Wednesday, October 31, 2007

Who Owns Your Start-Up...The Answer Is In The Documents

The below is a guest blog post on yesteday's Austin Start-Up Blog. The guest blogger, Ellen Wood, is the CEO of vcfo, the company where I work as the Director of Business Development. I thought this short post was an important reminder for all entrepreneurs to make sure that you are properly documenting your business. While verbal agreements with partners, employees, vendors and customers are need to make sure that everything is in writing to avoid disagreements down the line.

Start up Your Start-Up, But Don’t Forget The Documentation OR – Your Start up – Who owns it?

Guest blogger Ellen Wood is the co-founder and CEO of vcfo, inc. With over 800 clients to date, and offices in Austin, Dallas, Denver, and Seattle, vcfo has been an industry pioneer and continues to be a leading provider of financial, human resources and systems implementation services to companies ranging in size from emerging to public.

Have you documented your stock position? Co-founders, early employees, and funding sources often have a slice of the early company pie and it’s not unusual for some commitments to linger as verbal agreements among the team in the start-up phase. It can be a costly mistake to not document your ownership position as early as possible.

The ideal time to take ownership if you are part of the founding team is at or shortly following formation, well before any outside events cast a valuation over the company. Many companies form with the required initial $1000 as capital. If you are a 20% co-founder at formation, then you would write a check to the company for $200 and have a certificate issued in your name. Some agreements provide for stock to be paid for by services, but that is subject to interpretation and look back and often involves payroll taxes. It’s cleaner, easier and definitely less subject to interpretation to write a check if the amount is minimal as in this example. A cancelled check is independent evidence of your payment for the asset at the time you wrote it.

If you are in this situation, you are not alone. Paperwork is not top of mind for most early stage companies. However, timing delays are not your friend in this matter. If you let this matter linger without formalizing it, you may find yourself bringing up the issue of undocumented commitments when you are talking with investors. This is a very awkward time to have these discussions; and worse, once a term sheet is in play or even under discussion it is impossible to “back up” the value to the original value at formation. If you have waited until you have a premoney term sheet of say $3,000,000 to document your 20% interest you now have an asset with an outside value of up to $600,000 dependent on the type of equity you are raising. That is not a financially positive picture for you personally relative to taxes on receipt and it certainly wasn’t the deal you signed up for in the first place. You can also find yourself without vesting credit for time that you have worked or without the players in the deal that made the original verbal commitment to you. Don’t let this happen.

Work with a lawyer who understands company formation, founder’s stock, and shared early equity issues. Take the time to document these arrangements early in the life of the company.

Make sure you follow the process all the way through to making payment for your stock and receiving your stock certificate. Invest the time upfront to avoid headaches or worse at a later date.

Have A Great Day

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