A FounderPrenup is an written legal agreement between two or more partners that outlines things like under what conditions the company will run, what will happen money and stock-wise should the company merge, be sold, or go under completely, and what is expected of both partners. It prevents both partners from trying to screw each other over should the company get successful or go under.
It’s similar to a marriage prenuptial agreement in that both parties understand what will happen to their assets should they split up, but it also outlines who gets what if the company is successful.
Example #1 (without a FounderPrenup):
George is dedicating his life to the project. Sammy is not dedicating his life to the project, and wishes to act more as an advisor while still maintaining stock in the company. They both agree *initially* that George should get more stock in the company since he is going to be the one doing the majority of the work and taking the financial risk. They outline this in their prenuptial agreement. The company becomes huge, and they decide to sell. George takes 75% of the profits and Sammy takes the remaining 25%, as outlined in their FounderPrenup. Everyone knows what was expected of them and knows what they are owed. Everyone wins!
Example #2 (without a FounderPrenup:
Ahmad and Larry start a company. They agree to a few basic terms, but are so excited that they don’t think that they need a FounderPrenup — they just want to get started! They agree to be 50 – 50 partners and “gentleman’s shake” on it.
Both Ahmad and Larry put equal amount of work into the company, but Larry ends up investing more money. The company, again, grows exponentially and the cash comes rolling in. Larry has been investing almost all of his money into the company, while Ahmad has barely invested a cent. Larry feels that he should get more of the profits, considering that it was his capital that helped the company grow. Ahmad feels hurt. He and Larry agreed at the beginning to be 50 – 50 partners PLUS Ahmad worked just as hard as Larry to help grow the company AND it’s not his fault that Larry has a rich uncle that gave him all that money — Ahmad just didn’t have the capital to invest.
Ahmad and Larry fight. Larry punches Ahmad calling him a “stingy bastard”. Ahmad slaps Larry calling him a “greedy capitalist pig”. They end up hating each other and not being able to agree on the terms that the company slowly fades away, they lose all the money and focus that they had, and they end up not only losing the company…but also their friendship.
Don’t let Larry and Ahmad’s situation come true for you. Know what is expected out of both of you, and save yourself from any future headaches.