Founder Friendly Standard is a checklist of legal issues that can influence whether entrepreneurs run their companies or merely take orders from investors. Published in November of 2017, Founder Friendly Standard is the first startup investment template to define what a “founder-friendly term sheet” is from the perspective of three entrepreneurs. Other investment contract templates are written by investors; see how they compare in this infographic.
- Find an attorney in our directory below to help you negotiate a founder-friendly term sheet. (Please do not attempt legal work yourself.)
- Start with our term sheet template (.docx) if your attorney is papering the deal.
- Start with our attorney review form (.docx) if an angel investor or venture capitalist has given you paperwork.
Founder Friendly Standard (v1.1 USA)
A company meets the Founder Friendly Standard v1.1 when its equity, financing, corporate governance, and founder labor agreements meet all standards from every section below:
Section 1. Voting equity
These standards set boundaries for voting equity.
1.1 Individuals who work for the company and are instrumental in its inception (“Founders”) receive a class of equity such as Common Stock which provides no less than twenty-four (24) votes to one (1) vote of stock held by investors or employees.
1.2 Investors receive a class of equity such as Class A Preferred Stock which will have one vote per share with a higher par value justified by a liquidation preference.
1.3 Employees and contractors receive a class of equity such as Class B Common Stock which carries one vote per share and does not have a liquidation preference.
1.4 The first board consists only of Founders. The term of the board is one year. After the first year, a new board is elected by the equity holders at the annual meeting. Board decisions are made by a majority vote of the board. Board members cast no more than one vote each on any decision. Board committees are disallowed for at least the first two (2) years.
1.5 New equity of any kind, including stock option pools, dilutes all equity holders equally. Therefore, no investor in the company has anti-dilution rights of any kind.
Section 2. Sweat equity
These standards set boundaries for equity received in exchange for services or “sweat equity.”
2.1 Founders agree in writing they will give and receive performance reviews at the end of each fiscal quarter for the first four (4) years.
2.2 Sweat equity vests each month over a period of four (4) years with a one (1) year vesting cliff. Vesting begins on the date shares are issued.
2.3 Founders keep all information confidential and assign the company all intellectual property created within the scope of their work for the company.
2.4 Due to potentially devastating tax consequences, the company tells individuals receiving sweat equity in the United States to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code. Founders who live or pay taxes outside the United States are similarly advised to consult tax professionals about applicable local and national taxes.
2.5 Non-compete restrictions only apply to employee or independent contractor agreements and do not survive termination. The company’s bylaws and other investor agreements are either silent on the issue of non-competition or expressly allow competition.
Section 3. Law
These standards set legal boundaries.
3.1 For at least the first two (2) years of operations, the company does not agree to pay the legal expenses of any investor as a condition of investment.
3.2 For at least the first two (2) years of operations, the company does not agree to binding arbitration with any investor.
3.3 For at least the first two (2) years of operations, the company does not agree to binding arbitration with any Founder.
Section 4. Transfers
These standards set boundaries for equity transfers.
4.1 Upon any transfer or sale of Founders’ super-voting equity, the portion of equity transferred converts to the class of equity described in Section 1.3. This also includes any transfer to Founder’s estate, spouse, or heirs.
4.2 The company has the right of first refusal on any transfer or sale of equity for up to forty-five (45) days, but it cannot veto a transfer or sale. This provision is void after a company’s stock is listed on a public exchange such as the NASDAQ, OTCBB, New York Stock Exchange, etc.
Section 5. Usage
These standards attach the Founder Friendly Standard to a company’s agreements.
5.1 The company’s equity, financing, corporate governance, and Founder labor agreements invoke the Founder Friendly Standard as follows: Intention of the Parties. The Parties agree that the enclosed exhibit, “The Founder Friendly Standard” captures the intent of the parties in creating this Agreement. In the event of any discrepancy between this Agreement and the Founder Friendly Standard, the Founder Friendly Standard will prevail. The enclosed exhibit is an exact copy of version 1 retrieved from https://eisaiah.blog/founder-friendly-standard/.
5.2 By using the Founder Friendly Standard, you agree that its author(s) is not providing you with legal or tax advice and is not a party to any agreement where this work is attached. This work is licensed to you under CC BY-ND 4.0 which can be found online at https://creativecommons.org/licenses/by-nd/4.0/.
Find an attorney to prepare your startup’s organizational documents and negotiate a term sheet. Your attorney can help you determine which issues in Founder Friendly Standard apply to your unique situation.
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Similar to how there are different versions of Linux, you may remix Founder Friendly Standard for your organization or country if you:
- Call your standard any name except do not include the words “Founder Friendly Standard”
- Say your work product is “a modified version of Founder Friendly Standard (v1.1 USA) https://eisaiah.blog/founder-friendly-standard.”
- Disclose your version “may differ materially from Founder Friendly Standard, and users should consult with an attorney.”
Dan Flanegan, Eisaiah Engel, and Adam Bloom are entrepreneurs who have learned hard lessons about the importance of negotiating a founder-friendly term sheet with investors. They wrote the Founder Friendly Standard to help other innovators go further. Read about their startup struggles in “I’ll be the Sean Parker to your Mark Zuckerberg.”
INFOGRAPHIC: How does Founder Friendly Standard compare to term sheet templates from 500 Startups, Y Combinator, NVCA, Gust, and Sam Altman?
BOOK: The investment case behind Founder Friendly Standard is to give founders control in exchange for valuation discounts. This is described in Chapter 4 of the book Innovation Casino: Grow Digital Revenue with an Ecosystem Innovation Fund.