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Does Your Startup Need a Prenup?

Posted by in Invoice Factoring, Small Businesses

Business relationships, perhaps even more so than personal relationships, can be tricky to navigate. Startups are often formed by two or three co-founders, and it’s not uncommon for one or more to eventually part ways.

Does Your Startup Need a Prenup

If and when a co-founder chooses to leave, what happens to the startup’s equity? It’s a delicate matter, and that’s why a prenup might be the best solution.

Ed Zimmerman, adjunct professor of venture capital at Columbia School of Business, explains in a blog post for the Wall Street Journal:

When a team of two or three co-founders enlists my help to form a new startup, I invariably suggest that they earn their equity over time (“vesting”). Vesting often creates a shared incentive to stay in order to earn all of your equity over time–the “golden handcuff” effect. If–as the odds suggest–a co-founder departs, it can really help because the company will likely need that equity to give to whomever will fill his or her shoes.

A reasonable solution, then, is to establish vesting arrangements at the start. Together, create a list of expectations with regard to founder rights and responsibilities. Doing so will prevent resentment should a co-founder decide to move on somewhere down the road.

Allow RMP Capital to help reduce the daily stress associated with trying to meet cash flow needs. Call us at 631.738.0047 to learn more about our Accounts Receivable Financing Program.

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