Everything a Startup Founder Need to Know About Co-Founders’ Agreement
Are you a startup business or have a million-dollar idea for the startup and planning to start a business with your best buddies? There is no way someone can stop you from missing the window of opportunity but STOP, take a deep breath, pause and make sure that you are not missing the co-founders’ agreement before embarking your entrepreneurial journey.
In other words, it is very important to focus on building a solid foundation before you take the next step in business. Even if you are planning to run your business with your best friends or relatives but with future expansion and growth, the co-founders’ agreement needs to be drafted for governance of professional relationship in business.
What is a Co-Founders’ Agreement?
You must have taken a wild guess about it like “It’s a business agreement…between the founders…legal agreement…or something alike. So, YES, your guess is right. It is a casual and flexible agreement between the founders on a variety of key issues related to business. It is not a legally bound contract but just a written contract for understanding:
- Who will take care of what?
- Who is going to fund how much money?
- How much time will be given by each of them?
- What is the profit sharing ratio?
- How the company will be structured?
- How the co-founders’ relationship will work?
- What has to be the end product or purpose of business?
- And many such details depending upon the nature and structure of business.
Why Co-Founders’ Agreement?
It is important that the co-founders’ of business are all on the same page and work towards the purpose of startup. Before drafting the co-founders’ agreement, define your vision, mission, goals, philosophy, and line up these things:
• Roles and Responsibilities : The role of co-founder should be defined clearly so that every individual is dedicated to their roles.
• Decision making and conflicts settlement : Conflicts are very common when multiple minds work at the same place. For example, being domestic or international? Online or offline business community?
• Functional hierarchy clause : In case of conflicts, the person handling the domain (according to the set roles and responsibilities) will prevail.
• Voting process : It clarifies the equal or weighted voting procedure and in case of split vote, who will have the casting vote? Whether third parties can be involved in voting and in what circumstances? All such questions are answered.
• Arbitration clause : The arbitrator can be used for dispute settlement is pre-decided under this clause in case the agreement cannot address the issues of co-founders.
• Firing : It is difficult to take the decision of firing a member but under certain circumstances like failure to meet milestones, sexual misconduct, misappropriation of funds, not showing enough commitment at work, taking up of alternative employment etc., it lead to ouster of the member from business.
• Equity ownership : It is to ensure that there are no grudges among the members in future, it is important to decide on the issue of shares in the equity of business at initial stage.
• Assignment of Intellectual Property : There are different kind of rights used for business like codes, layouts, content that are used as an intellectual property. The agreement decides the assignment of intellectual property to the entities.
• Departure : It is process of dealing with the shares of co-founder who leaves the business and in this case, the entity will have the preferential right to buy back the shares. It is not a major concern for SMEs but becomes very important for the investors.
You must have understood the importance of Co-Founders’ Agreement by now. By laying out all the details and financials in the nascent stage of startup, you will be able to prevent maximum serious emergencies and disagreements. This agreement might not be the most exciting or crucial part of being an entrepreneur or running the business but it is incredibly important. These discussions must be held before any of the founders invest their money, time and energy into the company. Every startup needs to make countless difficult decisions once the company is setup and running. Unfortunately, being a co-founder in business is not very dissimilar from marriage and you need to start with right intentions and support each other for long term. But if that does not happen, it is better to plan ahead, otherwise, sooner or later you will end up jeopardizing your startup business viability.