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What is an effective “pre-incorporation-agreement” between possible founders of a startup?

The bottom line is that the very question you are asking is one of the trickiest things of all when it comes to startup founding.  On the one hand, if you DON’T make things explicitly clear up front, you are just begging for a future disaster by ‘kicking the can down the road’. On the other hand, if everything is locked in stone before you even start, you may find yourself with a completely untenable structure even six or twelve months out, when it becomes clear that not everyone is contributing as much as you all envisioned at the outset.

It’s sort of a case of “damned if you do, and damned if you don’t”. That said, it’s infinitely better to have a structure which at least provides a framework for taking action, otherwise you may well lose your money, your friends and your company. My suggestion? If this really has the potential to turn into a company (instead of just a school project) find a local lawyer who specializes in this stuff, and who will be willing to help you do a simple incorporation document for a few hundred dollars. Then sit down with your co-founders and divvy up the equity based on the contributions you all believe each of you will make…providing for reverse vesting, a large option pool, and a clear decision-making structure.

Good luck!

*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *

Written by David S. Rose

user David S. Rose Founder and CEO,
Gust

David has been described as "the Father of Angel Investing in New York" by Crain's New York Business, & a "world conquering entrepreneur" by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups. David is also CEO of Gust.

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Comments

One thought on “What is an effective “pre-incorporation-agreement” between possible founders of a startup?”

  1. A simple M.O.U. to start with prior to more serious documentation, as the Project develops. Our M.O.U. gives the developers 45% to start with, reducing to 30% after 4,000,000 downloads, with the developers owning the Copyright in the resultant code, till they receive $200,000.00 from the Project. If they can not realize the $200K within the first 12 months, they have the right to take over Marketing control of the Project.