• Ownership Issues for a Startup Business
  • November 25, 2015 | Author: James H. Gulseth
  • Law Firm: JGPC Business & Corporate Law - Pleasanton Office
  • Ownership issues for your startup:

    Getting clear about who owns what?

    Not being crystal clear about ownership issues can come back to haunt the founders and investors of a new startup. Founders are sometimes pretty sloppy when they start up their business about who the owners actually are.

    As soon as possible, if you are serious about getting into business, you need to form an entity and allocate ownership interest to people.

    In other words you need to issue stock or membership interests to people as soon as possible. You need to make it clear “who owns what.” This is the key ownership issue.

    What are the important ownership issues for a new startup?

    It’s also important to make it clear as to what each person’s role is within the business.

    Everybody who is involved in a business (including the founders) need to have employment contracts, or independent contractor agreements that identify what their work position is within the company (NOTE: this is different from their ownership or officer positions). Basically we are talking about what their job description is.

    Are they in sales? Or marketing? Or software / product development?

    Are they serving as CEO, or Chief Financial Officer, or another leadership management position?

    Whatever position each founding member holds, it needs to be clearly defined in a written document in an approved and legal format.

    It is important to identify what each role is and tie down what their compensation is supposed to be. Otherwise, six months or a year down the road, after people have been spending a lot of time building up this business but they don’t have anything in writing as to what their ownership interest is. There will be lack of clarity of what their position in the company is and what their compensation is.

    3 Important startup ownership issues and questions

    You need to have written documentation which clarifies those startup employment and ownership issues. You can start by asking questions like:

    • Who owns the business?
    • What’s their role in the business?
    • What’s their compensation in the business?

    Often you’ll have a business that is owned 50/50 by two founders, but one owner is working full time and the other owner is not working at all for the business.

    If someone is going to work full time, while someone else is not going to work full time you may have to make allowances for that. You have to understand that ownership has nothing to do with your employment or time spent on the business.

    The person who is employed full time needs to be compensated in some fashion for his services. They are either going to get money or they are going to get additional stock/ownership interest. Compensation can come in many forms, and may be delivered at various times in the life of a startup business.

    If people have different roles and they are putting in different amounts of time and energy, then you need to come up with a way to make this fair. Lack of important startup ownership information may cause business failure – the business isn’t going to last very long because the arrangement is going to fall apart.

    And employment issues arise at startup with owners, employees, consultants, contractors, and other contributors. Owners, employee / owners and other contributors need to have clear business and ownership criteria identified for the long term health of your startup.

    This article was originally published on JGPC.com.