I have a colleague in the process of negotiating the terms of a partnership that is offering 15% equity. He asked me the following:
What % of that equity should be earned over time vs. fully vested. I am being offered a vote on a board that has 3 other partners. The founder has 2 votes the remain have 1. Can new partners be added by the founder to the control board? How does this change if a VC is added? What terms should be added to an agreement in the event that they decided to take on investment and the VC wants to eliminate all partners? What is the standard penalty? Partners will receive 70% of equity fully vested in the event of termination in the first 24 months?
I have plenty of additional questions. In short, as a minority partner what terms should I be insisting to be added to the agreements to protect myself from dilution, termination, or protection from future VC or investment that may attempt to edit existing terms?
1. A contractual right to a specifically described and enforceable exit strategy
2. An "Armenian Handshake" style of shareholder agreement, tying:
(a) the compensation to which the Minority shareholder is entitled, to
(b) the compensation extracted by the Majority partner (directly or indirectly through salary, expense reimbursements, additional stock options/equity, employment of friends and family, etc)
Number 2 by itself is capable of keeping the relationship economically honest.
Curt Sahakian, Esq.
truCrowd, an SEC/FINRA licensed Equity Crowdfunding platform Debt, Equity & Revenue Participation
Chicago / Los Angeles
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- Make sure your are paid fully in cash
- Don't count on the equity ever being worth anything
- Hire a really good lawyer
They call them sharks for a reason.