In the early stages of a new venture, things move quickly. An entrepreneur will talk with many different potential team members, some of whom aren’t a good fit, some of whom become co-founders and valued long-term partners, and some of whom may seem like a good fit but ultimately don’t come aboard or add value. These early conversations often include a discussion of equity allocation. While an entrepreneur may think that a casual chat or email exchange regarding equity in a to-be-formed entity (contingent on performance or otherwise) may be nothing more than that, the other party to the conversation may think otherwise.
If everything works out well and the team member comes aboard and produces, there is no problem (especially if the equity is subject to vesting once actually granted). However, if the team member ultimately doesn’t join the venture, leaves in the short-term (especially before an entity is formed), or doesn’t produce what the entrepreneur expects, these early conversations about equity could result in a serious problem for the entrepreneur and, ultimately, the venture.
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