We often get asked whether, say, the CTO who joined the team early should be classed as a Founder or an Employee.
In order to answer that, there are three separate aspects to that decision, and they don't all have to have the same answer!
- Firstly, when it comes to the legal documents for a funding round, the Founders (as defined in those documents) sign up to the Warranties, which makes them liable if they mislead investors.
- Secondly, there's the question of whether that person signs a Founder Agreement or an Employment Agreement.
- And, lastly, there's the question about whether that person puts "Founder" or "Co-founder" on their business card.
So, let's start with the easy one first:
If you consider someone a member of the founding team, sure, they can put Founder on their business card, nice. This has nothing to do with the more legal things associated with a founder, below. Easy.
Next, when it comes to the person choosing between signing a Founder Agreement vs. an Employee Agreement, our suggestion is that if the person reports to someone, they're an Employee. If they don't report to anyone |(other than the Board), then they're a Founder. So, take a look at both the founder and employee agreements and see which is most appropriate. And again which one you choose has nothing to do with whether the person puts "Founder" on their business card, they could e.g. be a member of the founding team with 3% equity and be employeed with an Employment Agreement, but still put Founder on their business card and call themselves a founder (if the other founders agree, of course).
Lastly, and this is really the important legal point, is that when you tick the Founder checkbox in Users & Roles in SeedLegals, that will list that person in the definition of Founders in the Term Sheet and Shareholders Agreement. And that makes them a party to the Warranties, founder vesting and leaver provisions, and more.
So in our view, the only people who should be listed as Founder in Users & Roles are those founders who have a majority of the shares, who are prepared to sign up to the personal Warranty liabilities in the funding round, etc.
Let's say for example there are 4 people in your founding team:
- two people (who probably bootstrapped the company with their own money until it got funded) who own 40% of the shares each
- two people who get paid a salary, who own a few percent of the equity each
Our suggestion is that the two people who own the majority of the shares:
- have their Founder checkbox ticked in Users & Roles, and get listed as Founders in the funding round documents
- sign Founder Agreements
And the two minority shareholders:
- do not have their Founder checkbox ticked, and are not listed as Founders in the funding round documents
- sign Employment Agreements
- and of course, with the other founders' permission, put Founder on their business cards