Founder Agreement · Founder equity

A co-founder that is a felon dilemma

Pablo Neruda Co-founder of undisclosed company

September 24th, 2019

This is a long story but I'll try to reduce it to the most salient points.

1) My business partner and I are long-time friends that reunited after 30 years with the plan to engage in a SASS business as 50/50 partners.

2) On day one I made him aware that I am a convicted felon. He is the type that believes in forgiveness and redemption and this didn't hesitate to enter into this relationship with me.

3) The plan going forward was to bootstrap the business to MVP and profitability using capital from his full-time business. He would provide the business domain expertise and funding, while I would provide the Ux and programming.

4) We drafted a founder's agreement (that would not trigger until the MVP was complete) with a lawyer but never signed it, because...

5) About six months into development I realized that I needed a more senior developer to help me with this very large and complex project.

6) In order to afford another developer my partner considered looking for investors, except...

7) He hadn't considered that an investor would perform background checks on the founders.

8) I pointed out to my partner that my background could be detrimental to finding funding and we are both at a loss on how to structure an equitable business arrangement between us in the event this came to fruition.

9) Instead, we got a bank loan and we hired a senior dev. We have enough additional funding to carry us through MVP and (hopefully) profitability.

10) The possibility of needed investment capital still lingers and my position as partner remains in limbo. The founder's agreement remains unsigned. Development continues. Both myself and my partner are taking equal (but lesser) salaries during this MVP development phase. I'm probably making 1/2 (or more) of my market value.

11) For context: We are in a niche SASS market (architecture and construction) with no plans for IPO unless we diversify into other market segments. Being acquired is very much in the cards.

My questions:

1) Am I right to assume that my criminal background is a non-starter for seeking outside investors with me as a partner?

2) Given the possibility that the business may require outside funding in the future, how can I best protect my interests while also protecting the interest of the company? Don't get me wrong, my partner does not want to shutter me out. However, if I'm not a partner, what am I?

2) What is a fair and realistic arrangement if a formal partnership never comes to fruition? What sort of arrangement; equity, stocks, salary can we put in place to protect both my interests and the business'?

3) Is there anything legally-binding that can be used in place of a founder's agreement to cement this arrangement?

4) Should we still complete our existing founder's agreement under such uncertainty? There is a very good possibility that we may never need outside investors.

Thank you.

Paul Garcia marketing exec & business advisor

September 25th, 2019

These are good questions for an attorney. I'm not one, but my suggestion for you is to act as if the outside world doesn't exist for the moment. While there are possible consequences, your partner has already made the decision to accept your history and move forward with the business. You should have that agreement signed already. My advice to anyone is never to proceed with any work without having your agreement in writing, no matter how much you think you are friends.

Yes, your background is likely to come up in any diligence activity, and as a consequence, you should get ahead of it and prepare a response as to why the old conditions are unrelated to your ability to operate this business, and detail what steps have been taken to shield the company from perceived risk. You're right, if you're lucky you will be adequately funded with institutional lending and your own revenue stream.

If your partner isn't truly comfortable and hasn't yet signed the agreement because of the things you mentioned, then you should know that now and probably stop being partners immediately and no longer work on the business. An unsigned agreement is a red flag to me. Get it done immediately. Bring it to a head and make a decision about whether you are really partners or not. The benefits might not activate until later, but you have in practice been partners all along. Cement it or call it out for the farce it is.

If you decide to change the agreement, change it now so you know whether it's acceptable to you going forward. An alternative might be that you become an employee who receives a profit sharing bonus. Regardless, get it in writing immediately.