You’re starting a business and looking for help anywhere you can get it. Things are moving really fast, so you skip the formalities. Verbal agreements and handshakes will suffice. The people you’re working with understand what you’re thinking. They know what they’ll get if they help you.
Guess what? If that’s what you’ve been doing, then you’ve already fallen into the entrepreneurial trap. Is a slippery slope and once you start going down it, it’s hard to climb back out.
Believe it or not, even your closest friends and family members don’t fully understand what you’re thinking. Verbal agreements and handshakes are not only inadequate to protect you and your business, but they can also destroy life-long relationships.
Don’t let that happen to you. Avoid the entrepreneurial trap by not discussing things like equity allocation in the new business in a casual manner. This is not a casual conversation to be had over dinner or through some email messages.
Why? Because that verbal conversation is likely to be interpreted very differently by you and the other person.
Imagine that person joins your business and things don’t work out. He or she leaves sooner than you expected. Suddenly, that conversation you had over drinks about equity allocation becomes extremely important, particularly if your new business has been picking up steam. That casual conversation could put your entire business at risk.
Even if that casual conversation wasn’t in writing, courts have found that formal written agreements aren’t necessary for this kind of equity conversation and any related offers to be legally binding.
Conversations that entrepreneurs have in an effort to entice people to join the team with creative promises of equity in the business could become big problems down the road. If your conversations even imply an offer, they could become problems that negatively affect venture funding or liquidity.
5 Tips to Avoid the Entrepreneurial Trap
Fortunately, there are some steps you can take to avoid the entrepreneurial trap:
- Legally form your company and determine equity, and vesting terms before you have any conversations related to equity allocation.
- Consult with a financial expert and experienced attorney to ensure you’re granting equity in the best way possible.
- Write a comprehensive business plan so you know who should be granted equity, when and why.
- Draft the necessary agreements to ensure you’re protected and you’re in compliance with relevant laws.
- Grant equity as soon as possible to those who qualify for it.
Remember, casual conversations, particularly when they’re about money, can cause big problems. Get the help you need in advance of having these types of discussions so you have a process in place that will mitigate risk for you and your business.