Why Startups Must Have A Co-Founders’ Agreement

You just planned to launch your multi-billion dollar start up and wondering if you should enter into a co-founder agreement or not. It is pertinent to enter into a co-founders agreement before you embark your entrepreneurial journey. As your startup grows you may discover that there are differences among your co-founders on the future of your startup or its mission.

You and your co-founders should be on the same page when it comes to goals and vision of the company. Founders should enter into a co-founders agreement even before the incorporation of the company. While getting into such an agreement you should discuss with the partners apprehensions, fears, outlook, aspirations.

The entire purpose of having co-founders agreement in place is to minimise the possibility of any future shocking events. Having a clear agreement amongst founders around the key issues will help the new venture to avoid unnecessary feud between the co-founders and keep the business running. The key issues covers, roles and responsibility of co-founders, equity ownership etc.

To put it simply co-founders agreement is an agreement between founders of a company on number of issues they may face. It categorically states what is expected out of them and how decisions will be made. To draft an effective co-founder’s agreement you must consult a lawyer who will keep in mind your business goals and safeguard your interest.

Here are few things you should adhere to while drafting a co-founders agreement:


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1. Business Definitions

It is very pertinent that the agreement states the mission, vision of the company. It will also be helpful if they clearly mention the milestones that they wish to achieve over the period of time.

2. Roles and responsibilities

The co-founders agreement should clearly stipulate the role, duty and responsibility of all the co-founders. Ensuring that the co-founders know what they need to be doing would lead to less wasteful and more efficient. You should be really specific while deciding on roles and responsibilities, so that there is clarity among the founders and there is no confusion. Also, this creates a system of accountability and you would know who is responsible when something is not done.

3. Protect your Intellectual property rights

Intellectual property is vital for any form of business and it is important to protect your IP during the formative years of your startup. The agreement should specifically mention who will own the intellectual property. Will the company have intellectual property rights or co- founders will have ownership over intellectual property. All these questions must be discussed before only. A lawyer can assist you on what all intellectual property you need to protect and how.

4. Investments and contribution

The co-founder’s agreement must categorically state who and all will invest in the business and their contribution percentage in the total capital. The agreement should also mention in which form is the contribution made by the parties. There should be no ambiguity and later after the contribution is made it must specifically state, what is contributed by whom and when as well as during which phase ( after or before inception of the company).

5. Compensation

The compensation or salary that the founders will draw and the determination of such compensation are both sensitive issues and must be provided in the co-founder’s agreement.

6. Liabilities of co-founders

This is another crucial clause in a co-founders agreement. As per this, the co-founders are severally liable for any such wrongful acts. Like negligence, cheating, fraud. If the company suffers loss due to an intentional act of one of the co-founders then he must be responsible for such loss caused intentionally.

7. Treatment of loan from founders

It should be clarified that how will the loan received from founders will be treated. Whether the loan will be repaid with or without interest. The founder can also be compensated by issuing of shares of the company.

8. Confidentiality

There must be clauses in the contract imposing obligations on the co-founders to protect sensitive business information.

9. Non-compete

A non-compete is essential clause to ensure that the founders do not abandon the partnership and start their own business and compete with original business. 3- 5 year is common.

10. Appointment and removal of CEO

The agreement shall state as to how a CEO will be appointed and removed. Generally, Board of directors and each founder will have single vote over this issue.

11. Dispute resolution

The agreement must state that in case if there is a dispute how will that be resolved by the parties. The preferred method is to opt for arbitration bringing in the neutral third party to resolve the disputes. Specifying the method for dispute resolution simplifies the process and enables it resolve it faster.

12. Vesting clause

If the co-founder leaves the company at an initial age, then all the burden comes on the other co-founders. Due to this vesting clause, the co-founder will have to stay with company to get back all the shares he owns in the company. This clause helps the company to retain the co-founder for a particular period.

13. Amendment clause

You must state that the agreement should not be amended without the prior consent of all the co-founders and such a consent must be in writing and henceforth signed by each and and every co-founder. Prior consent should also be taken for waiving of any clause.

14. Termination clause

The agreement should also spell out if the founders decide to terminate their relationship and how will it take place. Termination clause is a stressful clause but the agreement should stipulate what will happen if your co-founder flunked on you and what would happen if the co-founder was under performing or letting the business down or what will happen if one of the co-founders want to leave for whatsoever reason.

Ensure that you sign a co-founder’s agreement before you start your own business to avoid unnecessary disputes and hassles.

Read our startups section for more useful informations.

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