What stockholder rights should a minority shareholder have in a startup?
I have teamed up with a third party to raise the initial $1 million in startup capital and provide infrastructure (HR, accounting, etc.) to start a business. In return, the third party is going to receive 70 percent of the ownership and I will have 30 percent. Should my 30 percent shares be common shares, with identical rights as the 70 percent partner, or should I be willing to accept fewer rights (nonvoting shares, transfer restrictions, etc.)?
Get the working capital your business needs from Entrepreneur Lending, powered by CAN Capital. Learn More »In general, you want to get as much out of the deal as you possibly can. Although your "third-party" is providing what seems to be a sizable amount of cash, is that really worth 70 percent of the company? If you're providing the IP for the company, it may be worth more than a mere 30 percent.
Assuming you're comfortable with the percentages, if you want to have any say in how the business is run, do not give up your right to receive voting shares. However, be advised that with only 30 percent, your business partner could easily make all of the decisions without needing to consult with you . . . unless your partnership agreement provides for the issues on which you'll have a vote (usually, having to do with major decisions such as changes in company ownership, company mission or target market, or changes in company status).
In closely held companies, there usually are transfer restrictions because ownership is not traded on the public markets, and you don’t want "just anyone" coming into the mix . . . so those are not surprising. However, make sure that you get the advice and counsel of an attorney to make sure that 1. Your rights and obligations are set out in a partnership agreement and 2. The terms give you some measure of protection.