Founder Agreements and Equity

Your role as a mental health investor includes setting startups on the right path for sustainable success. Founder disputes and unclear equity splits can derail even the most promising ventures. 

Here’s how you can help avoid those pitfalls, ensuring fairness and focus:

Why Should Investors Care?

• Attracting Future Investment: Clean cap tables and defined founder responsibilities signal good governance to series A investors and beyond.
• Risk Mitigation: Lingering disagreements between co-founders can tank promising mental health solutions, hurting not just the company but your long-term investment potential.
• Talent Pipeline: Fair terms motivate team members beyond early founders. Having systems in place as they scale builds trust.

The Essential Ingredients of Founder Agreements

Roles & Responsibilities:

• • Go beyond generic title. Clearly outline daily tasks, decision-making authority, and reporting structure, even for founding teams who believe “we all just do everything.”
  • Mental Health Adds Nuance: If one founder brings clinical expertise while another handles development, ensure they aren’t viewed as equally replaceable under ‘standard’ exit clauses.

Equity Splits & Vesting:

• • No magic formula exists, but investors can help founders avoid a naive 50/50 split by encouraging conversations around differing skill sets, time commitment, and IP each person brings to the table.
  • Vesting Schedules are Vital: A 4-year cliff with gradual payout protects everyone if commitment wanes in such a highly demanding sector.

Intellectual Property:

• • “But we developed the idea together!” Doesn’t count. Explicitly state all pre-existing patents, algorithm sketches, etc., are part of the company IP from Day 1.
  • Domain-Specific Caution: If mental health founders developed concepts while employed elsewhere, ensure there’s no risk to the new venture due to non-competes, etc.

Exit Strategies:

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  • While seemingly far off, discussing eventual scenarios pre-conflict is key. How is buyout handled if one founder needs to leave for unforeseen reasons? Under what circumstances can a founder be involuntarily terminated?

Investors as Facilitators, Not Lawyers

• Template Sharing with Disclaimers: Offer founders basic Founder Agreement examples, reminding them attorney review is non-negotiable.
• ‘Tough Questions’ Workshop: Lead portfolio companies through a simulation of challenging scenarios (IP infringement, one founder falling ill), prompting them to realize gaps in their agreement.
• The Emotional Side: Mental health startup work is draining. Founders may try to avoid hard topics like exit pathways. Acknowledge this is valid, but delaying those decisions harms everyone.

Investor-Specific Equity: Considerations

• Delayed Pre-Money: Instead of immediate equity at investment, tie to early milestones based on the startup’s specific path (FDA review initiated, key hire made, etc.).
• Advisor Stakes: If providing hands-on mentorship, carve out small percentages tied to milestones. This reinforces your vested interest in success.
• Alignment Not Control: Ensure your own vesting doesn’t give you decision-making power exceeding your knowledge of the mental health market, potentially overriding sound founder choices.

Creating Openness and Growth

Investors gain by enabling successful ventures – let’s foster transparency:

• Founders: What’s the hardest obstacle you faced regarding founder agreements, and how did it shape your business trajectory?
• Investors: Do you have a specific pre-investment “checklist” to vet the strength of early founder team dynamics and equity splits?