUp Day on Saturday, where Dave S. will be delivering on the very clearly defined outcomes that he was assigned.
