Startups Stack Exchange Archive

Write out other stakeholders?

Many years down the line, if some founders have left and others are still there, what is to prevent the remaining founders from making a new company and issuing stock to current employees and write out earlier stakeholders? Or from keeping the same company, diluting everyone by a huge amount, and giving those new shares out in a percentage to the current shareholders?

Is there language that can be added to the agreements to prevent these things from happening?

Answer 7727

Yes, every well run startup will have language in their corporate agreements to try to make sure that everyone is treated fairly in the future. Further, there are laws (at least in the United States) that protect the rights of minority owners so that the majority owners can’t treat them unfairly.

A couple of examples:

(1) Ownership should vest over time so a person who leaves early doesn’t get a windfall.

(2) Officers of a corporation have a fiduciary duty to act in the best interest of the corporation (which may differ from their own best interest).

Answer 7736

You have posed very important concerns and very good questions. However, I need more information to give you a good answer.

  1. What type of entity is the business : C-Corporation, S-Corporation, LLC or Partnership?
  2. How many equity (founding) owners are there? Does each owner (founder) have the same percentage ownership of the business? If not, what is the range of percentage ownership? I am primarily looking to see if one person owns 50% or more.
  3. Do all the founding owners (currently there + those that have left) continue to have ownership interests in the business? If not, what happened to the equity ownership of those that left?
  4. Are you currently an equity holder and what percentage of the equity do you have? If not now, will you be in the future, when will you be and what percentage of the business will you own?
  5. Assuming the business is a corporation or a board managed LLC, is the Board of Directors made up of only equity owners?

Sorry for all these questions, but they are necessary to give you good advice for your concerns?

Answer 7744

I have thought of a potential solution. but so as not to waste your time with something that will not work, a couple more questions.

1) Can the corporate equity structure be changed? I am not contemplating any change in the current ownership percentage or voting rights?

2) Are there plans for future stockholders? If so, will they have different rights? .

2) Are there any provisions currently existing (documented) regarding future rights or anything current that would change the voting or equity of the owners (founders) other than vesting?

3) How are the investors going to get the return on their investment? Will they ever be issued stock? If so, how would affect the equity ownership and voting rights of the founders?

4) Is there any convertible debt to equity (stock)? If so what would be the rights of the stock?

5) Is there anything else that would be converted to stock? If so, what would those rights be?

As you might guess, my potential solution is tied to changing the equity structure.

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