RSS at Feed BurnerUsing Stock as a Thank You Note
Rick, at The Post Money Value, writes about a start-up that recently went bust as a result of not being able to get funding. The company actually had a VC ready to invest and needed to get some paperwork signed. One piece of paperwork was the shareholders agreement requiring all of the shareholders to sign. The problem? The founders were generous in giving out shares of the company in the early stages:
A little code help? Here, have some shares. Dropping a pizza by? Here, have some shares. Some cash? Bless you, here, have some shares. You get the point. All told, 42 shareholders which owned 22% of the company. 42 people spread out over three countries. 42 signatures required. And, as fate would have it 21 missing shareholders. Moved, not returning phone calls, no emails, etc.
Giving out shares is not necessarily bad, but you should be sure you do it only in exchange for things that are truly valuable to you. In addition, Rick discusses setting up a voting trust:
Draw up a voting trust for everybody who has less than a certain percentage of share ownership. You can use less than 10% or whatever number but spell it out and ensure the language is clear and reviewed by a qualified lawyer.
Early in your start-up keep in mind that you may want to get additional funding, even if it is not in your immediate plans. New investors do not want to have to deal with anything too complicated. An investment in any company is inherently risky and the more complicated things are, like having 42 investors that need to sign off on any deal, the riskier the investment becomes.