age of ownership in an enterprise as, quite often, an investor expects his or her “one third” to remain constant until the company goes iPO. This is why it is important for the founders to discuss with the early investors (and hopefully to put it in writing) the fact that “one third” was bought as of a particular date’s valuation of the com- pany. Future investments of services and money may dilute the ownership interest of the current investors and it is easier, at the early stages, to chan- nel the discussion in ratios between the founders and investors rather than promise percentages in the enterprise. Using simple strategies and discuss- ing such issues in detail averts misun- derstanding among the partners and eventually prevents stalemates that quite often drive tech companies into the ground.
Obviously, while having a compre- hensive contract is preferred, the high- tech founders at least should have the temerity to discuss with investors, in
the period during which the shares cannot be sold, such sensitive issues as the rights or obligations of re-pur- chase of shares by the company or priority rights to purchase new shares or shares being sold by other share- holders. in addition, the investors, to protect their investments, would want to have a say in the management of the company. it is a somewhat diffi- cult task, requiring legal assistance, to strike a reasonable balance between the investor’s protection (participa- tion in the board and veto power over certain issues) and the need for the founders to run their company as they see fit.
The third “c” may be a less ob- vious danger of “consultancy.” in entering new markets, the technol- ogy companies often face consul- tants/resellers/promoters who do a great job in selling the perception of their marketing expertise, resulting in highly unbalanced agreements which omit the right of the company to ter-
minate for consultant’s non-perfor- mance, provide for unjustifiably high percentage commissions lasting for a lifetime with little, if any, duties of the consultants relating to performance, confidentiality and active marketing efforts. While it might be tough to single out a “leech,” it is much sim- pler to let the contract speak for it- self by setting the performance val- ues (for example, “exclusivity” based on sales targets) and, most important- ly, by reserving the right to terminate based on non-performance.
The elements described above pres- ent neither a comprehensive nor an exhaustive list of legal pitfalls that are faced by evolving high-tech ventures. it is important, however, to have a mind- set of taking care of the legal integ- rity of the technology enterprise, and its equity structure and iP foundation in particular. and, as Benjamin Frank- lin said, “Be aware of little expenses; a small leak can sink a big ship.”
Dmitri I. Dubograev
International Life Magazine