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Clinton Richardson, an Atlanta attorney who works with many start-ups, says almost every one he sees has a hidden flaw that can end up costing the founder a lot of money. Under pressure to hold on to key employees, many new companies promise them more and more stock, often without really nailing down the terms. "Invariably," says Richardson, "you get to the financing, and you have to figure out who owns what." To ensure that outside equity investors get the percentage of the company they're paying for, founders may have to buy up some known stock options before closing a deal. Worse, they may find that vague talk has turned into legally enforceable promises. Or an optionholder may turn up only after the financing, forcing founders to dilute their own holdings to make good on the options while maintaining the investors' ownership percentage. To avoid such problems, don't make idle promises of equity. And use a lawyer who is familiar with both federal and state securities laws. If cash is tight, maybe the attorney will take equity, too.

Last updated: Jul 1, 1986




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