As the founder of a business, you have a vested interest in making sure that you protect the stock and equity that you have in that business. As a founder, you have what is commonly referred to as “founder’s stock.” Here are five ways to protect founders’ stock and equity.
So what is founder’s stock exactly?
In general, founder’s stock is really just a fancy way of saying “common stock.” Common stocks are the shares issued at the business’s inception (for a lower price than when stocks are sold on the market), and typically to those who are there from the beginning. Because the amount of stock owned determines the ownership of a business, it’s vital as the founder to make sure that you are properly protecting the equity you have in your business. What are some ways that you can go about doing this?
- Watch your language
Whenever you are talking about interest in your business, it’s very important to make sure that you are watching the way that you do so. By this, we mean that if you are talking with someone about getting involved in your company, like an employee or investor, be careful and deliberate about how you use the term “equity” and others related to it. It’s normal for people to want to know what benefits they will reap from getting involved with your business, like stock options, so just think of this as an easy way to avoid making frivolous promises to potential partners that could cost you your equity down the line.
- Create a vesting schedule
Although stocks are issued to the founders at the business’s inception, they aren’t actually owned until they “vest.” By setting up a vesting schedule, which usually provides for stocks to vest over a certain period of time, you are protecting the ownership of your company by preventing any one person from immediately departing with a huge percentage of ownership in the company.
- The Right of First Refusal
The “right of first refusal” is basically a clause in your ownership documents that gives the founder the first right to repurchase back stocks from departing owners before they have the opportunity to sell them off. This gives you the right as the founder to protect ownership in your startup by preventing ousted partners from giving away their shares.
- Carefully document ownership structure
Another way to protect your founder’s interest is by clearly and carefully documenting the ownership structure of your company. This is because the percentage that each founder or owner gets will vary depending on their roles, and so it’s vital that each and every person’s role is clearly defined.
- Consult your attorney
If you are starting your own business, it’s essential that you work closely with a qualified business law attorney at every step of the way. Not only is it essential to make sure that everything is up and running smoothly, but your lawyer can also make sure your founder’s interest is securely protected.
At EmergeCounsel, we have the experience to help get your new business started off on the right foot. Because we understand that every business is unique, we work closely with our clients to create the best solutions for their business. If you own a business or are in the process of starting one in Colorado, please contact us today to find out more about how we can help!