Useful Tools For Structuring Founders’ Ownership
When an entrepreneur thinks about starting a business with one or more partners, they don’t imagine a situation where the business is working out, but the partnership is not.
Perhaps a cofounder wants to leave or needs to be terminated.
Perhaps a business owned equally by two cofounders is paralyzed because of a broken cofounder relationship.
But that scenario, where the team has been able to create a valuable, growing business, is exactly where having share vesting and repurchase arrangements down in writing, is crucial.
Why are these agreements and arrangements so important?
Because, absent these arrangements, if a company’s governing documents state that a particular founder owns a certain number of shares, then that individual owns those shares regardless of their ongoing contribution.
In other words, there’s nothing in the standard laws governing corporations that states that someone who came to own shares because of active involvement in the business must surrender those shares if and when that involvement ends.
Yet, time and again, this basic point is often overlooked by otherwise very intelligent, very capable entrepreneurs.
The result is predictable: a founder who no longer contributes to the company ends up retaining a significant ownership stake in the business and any associated voting power.
The solution to this ‘free-riding’ situation simple. There are multiple, straightforward mechanisms that protect the business (and shares) from such a situation. For example:
Vesting schedules: many companies with multiple founders have the founders vest into their shares (or other type of equity) over time, usually a period between 2-4 years. These vesting arrangements can be customized to reflect any important differences between the founders.
Repurchase Rights in the Event of Resignation, Termination, Death, or Disability: many founder teams like the idea that some or all of the cofounders (or their estates) are obligated to resell their shares to the company and/or the other founders if they resign, are terminated from their role at the company, pass away, or become permanently disabled.
Buy-Sell Arrangement for a Two-Owner Company: if two cofounders each own 50% of the business – meaning, a situation where both cofounders need to approve any decisions – continuing management disagreements can paralyze a business and destroy its value. In those cases, a Buy-Sell arrangement sets out rules for how one partner can buy out the other in a way that’s fair to both sides.
These foundational governance tools are not novel. When implemented at the outset and embedded in binding agreements, they clarify expectations, allocate risk, and protect long-term enterprise value.
Equity structures define control, economics, and strategic flexibility. Addressing them early on is a matter of leadership & stewardship for any business with real potential for major growth & value generation.
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