Equity And Governance Structures

Summary

When co-founding a for-profit social venture within a nonprofit ecosystem, consider implementing a dual-class share structure for governance rights and allocating board seats to founders. Protect intellectual property through IP assignment or licensing agreements and establish vesting schedules for equity and profit-sharing. Align mission statements and performance metrics with the Foundations goals. Design flexible equity structures for future investors. Consider golden shares for veto power and direct subsidiary ownership for operational clarity. Risks in direct subsidiary ownership include limited control, dependency, profit allocation, and dilution. Founders should ensure significant equity stakes, board representation, robust vesting agreements, governance rights, and clearly defined IP contributions.

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I'm co-founding a for-profit social venture (Indaba Care) incubated within a nonprofit ecosystem (Indaba Foundation). The Foundation is setting up a holding company to own *%+ of Indaba Care, while my co-founders and I are building and operating the business from the ground up. Andre and Greg (Foundation founders) will control the holding company but are not operationally involved in Indaba Care. We want to ensure fairness given our founder-level contributions. Can you advise on structures that balance: (*) meaningful equity and governance rights for founders, (*) IP and compensation protections, (*) mission control for the Foundation, and (*) flexibility for future fundraising? We'd also like your input on golden shares, profit-sharing, or direct subsidiary ownership as alternatives.
Here are some options to consider:
*. Equity and Governance:
- Implement a dual-class share structure for governance rights.
- Allocate board seats to founders to ensure decision-making power.
*. IP and Compensation:
- Use IP assignment or licensing agreements to protect founder contributions.
- Establish a vesting schedule for equity and profit-sharing agreements.
*. Mission Control:
- Have a mission statement and performance metrics aligned with the Foundation’s goals.
*. Fundraising Flexibility:
- Design flexible equity structures for future investors.
*. Alternative Models:
- Consider golden shares to give founders veto power on key issues.
- Direct subsidiary ownership can provide clarity in operations and profits.
Is there a specific area you’d like more detailed information on?
While Direct subsidiary ownership can provide clarity in operations and profits, what are the risks to the founders in this model
In a direct subsidiary ownership model, risks to founders might include:
- Limited Control: Founders may have reduced decision-making power if the holding company controls the majority.
- Dependency: The subsidiary's success is closely tied to the holding company's decisions.
- Profit Allocation: Founders may receive a smaller share of profits if not clearly defined.
- Dilution: Future fundraising could dilute founder equity further.
Would you like more details on how to mitigate these risks?
What are the ownership considerations for the founders of the subsidiary and the holding company when the founders of the subsidiary are assuming founder-level risk
Case Rating: *
Ownership considerations for founders assuming founder-level risk include:
- Equity Stake: Ensure a significant equity stake to reflect their contributions.
- Board Representation: Secure board seats for decision-making influence.
- Vesting Agreements: Implement robust vesting schedules for equity and profit-sharing.
- Governance Rights: Use dual-class shares or golden shares for governance leverage.
- IP Contributions: Clearly define IP rights and ownership.
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