CO-FOUNDER’S AGREEMENT: Things you should look out for while entering into a co-founders agreement

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A Co-founders Agreement is a contract between Co-founders setting out the ownership, initial investments and responsibilities of each Co-founder in the Company. This Agreement also safeguards Co-founders in the case of a future dispute as it can provide protection to show what terms the Co-founders have agreed to in the first place.Often one starts a venture with another person who usually is a friend/family member. Whenever one decides to start a business with one or more people (Co-founders), it is important to make an Agreement that details some important aspects of running the business in the long term. Having a discussion about a Co-founders' Agreement is not only healthy but also prevents any misunderstanding amongst the Co-founders at a later stage.

WHEN SHOULD YOU ENTER INTO A CO-FOUNDERS AGREEMENT?

The time to think about a Co-founders Agreement is when you start thinking about a company/partnership/LLP etc. instead of merely an idea. At that early stage, a Co-founders Agreement would likely be a relatively short, informal document, but it is still helpful to start the conversation early on and to begin to sketch out the contours of the relationship.

WHAT ARE THE ROLES AND RESPONSIBILITIES OF CO-FOUNDERS TOWARDS THE BUSINESS?

Many startups fail because the Co-founders are not clear about who is responsible for which activity. A task which is owned by everyone belongs to none. Therefore, it is important to establish clear areas of responsibility and also specifying the type of decisions that will require consultation or approval of other Co-founders. Another potential issue to decide is whether all Co-founders are going to devote to the business their full time or the Co-founders will address issues in different degrees.

WHAT IS THE TYPE OF BUSINESS?

o-founders need to decide amongst themselves the type of Business that they are going to undertake. For eg: Partnership, Company, LLP etc.

WHAT ARE THE OWNERSHIP RIGHTS OF CO-FOUNDERS?

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In some situations, the Co-founders may decide to split equity equally. In other cases there is different allocation of equity, the Co-founders will receive different amount of equity with the share allocated based on a number of factors including who came up with the idea, the amount of time and capital that each Co-founder has invested in the business and the involvement of each Co- founder. Again, the key here is to have an open and honest conversation with the other Co-founders and to reach an arrangement that every Co-founder is comfortable with.

HOW ARE THE EXPENSES GOING TO BE MET?

The Co-founders also need to arrive at a decision about the working expenses. If there is any understanding regarding the reimbursement of out-of-pocket expenses, it needs to be explicitly mentioned in the Co-founders Agreement.

HOW THE SHAREHOLDING AND INVESTMENT IS GOING TO BE STRUCTURED?

It is important to discuss the shareholding structure of the company/partnership/LLP business, similar to the profit sharing ratio in the case of a partnership firm. Equity ownership depends on various factors such as capital investment, intangible assets like value, experience. Any Co-founder who is contributing more should be entitled to more equity.

WHO IS THE OWNER OF THE IP?

Intellectual Property comes in many forms but it's important to make sure that whatever IP is being developed for the new enterprise it belongs to the entity and not the individuals behind the development of the IP. In addition to protecting the company and other Co-founders if the Co-founder with the IP rights were to leave, ownership by the company of all IP rights is essential for raising money from investors.

WHAT IS THE EXIT STRATEGY?

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While many Co-founders never think about exiting a business, it is important to plan for such an eventuality. Exiting a business could be for various reasons both positive and negative. If one or more Co-founders want to leave the company, what is going to happen to the money that they have invested. There needs to be a predetermined plan if any Co-founder wants to buy out the existing partners. In other situation if a Co-founder wants to sell his/her equity to an outsider and what is going to be the fair value if any Co-founder wants to buy out the existing partners.

Co-founding a business isn't too different from marriage. It is absolutely important to agree with your Co-founders early on what the deal and understanding is amongst yourselves as you can start with all the right intentions and never imagine separating but it does happen. Therefore, not having a Co-founders Agreement can cause enormous problems and jeopardize the viability of the new enterprise.

Legal Quote


It is better to risk saving a guilty man than to condemn an innocent one.

Do you want to create a Co-founders Agreement?

Agreement among startup entrepreneurs to fix their duties and responsibilities. This agreement also focus future investment, action at each point, how a co-founder can leave the company, protection of intellectual property etc. It is a must for any start up to safeguard interest.

Sanjna

Legal Consultant

One thought on “CO-FOUNDER’S AGREEMENT: Things you should look out for while entering into a co-founders agreement

  • May 1, 2017 at 5:54 am
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    wow, awesome blog article.Really looking forward to read more. Awesome.

    Reply

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