Establishing ownership and reward in a start-up company

In the second part of a series, Peter Rouse investigates how entrepreneurs can navigate shared ownership in the early stages of business.

There are many reasons why start-up culture in the US is so much more vibrant and persistent than in the UK. What is clear is that the US is home to some of the largest tech-based businesses in the world and innovative business models continue to stream out from this admittedly large developed economy. In the US there is a level of sophistication with regard to managing ownership and reward in startups that seems to be lacking in the UK. Could it be that US start-ups are more likely to succeed and thrive because they can attract and retain key talent using methodologies that are virtually unknown here in the UK?

Why does it matter how start-ups deal with ownership and reward? It matters because if you don’t get it right from the start then it becomes much harder, if not impossible, to put things right later on with the result that people walk away rather than stay with often fatal results for the business. Getting it right from the outset means including mechanisms that can be applied to deal with the unexpected and in such a way that those involved feel to be fair, if only because they knew the deal from the outset.

So at what stage is it important to deal with ownership and reward in a start-up context? Most start-ups begin with an idea in someone’s head about how to solve a particular problem and so do something better. If we share our ideas someone may take them; if we don’t then we get nowhere. So we have to share our ideas ‘in confidence’ with people we trust (not to take them), hence the predisposition to deal with family and friends (who may not be the best people for the job and whose relationships you place it risk if things go wrong).

If we are dealing with a stranger then we reach for an non-disclosure agreement (NDA) which sets out what is confidential and what can and can not be done with the information. (NDAs are a form of contract and relatively inexpensive to enforce using the Patents County Court). An NDA is an example of how thought is given to the respective interests and obligations of those involved. There is generally not much scope for discussion or negotiation over what are common terms in such agreements, so they are relatively unlikely to be a cause of conflict or arouse emotions.

Discussing who will contribute what, who will be responsible for what, and what each will get in return in terms of equity, income and control is far more likely to give rise to disagreement and so arouse emotions. In truth, if you can deal with these issues openly and fairly then you have a much better chance of surviving when the proverbial hits the fan, as most surely it will. The best means of addressing these issues properly and comprehensively is to make use of model agreements and other resources, all of which originate in the US.

The common approach is for founders to agree their ‘shares’ at the outset. Whatever the split, what all too often happens is that a founder does not contribute as planned or at all with the result that the others are left working in the business while that founder still has their share of the business and whatever rights go with it. I know this happens and the consequences of trying to put things right as I have been there myself; more than once I’m ashamed to say. Now I know what I know, that will not happen again.

People probably don’t change that much but their priorities do and what was once stated as a firm commitment can be quickly forgotten when something better comes along. Equally, circumstances change and through no fault of their own a founder may be forced to withdraw from the business due to ill health or family issues or any number of factors outside their control. To be responsible towards the business you create it makes sense to do all you can to make sure that it can survive change, particularly among the founders.

In the final part of this series, I will look at vesting schedules and how they can be used along with other tools to ensure a startup has the best chance of success.

Read Parts I and III here

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