Ah yes, co-founders. Best friends, confidantes, all-nighter buddies, the list goes on. Your co-founder is, or will become, one of the most important people in your life, and that’s a fact. No pressure at all. Today, we’re going through the basics of co-founder structures, from the technical stuff to relationship advice. Interested in learning more? Join us on 15 April for‘The Co-Founder Wars’, where solicitor and SME / Startup Advisor Cermain Cheung will be sharing everything you need to know to get your startup prenup right from the beginning!
The issue we need to discuss first is selecting your co-founder. Most co-founder partnerships stem from longstanding friendships, which feels like a natural choice because support and trust are absolutely essential when you’re starting a business with someone else. Even thought this is hard to hear, but it’s important to keep in mind that a close friendship does not always translate well into a business setting. People operate on a different wavelength when it comes to work, and change over time (as well all do), causing conflicts to arise. Before diving into a partnership that requires incredible commitment, consider starting the company on our own if it was your idea, or finding a business school friend who you work well with. There are also a number of ‘co-founder dating’ website and meet-ups out there as well, but we’re 100% sold about the science behind them.
Without wasting any time, let’s dive straight into what a common equity structure looks like. Most startup gurus will tell you that a 4 year vesting with a 1-year cliff on a 50-50 split, with full acceleration on exit. Not familiar with the terms? Don’t worry, let’s break it down: Vesting: When you receive your equity share after a period of time (typically 4 years), which means that if you leave the company after a year, you’ll be able to receive 25% of your 50% share, which is 12.5%. Cliff: If a co-founder severs the partnership during this time and leaves the company, then he or she does not get any equity at all. Full Acceleration On Exit: When you receive 100% of your equity share after the company has undergoes an IPO.
One additional thing to keep in mind is that your co-founder structure will affect how investors value your company. This means that while it’s tempting to give yourself a generous equity structure, investors will be weary if the vesting structure or cliff is not standard. In fact, you’ll likely have to restructure before you’re able to receive funding. Rather than being able to cash out faster, having a weak structure will probably leave you with considerable investor and co-founder problems along the way.
It’s common to want to assign the C-level titles right off the bat, which is fine if there are distinct strengths in the co-founding team. But there’s no need to rush into this, and perfectly fine or even advisable in some cases to wait a couple of months, get a feel for what works well, and then decide how the responsibilities should be more strictly divided. In most cases, the co-founders will be overseeing every aspect of the startup in the beginning, so there’s no need to draw lines until more structure is necessary as more employees join the company. That being said, it is absolutely crucial to have a hierarchical structure within the company, even if your co-founder is your best friend. This means no startup-y titles that makes you co-CEOs.
All is not always fair in love and war, and when it comes to disputes with your cofounder, someone who quite often can be a close friend too, all manner of issues can arise. Solicitor and longtime SME & Startup Advisor Cermain Cheung will be leading a discussion about the challenges that Co-Founders inevitably face.
Topics will include: real (and sometimes sad) stories, Co-Founder structures, and more.
Monday, 25 April | 7 - 9 pm
QRC Garage | 299 Queen's Road Central, Hong Kong
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