Startup Legal Lessons from the Biography of Steve Jobs (Part 1)
With the movie “Jobs” opening in theaters today, we thought it might be interesting to revisit Walter Isaacson’s bestselling biography on Steve Jobs. Not surprisingly, given the dynamic history of the company Jobs co-founded and led, the book touches upon numerous legal issues encountered by Apple since its formation in 1976. We can use these legal issues as a framework for addressing some of the common legal issues faced by startups and entrepreneurs today. This is Part 1 of a multi-part series.
While Steve Jobs and Apple are known for thinking differently (as famously depicted in their 1997 “Think Different” ad), as a company, Apple has still encountered some of the same legal decision points common to today’s tech startups. One example is the early choice of a form of entity for startup ventures. On page 61 of the Steve Jobs biography, Isaacson explains that Apple’s three original founders — Jobs, Steve Wozniak, and Ron Wayne — established Apple as a general partnership. Wayne wrote the partnership agreement, allotting 45% of the equity to Jobs, 45% to Wozniak, and 10% to Wayne, and requiring that expenditures over $100 receive approval of 2/3 of the partnership.
There are a few points to make here. First, documenting these early agreements is a good idea in most cases. It is important to note that in most states, a general partnership can be formed even without a written agreement. The Revised Uniform Partnership Act defines a partnership as “an association of persons who carry on as co-owners of a business for profit.” Therefore, if founders are working together in pursuit of a venture, they may be operating as a general partnership whether they know it or not.
Absent a written agreement, state law is going to dictate the specific equity and governance structure of the partnership. This would be the same for other forms of entity as well, such as a limited liability company which is going to have an equity and governance structure imposed by state law in the absence of an operating agreement. It is highly likely that this default equity and governance structure will not reflect what the founders have in mind. So, put these agreements in writing — like Wayne did. Unlike Jobs, Wozniak, and Wayne it is also wise to consult an attorney familiar with startups who can also establish industry standard mechanisms such as vesting.
Second, today, selecting to organize a tech startup as a general partnership would be highly irregular. The reason is that in a general partnership, each partner is responsible for the liabilities of the company (whether or not that partner was involved in any way with the actions underlying the liability). In other words, an individual partner in a general partnership could incur catastrophic liability through no fault of their own. Accordingly, almost all tech startups will organize in a form of entity providing limited liability to the owners — typically a limited liability company, an S corporation, or a C corporation. This prior post addresses the entity selection question for startups. Indeed, according to its website, Apple incorporated on January 3, 1977, within a year of its initial organization as a partnership.
In fact, the threat of personal liability is one of the reasons for Wayne electing to leave the Apple partnership shortly after its formation. According to Isaacson’s book, Wayne became worried about his personal liability for Apple’s debts when Jobs began planning to borrow money to grow the company. He sold the entirety of his partnership interest to Jobs and Wozniak for $2,300, as reported in Isaacson’s book and by Wired Magazine. We will talk more about legal issues associated with departing founders in our next post in this series.