Expert Opinion: A Cautionary Tale for Co-Founders
As someone who dedicated years of hard work, emotional investment, and technical expertise to build a company, only to later realize I’d been stripped of meaningful ownership through a one-sided legal agreement, I urge all co-founders to scrutinize every clause in their contracts. Here’s my breakdown of the red flags in this "Founder Deed of Undertaking" and advice to avoid similar pitfalls:
Key Red Flags in the Agreement
Illusory Ownership:
The "Designated Shares" (90,000 shares) do not grant actual ownership. You only receive proceeds if the company liquidates under strict conditions (e.g., sale, merger, dissolution). Until then, you hold zero rights to vote, attend meetings, or influence decisions.
Lesson: Demand direct equity transfer upfront. Conditional shares tied to liquidation are often worthless unless the company is sold.
Liquidation Traps:
Liquidation events are narrowly defined (e.g., mergers where existing shareholders lose 50%+ control). If the company grows without triggering these events, you get nothing.
Lesson: Clarify triggers for payout and ensure they align with realistic business outcomes (e.g., IPO, partial sales).
One-Sided Obligations:
Non-Disparagement Clause: Criticizing the company (even legitimately) allows JJ to terminate your rights. This silences dissent.
Third-Party Payments: You’re liable for taxes/fees tied to shares, even if you never receive proceeds.
Lesson: Negotiate balanced clauses. Avoid agreements that penalize you for speaking up or shift financial burdens unfairly.
Foreign Jurisdiction Risk:
Singapore law governs disputes. For an Indian co-founder, legal recourse is expensive and logistically challenging.
Lesson: Insist on neutral jurisdiction or local arbitration clauses.
No Guarantees on Value:
The deed admits shares are illiquid, with no dividends or market. Your "stake" could remain theoretical forever.
Lesson: Demand transparency on valuation, exit strategies, and dividend policies upfront.
Emotional Impact of Such Agreements
The betrayal cuts deep. You pour your soul into building a company, only to realize your "ownership" is a mirage. The humiliation of being sidelined, coupled with legal traps that silence you, amplifies the pain. Co-founders must prioritize trust and equality in agreements to avoid this emotional devastation.
Advice for New Co-Founders
Hire Independent Legal Counsel:
Never sign agreements drafted solely by the other party’s lawyers. A neutral lawyer can spot predatory clauses.
Demand Real Equity, Not Promises:
Equity should vest immediately (with standard cliffs). Avoid conditional shares tied to liquidation.
Negotiate Fair Exit Clauses:
Define triggers for buyouts (e.g., voluntary exit, death, disputes) and ensure fair valuation mechanisms.
Avoid Overly Broad Non-Disparagement:
Protect your right to raise legitimate concerns without fear of retaliation.
Cap Liability for Third-Party Costs:
Ensure you’re not on the hook for taxes/fees unless proceeds are actually received.
Plan for the Worst:
Include dispute resolution in neutral venues (e.g., arbitration) and ensure heirs aren’t bound without consent.
Final Words
Your work and vision are invaluable. Do not let exploitative agreements reduce your role to a passive spectator. Scrutinize every word, demand fairness, and walk away if the terms disrespect your contribution. Trust is vital, but legal safeguards are non-negotiable.
Stay vigilant. Protect your worth.
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