When negotiating the terms of their investment in a startup, angel investors should consider requiring the following covenants from founders. These covenants help preserve the value of the angel's investment by protecting the company from potentially adverse actions of the founders.

  • Vesting of Equity:The founders' equity should be subject to forfeiture in decreasing percentages over several years (commonly referred to as "vesting"). Vesting prevents a founder who leaves the startup after working for only a short period of time from retaining all the equity in the startup originally granted to him or her.Note, however, that if founders receive equity that is subject to vesting (often referred to as "restricted stock"), they should consider making an election under Section 83(b) of the Internal Revenue Code within 30 days after issuance in order to avoid adverse tax consequences once the equity vests.
  • Repurchase Rights: The startup should have the right to repurchase a founder's vested equity upon certain "triggering events." Triggering events may include: (i) death, (ii) disability, (iii) bankruptcy, (iv) taking action materially adverse to the startup's interest, or (v) becoming disassociated or expelled from the startup. Depending upon the particular triggering event, the purchase price is often the fair market value of the equity determined by an independent appraiser, which amount is often paid out over several years.
  • Restrictive Covenants: Departing founders should be prohibited from (i) divulging or using the startup's confidential information, (ii) competing with the startup (whether by starting his or her own company or working for an existing competitor), or (iii) soliciting the startup's employees, contractors, or customers away from the startup. These types of restrictions are usually found in standard company documents such as a Stockholders' Agreement or Operating Agreement, or in a separate written agreement between the startup and the founder directly.
  • Assignment of Inventions: Founders (as well as employees, developers, and other contractors of a startup) should be bound by a written agreement that assigns to the startup all intellectual property created in connection with the services performed for the startup. Absent a written agreement, the individual or entity providing the services will generally have ownership rights in such intellectual property, and this can cause problems for a startup when it seeks to assert ownership rights, raise capital or sell to a third party.

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