Kartik sarwade: A Pre-nup for your Startup - the Founders' Agreement
Execution Advisory for Startups
A pre-nup for your startup:
The Founder's Agreement
Nasscom Product Conclave 2013
• Nothing contained in this presentation should be considered as legal advice.
• Tax, regulatory and legal issues around valuations and equity issuance are complex
matters and you should consult with a law firm / a Chartered accountant or other advisors
to advise you on them.
How many of you are entrepreneurs?
What if you get the Founders’ Agreement wrong?
Likely reasons why you might get this wrong
Approaches to making better Founders’ Agreements
What should be in the contract?
When should you get one done?
“Watch out” issues
How bad is the problem:
How many think >50% of startups have
serious cofounder issues?
VC Portfolio startups*
*10,000 founders of 4,000 startups,
The Founder’s Dilemmas – Noam Wasserman
B K Birla
How many of you Entrepreneurs have a
written Founders’ Agreement?
Co-found with people you
have social relationships
with – friends, relatives,
Split equity early, static
A social relationship
increases the likelihood
of a cofounder leaving by
>85% of startups will have a
major change in strategy/
business model/ cofounder
Assign roles based on
Attitude and skills almost
competencies demonstrated always trump competency
in the past
A commonly used agreement
RTO Notification on Autorickshaw fares and terms in Bangalore
Above minimum fare:
Waiting charges per hour:
Night Extra fare percentage:
Outside city limits:
Rs 20 for first 1.8 Km
Rs 11 per Km
Rs 30. Minimum 10 minutes are charged.
No charge for first 20 kgs. For every
additional 20 kgs or part thereof Rs. 5
23:00:00 - 05:00:00
You’ve reached an agreement with an auto driver
You have full intentions to keep your end of the
Yet, you sometimes end up with a conflict
List down 3-4 scenarios that could cause you get into
Reasons Agreements fail
Primary intentions no longer valid
Significant shifts in balance of power
Incorrect assumptions (Stated or otherwise)
Ambiguity – no “Meeting of the minds”
Boundary conditions – uneven or unhandled
Notes to slide 13
• Agreements in general (not just Founders’ Agreements) cause problems between
agreeing parties at one of these 5 common points of failure.
• Point 1 is far more common for agreements involving startups than usual agreements
because of the propensity of startups to pivot their business plans frequently.
• Negotiating a framework rather than fixed numbers works well in handling problems
caused by Point 1.
A good framework..
… should strike a balance between complexity and effectiveness: Aim
for “Simplest that is good-enough”, not perfection
… be based on objective variables
… makes judicious choices in underlying assumptions
… is validatable, ideally using back testing
Hypothetical startup: Fddzzrrbl.ly
Problem: What percentage of equity in a startup should be
allocated to each founder
All founders contribute to the startup in various ways – cash, effort,
The startup should repay founders in equity commensurate with their
contribution to the startup
Model / assumptions
Most objectively determined, startup values at face value
Time as substitute for effort
“Market salary” as good enough estimate of value of time
Expertise: Nebulous to value; Take subjective circumstantial call
Senior guy, agreed to invest 10L, will go without a
salary for now
Relatively junior, agreed to put in 5L, will also go
without salary for the time being
Domain expert, cannot invest, will need a basic
salary of 5L
To sum up
The model is:
(i) not unduly complex
(ii) based on objective variables
In practice, a slightly more complex model provides pretty
Discounting later time periods’ contribution geometrically
is a particularly helpful adjustment.
Notes to slide 21
• A framework such as this comes in handy to take care of unexpected events. A founder
moves out or comes in, one founder decides to work part time, one of them decides to
invest a few lakhs – all these can be handled fairly easily by tweaking the numbers.
• You could even extend the framework to help determine the quantum of equity to
allocate to Advisors, Mentors or even for ESOPs.
• In our experience, we’ve found that a slightly more sophisticated model gives good
results but complicating the model beyond that isn’t worth the effort and in fact soon
• You should consult with appropriate professionals to advise you on valuations and
equity issuance matters. You cannot take anything contained this presentation as legal
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