Professor Noam Wasserman, who studied 10,000 founders shares that 65% of venture-funded companies fail due to conflicts amongst co-founders.
Could you improve your odds of success by reducing the potential for conflicts with co-founders? Could you expand that to investors? The Founder Friendly Standard seeks to answer these questions by clarifying commonly disputed corporate governance issues upfront.
The Founder Friendly Standard is an open source addendum that a licensed attorney can attach to the typical agreements startup companies sign. It is not a replacement for any agreement. Founders can bring this adjudication form to an attorney to see if their deal meets the standard.
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Founder Friendly Standard™ v1.0
A company meets the Founder Friendly Standard v1.0 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 to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code.
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 the Founder Friendly Standard LLC 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/. Founder Friendly Standard is a trademark of Founder Friendly Standard LLC in Dallas, TX, USA.
About the Founder Friendly Standard
Founder Friendly Standard™ is an open-source framework that improves a startup’s odds of success by clarifying commonly disputed corporate governance issues upfront. It attaches to any agreement that entrepreneurs sign, including bylaws, employment agreements, and equity agreements.
Authors
Eisaiah Engel, Dan Flanegan, and Adam Bloom are entrepreneurs who have learned hard lessons about the importance of establishing a founder-friendly legal foundation at the beginning of a venture. They wrote the Founder Friendly Standard to help other innovators avoid mistakes and go further.