In January, I debuted a brand-new MBA course based on my research on founders. The theme of the course should be familiar to readers of this blog: the tough, early choices founders face that have important, long-term implications for them and their ventures.
For the course, I wrote 15 HBS Cases about the challenges faced by founders as they decide: when to make the leap into founderhood, whether and how to build their founding teams (e.g., is it a good idea to found with your best friend?), how to split roles and the equity with their co-founders, how to make early hiring tradeoffs (e.g., hire “Mr. Right” or “Mr. Right Now”?), and how to think about the costs and benefits of taking outside capital.
As I’ve mentioned in the past, people (here, founders, new-venture employees, investors, and others involved in new ventures) often find HBS Cases useful for helping them think through the challenges they are currently facing or may face down the road. Thus, in the coming weeks, I will be posting overviews of my new cases and of the course’s modules.
A central issue in the early part of the course is splitting the equity within the founding team. (On this blog, the equity-split posts are consistently among the most popular items. For those posts, see the “Co-founder Issues” section of the blog index.) In several of the course’s cases and in a hands-on negotiation exercise, we tackle the relevant business considerations. However, there are also some critical legal and tax issues that should be considered when splitting equity and setting up the ownership structure.
To cover some of these legal and tax issues, I created an 8-page HBS Note entitled (very creatively) “A Note on the Legal and Tax Implications of Founders’ Equity Splits.” (The note was co-authored with Lauren Barley, and taps the expertise and wisdom of Allison Berry Spinner of Wilson Sonsini Goodrich & Rosati; Raj Kapoor of Mayfield and founder-CEO of Snapfish; Bill Fenwick of Fenwick & West; serial entrepreneur Mike Cassidy; and Steve Berkley, former chairman and CEO of Quantum Corporation.) The issues covered in it include:
- The need to make timely and valid Section 83(b) elections if the founders adopt vesting as part of the equity split.
- The importance of considering intellectual property (IP) issues when splitting the equity and the need to do so consistent with Section 351 of the Internal Revenue Code.
- Reasons why founders should not delay splitting the equity, and whether they should involve an attorney or accountant when they do.
It also includes a sample restricted stock purchase agreement and a sample 83(b) election document.
In case it’ll be useful to anyone dealing with those issues in the near future, the Note is available on the HBS Publishing site as of today.
Feel free to post comments about the Note (e.g., issues that you feel should be covered more extensively) here.
More details on the course coming soon!
Can anyone help me find a listing of criteria that corporations should use in assembling their board of directors? I am primarily interested in the fields of expertise that boards should be include. Thank you.Steve Kroeter[email protected]
Noam- I thought your note was pretty comprehensive on the topic. One tangential issue, which deals more with options then pure equity grants is the topic of 409a. That is, the requirement of companies to perform an independent vauation exercise in order to price options. Since the resulting valuation sets an equity/enterprise value for the company, it has an effect on founders equity-particularly if there are founder buyback provisions. It’s probably too detailed a concept for your note, but could be an interesting future note as this topic is one which I am spending an increasing amount of time on with founders.