Can equity agreements be negotiated before an entity exists?

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Can equity agreements be negotiated before an entity exists?

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AsiaOrBust

posts: 19

Dec 06, 2007 5:55 PM ET Quote Report Abuse

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So I`m trying to negotiate an agreement with a developer who is willing to partner with me on my project and get a prototype out. However, neither of us is sure whether we can really discuss terms when the corprate entity issuing stock isn`t yet in existence. Do I need to incorporate before we can create legally binding agreements?

If there is any other way of doing this, it would be preferable.

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Darien Brown
dbrown02@gmail.com

robertj

posts: 1458

Dec 06, 2007 6:13 PM ET Quote Report Abuse

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Generally speaking, if you are going to be partners in the company- you can "agree" before you execute. This is not uncommon for founders.

As to creating legally binding agreements - agreements between 2 individuals is possible, but the securities can only be issued by a formal entity - so the sequence should be to form the company then have it issue the securities (stock or units).

Why are you looking for another way of "doing this"?

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CampSteve

posts: 1216

Dec 06, 2007 7:03 PM ET Quote Report Abuse

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Robert got it right by putting "agree" in quotes. I was in the same exact situation as you, partnered with a web developer on my business. We agreed on the percentage of equity terms before officially filing. And we put it in writing too! We signed a contract that we wrote together spelling out the basics of the partnership. This contract was then overwritten by the formal paperwork but we were glad to have it from the start.

AsiaOrBust

posts: 19

Dec 06, 2007 8:10 PM ET Quote Report Abuse

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Thanks a lot for your responses.

I phrased this question very poorly. When I said I hoped there was "another way of doing this", I meant a way besides incorporating first. Both of your responses were good to hear, because I`m trying to get my prototype off the ground as quickly as possible, and my developer doesn`t want to proceed with anything until he knows that an agreement we come up with will be binding. I`ve got a couple of potential investors on the line who are interested in seeing how many initial customers I can get through a scaled down model of my site.

Is there any special language that needs to be applied in order to make it clear that stock will be issued by the entity only once its been formed? How would we phrase an agreement for an entity that does not yet exist?

-------------------------

Darien Brown
dbrown02@gmail.com

CampSteve

posts: 1216

Dec 07, 2007 12:38 AM ET Quote Report Abuse

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We didn`t get very detailed in our agreement, rather we simply said X% equity goes to this person, X% to the other. We didn`t worry too much about language or legal phrasing because we were basically agreeing on terms that would get rewritten when I becomes official. There were other IP terms we spelled out as well and we just wrote it however made sense to both of us.

It was a temporary agreement and as long as everyone understood it and was on the same page, we happily signed. You may get advice otherwise but that was just my experience. We`re bootstrapping here! :)

entreplanet

posts: 36

Dec 10, 2007 12:00 AM ET Quote Report Abuse

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You should write up a Letter of Intent agreement,outline the terms, and sign and notarize. That way, the "agreement" isn`t just verbal, but it`s somewhat legally binding. If there are any issues where one party tries to change or manuver away from the original agreement, the LOI can prove that some sort of agreement was reached prior to establishing the corporation and finalizing the contract.

Similar to selling a business or a property, an LOI will outline the original terms for which the contract is to be created from.

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My site: www.entreplanet.com

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