In the early stages of building a startup, the company’s law firm will advise the founders to sign a letter acknowledging the company, not the individuals, are the clients. This is to ensure the firm works in the company’s best interests as a whole.
As the company grows to include more employees and investor stockholders, founders can lose voting control of the company and eventually have the same voting power as a common stockholder.
The individual founders should seek separate legal counsel for the following reasons:
1. To create a contribution agreement. The intellectual propertydeveloped by a founder of a technology startup is usually contributed to the company in exchange for founders stock. The intellectual property is then considered property of the company, and the founder doesn’t retain any rights to it.
An attorney can help a founder structure the contribution of the intellectual property so that it reverts to the founder’s ownership if he or she is terminated without cause or if the startup is disbanded. A contribution agreement can also protect other intellectual property the founder does not intend to give to the startup.
2. To protect a founder’s shares if the founder leaves. Under a stock restriction agreement, a company has the right to purchase a founder’s shares if the founder leaves the company. These shares may accelerate after the founder leaves the company. The founder may leave the company before the option to buy the stock has vested.
Under the guidance of an attorney, a founder may be able to negotiate for partial or even full acceleration.
Stocks, vesting and acceleration can be complex issues for the founders of a company. To learn how we can help protect your intellectual property, shares and other interests, contact us today.