You have finalized the brilliant idea for your start-up, and are confident of the value proposition. And, you have also figured out who to join hands with you on this venture as ‘co-founders’. While it may seen that you are all set to get started, in all probabilities, there are many minute details you must address.
If two or more people come together to work, it is essential to building clarity on how things will work out between them. Documenting this in a systematic and detailed manner is what defines the ‘Co-Founder’s Agreement’.
By definition, broadly the agreement must cover key points like:
- Description of the company’s project
- Co-founder roles and responsibilities
- Equity ownership, rights, and vesting
- Decision-making processes, rights and veto powers
- Contribution of each Co-founder in the form of time, money, intellectual property, etc.
- Legal aspects such as confidentiality, IP assignment, non-compete terms, etc.
Here are the key points you must bear in mind while creating a co-founder agreement :
Alignment of Vision
As multiple heads start working on a new company together from bottom-up, they must share a common vision, purpose, and goals for the company. It is natural to get caught up in the instant thrill to start working on the idea but the foundations of the company must be laid down right at the beginning, impartially, dispassionately and objectively, to avoid future heart-burn.
Topics such as what are the goals of this company, its product or service offering, strategy for growth, how will the progress be measured, who will measure them and what will have to be done in case of disagreements, etc. need to be discussed upfront and thread-bare. The list must cover aspects such as core values of the company, equity allocation to future employees, top 5 things that would be expected in the initial few hires, etc. Individual working styles, background and culture play an important role when diverse individuals come together to build the start-up and it becomes essential to get these points addressed well in advance.
Co-Founder Roles and Responsibilities
It’s a very old and well-known adage that ‘too many cooks spoil the broth’ and this holds true even for a company. With multiple co-founders around, expectations need to be set that not everyone is in charge of or is responsible for everything. Diverse co-founders come together primarily to contribute to their diverse experiences, knowledge, and background. An open and shared culture is a foundation for a good company but as an example, someone with an operations background may not be able to take an effective decision about the financials.
While a CEO title is a fancy one to put up as one’s credentials, the reality is not everyone can be a co-CEO of the company. Promoting such an organizational structure is prone to create several operational difficulties, confusion, and frustration in the long run. You must establish clear lines between the roles of the co-founders and assign appropriate responsibilities along with them. This might appear as overkill at the stage of start-up formation and might result in an inconvenient conversation among the co-founders, yet it is prudent to document the responsibilities right in the beginning when everyone is on good terms with each other and focused on the success of the company than on self.
In the subsequent years, this facilitates to minimize a lot of future pains, sets up a good working culture within the organization and also provides clear guidance to the new hires and employees, as to whom they should approach and in what situation.
Equity Ownership, Rights and Vesting
This aspect comes immediately on the back of and practices in line with the roles and responsibilities of individual co-founders. Like any business enterprise, the ownership of the new company needs to be allocated among the co-founding members. Yet, as a healthy practice, it is prudent to keep 10% equity for future capable hires and allocate only the remaining 90% within the co-founders.
An equitable distribution is one of the most sensitive and difficult discussions, often fraught with misunderstandings or hurt feelings, though not intentionally done. And yet, precisely for the same reasons, it becomes necessary to freeze upon this decision right at the beginning, before things get off the ground. Discuss, challenge, but come to terms that not all are equals and the equity allocation is a recognition and reward for the contribution that (s)he will pitch-in with, in the enterprise. Ideas are valuable and full-time commitment comes with a price. Finally, reputation matters, as it brings in potential customers, vendors and contractors along.
While there are no set rules on who gets how much, a rationale and objective discussion will help to avoid a lot of future trouble. Nailing down equity ownership upfront is the wisest part of the ‘Co-Founder’s Agreement’.
Most co-founders who set out to launch new start-ups are observed to have no or very low legal experience and this can lead to problems. Entrepreneurs do not have to be legal experts but a basic understanding can help avoid several future pitfalls. A few key things to be hashed out are what happens if one or more co-founders decide to leave the company, will the equity be vested based on continuing participation, what should be the salaries if any, of the co-founders and the criteria for how will they change, etc.
Usually, in most of the cases, IP of the company matters a lot to its business. And hence, it needs to be duly protected, especially during the formative years. This can be addressed via filing for patents, trademarks, copyrights, and other confidential trade secrets. A safe approach can be ensuring and enforcing that all co-founders, employees and independent contractors assign their IP rights to the company so that the company stays secure in case if any of the co-founders decide to leave, taking an important patent away.
Plan the equity vesting period for each co-founder. Effectively, this will ensure that the equity stays within the organization for a reasonable duration, before one or more co-founders decides to part ways.
Forging a partnership or co-founding a business needs to be handled with lot of thought. Everyone starts with the right intentions with a commitment to a long-term relationship but things can and do change over time – money and bandwidth make people behave differently in different conditions.
Plan and secure the future of the enterprise through a solid and well thought of Co-Founder’s Agreement. The upfront discussions and decisions, however uncomfortable they might be, are essential for a successful partnership before anyone gets heavily invested by putting one’s time, energy and money into it. There are countless other decisions that the co-founders have to take once the company comes alive and starts running, hence you must sort the agreements before you get very busy.