What does it mean to be “founder-friendly”, and how can a few simple questions help you identify a founder-friendly law firm from a mile away? If you’re looking for ways to protect your influence and company ownership, even as you hand over some control to independent board members and/or gain funding that comes with limitations and qualifications, keep a few things in mind. Some founders want to launch a company, hand over control, and then sell as soon as possible so they can move onto the next idea. But if you’d like to stay in the driver’s seat until you’re ready to change direction or let go on your own terms, you’ll need specific type of legal and business advice to make sure you’ve kept open every available option.
Here are some “founder-friendly” things you should think about:
A founder friendly law firm will help you understand how to implement supervoting stock, which may mean establishing two classes of common stock, A and B. Class A common stock carries multiple votes per share while Class B common stock carries only one vote per share. Sometimes, companies will also create a Class C, “no-voting” stock, for employee hires. Founders are typically the sole owner of the Class A, heavy voting shares.
There are advantages to disadvantages to this type of approach with common stock, and institutional investors can be wary of seeing multiple classes of stock in early stage companies. Nonetheless, many of the experienced entrepreneurs we counsel and advise have been keen to adopt these types of common stock classes and want this type of common stock class structure as a way of maintaining founder-control over the long term.
Founder Friendly Exits
While there are many founders who hope to run their company for decades, many entrepreneurs are hoping to build a company and exit by selling to a bigger player that can better monetize or scale a good idea. It can be exciting for founders to receive an acquisition offer, but founders must keep in mind that some term sheets are better than others. There should be no rush to exit in the face of onerous terms that may handicap the founders, the company, or its stockholders. Founders need to be wary of post-closing representations and covenants that may impose additional obligations and liabilities on founders for months or even years after the closing. To the extent that a founder is transitioning to a bigger company (the “acqui-hire” process), founders should carefully review the terms of their employment, which may carry heavy strings with respect to future equity grants, covenants not to compete, or other intellectual property issues. If your company is composed of multiple stockholders or even multiple classes of stockholders, it would be completely appropriate for founders to be represented by separate counsel at an exit as well, to ensure that founder interests are kept in mind throughout the sales process. As controlling stockholders or members of the board, founders will have to juggle their fiduciary duties to the company and to minority stockholders in addition to their own interests, and having separate representation may be appropriate at that time.
Enhanced Dispute Resolution
We’re all heard horror stories about early-stage unicorns suddenly disintegrating because of lawsuits -- either lawsuits between founders (usually fighting over equity), or lawsuits between companies fighting over trade secrets or important data. Ideally, as a founder, you want to keep the risk of these disputes to an absolute minimum. While it’s impossible to shield your company from a completely random third-party lawsuit, founders actually have a lot of control over dispute resolution. Between themselves, the founders should be agreeing to mandatory and confidential dispute resolution mechanisms that will keep the temperature of any dispute very low and ensure that fights are kept behind closed doors and dirty laundry isn’t aired to the public. Employee and consultant contracts should also have robust provisions that protect confidential information and proprietary data, while also ensuring speedy and enforceable dispute resolution. Terms of service contracts should have enhanced dispute resolution provisions so that a company can regulate how its users are using the data provided through an internet or app service and to prevent data mining and scraping. And finally, companies can ask their stockholders and board members to consider confidential and bespoke methods of resolving internal disputes, both to keep costs low and to prevent such disputes from spilling over onto the front pages of industry papers, blogs, and newspapers. All of this can be accomplished and put into practice with the help of counsel that is astute and aware to a founder friendly perspective and approach.