Musketeer as Entrepreneur (Part 5): Legalities

Our heros, when we last left them, had come to a verbal understanding of the enterprise, its risks and its potential for financial reward. Now they must get into the details of recording a contract. Since both D'Artagnan and Planchet are honourable men and would be content with a handshake on the deal, they are agreed that a written contract has advantages.

No startup would or should do business this way, even in the rare cases where investors and founders are as close as Dumas' characters. Not only that, they do it without lawyers. Of course they lived in an age when there was no contract law and disagreements between gentlemen were often resolved with sabres in dark courtyards, and courts were hardly the impartial venues we rely upon today. In other words, a contract was frequently of little import in their world. So why are they going through with this? We'll come back to this point after we listen in as the contract -- a combined term sheet and shareholders agreement -- is drafted.

"...We shall, like two lawyers' clerks, draw up together an agreement, a sort of act, which may be called a deed of company."

"Willingly, monsieur."

"I know it is difficult to draw such a thing up, but we can try."

"Let us try, then." And Planchet went in search of pens, ink, and paper. D'Artagnan took the pen and wrote: - "Between Messire d'Artagnan, ex-lieutenant of the king's musketeers, at present residing in the Rue Tiquetonne, Hotel de la Chevrette; and the Sieur Planchet, grocer, residing in the Rue des Lombards, at the sign of the Pilon d'Or, it has been agreed as follows: - A company, with a capital of forty thousand livres, and formed for the purpose of carrying out an idea conceived by M. d'Artagnan, and the said Planchet approving of it in all points, will place twenty thousand livres in the hands of M. d'Artagnan. He will require neither repayment nor interest before the return of M. d'Artagnan from a journey he is about to take into England. On his part, M. d'Artagnan undertakes it to find twenty thousand livres, which he will join to the twenty thousand already laid down by the Sieur Planchet. He will employ the said sum of forty thousand livres according to his judgment in an undertaking which is described below. On the day when M. d'Artagnan shall have re-established, by whatever means, his majesty King Charles II. upon the throne of England, he will pay into the hands of M. Planchet the sum of - "

"The sum of a hundred and fifty thousand livres," said Planchet, innocently, perceiving that D'Artagnan hesitated.

"Oh, the devil, no!" said D'Artagnan, "the division cannot be made by half; that would not be just."

"And yet, monsieur, we each lay down half," objected Planchet, timidly.

"Yes; but listen to this clause, my dear Planchet, and if you do not find if equitable in every respect when it is written, well, we can scratch it out again: - 'Nevertheless, as M. d'Artagnan brings to the association, besides his capital of twenty thousand livres, his time, his idea, his industry, and his skin, - things which he appreciates strongly, particularly the last, - M. d'Artagnan will keep, of the three hundred thousand livres, two hundred thousand livres for himself, which will make his share two-thirds."

D'Artagnan understands the value of sweat equity, although Planchet is reluctant. Planchet had hoped to get 50% of the post-money valuation, but he must be satisfied with less since D'Artagnan will be awarded immediately-exercisable options on achieving the agreed milestone.

"Very well," said Planchet.

"Is it just?" asked D'Artagnan.

"Perfectly just, monsieur."

"And you will be contented with a hundred thousand livres?"

"_Peste!_ I think so. A hundred thousand for twenty thousand!"

"And in a month, understand."

"How, in a month?"

"Yes, I only ask one month."

"Monsieur," said Planchet, generously, "I give you six weeks."

"Thank you," replied the musketeer, politely; after which the two partners reperused their deed.

"That is perfect, monsieur," said Planchet; "and the late M. Coquenard, the first husband of Madame la Baronne du Vallon, could not have done it better."

"Do you find it so? Let us sign it then." And both affixed their signatures.

There you have it: a shareholders agreement with terms, and an exit strategy to liquidate the firm's assets among the two shareholders. There will be no ESOP (employee stock option plan), just performance-based salaries for the employees -- sorry, mercenaries -- D'Artagnan will hire. In the end he will wisely implement a profit-sharing plan as incentive to keep mouths tightly shut among his unsavoury helpers, however that episode will not be shown in this series of blog posts.

"In this fashion," said D'Artagnan, "I shall be under obligations to no one."

"But I shall be under obligations to you," said Planchet.

"No; for whatever store I set by it, Planchet, I may lose my skin yonder, and you will lose all. _A propos - peste!_ - that makes me think of the principal, an indispensable clause. I shall write it: - 'In case of M. d'Artagnan dying in this enterprise, liquidation will be considered made, and the Sieur Planchet will give quittance from that moment to the shade of Messire d'Artagnan for the twenty thousand livres paid by him into the hands of the said company.'"

This last clause made Planchet knit his brows a little, but when he saw the brilliant eye, the muscular hand, the supple and strong back of his associate, he regained his courage, and, without regret, he at once added another stroke to his signature. D'Artagnan did the same. Thus was drawn the first known company contract; perhaps such things have been abused a little since, both in form and principle.

Ah yes, the disposition of shares and assets should a shareholder pass away before the milestone is reached is a necessary part of any shareholders agreement. Today's entrepreneur will be most familiar with it and many pages of similar clauses. Most contracts, and shareholders agreements are no different, spend most of their time on dealing with the cases where things go wrong.

Lawyering is a lot like software design: much of the code must deal with exceptional conditions rather than what the application is ostensibly for. Bad code, like a bad contract, is unwittingly optimistic and thus useless.

In our next installment, the newly-minted CEO of Planchet and Co. will immediately take steps to launch operations. His first step will be to hire a team: the company's employees.