A Brief Introduction About the Co Founder Agreement
Starting a business is not that easy. Once you have started one to slow down or losing the momentum halfway through means, making it detrimental to the business. You may consider including co-founder in order to keep up the momentum. Co founder agreement is one that is designed to ensure that each of the founders’ interest is protected and conflicts are avoided down the line.
Who Takes the Co Founder Agreement?
Co founder contract is an agreement between an entrepreneur and others who are about to invest in the business. The agreement template is helpful in drawing up the founder’s agreement, and you may well consider it as an insurance against the unexpected and the things you hope that it never happens.
Purpose of the Co Founder Agreement – Why Do You Need It?
The purpose of a founders agreement includes
- Clarifying the role of each owner in the business
- Providing a structure that ensures that the disputes that may come up are resolved following a structured pattern
- Providing clarity as to how a partner can enter or exit the business
- It protects the rights of the minority owners
- It ensures the rights of the investor are protected, and the stability of the business is signaled to them.
Contents of the Co Founder Agreement- Inclusions
The co founders agreement generally involves naming the founders and agreeing on the rules that are agreed upon. The issues that you would have to address include
Length of validity- This refers to fixing the length of time for which the agreement would be valid. It also allows scope for the wilful dissolution of the agreement. Though the business might seem like something you are passionate about, there is all likelihood that you might vacillate when it comes to greener opportunities.
Company goals- It is good to ink the company goals in ink and paper despite there is a scope for a change in goals in the future. The things that can be inked include mentioning the products you offer, the industry in which you re about to operate in, how you want your business to be perceived by the consumers, competitors, as well as the employees and the plans that you are ready to try? Most of the times, this agreement could well be the place to list the company values, work culture, priorities as well as the bigger picture that you envisage.
Defining roles and responsibilities– Whether it is a small business with just one or two co-founders or a large business with a number of co-founders, defining the roles and delegating or sharing the responsibilities between the co-founders would ensure that there is no confusion in who should decide on what aspects and there are no two persons doing the same job causing redundancy and inefficient management.
Defining the roles and responsibilities would also ensure transparency, accountability, teamwork, and communication. That is when something is not done; you know who has not done the job and also whom to congratulate in case of achievement.
Equity breakdown– This is the most important aspect of the co founder contract. When the equity breakdown is decided at the onset, it will help eliminate misunderstandings, hurt feelings, and eventually closing down a flourishing business when it is at its peak.
How to Draft the Co Founder Agreement?
The inclusions in cofounder agreement whether it is a startup co-founder agreement or co founder agreement startup template or a co founders agreement for an already existing business include
- Defining the business
- Details of all the founders and the investors
- Ownership details of the company
- Roles and responsibilities of the founders
- Compensation or salary to be withdrawn by each of the co-founders.
- Details of formality to be followed for the exit of the founders
- Dissolution of firm
- Steps for dispute resolution
- Miscellaneous provisions that deal with aspects related to the intellectual property which actually belong to the business entity and not any of the individuals. When the intellectual property(IP) is assigned, it would be easier to evolve the business as well as raise the capital when required.
Negotiation Strategy
Before you sign up for cofounder agreement, it is important that you understand the investor’s motivation behind funding the company. You need to choose the investor or co-founder wisely. You can do this if you are clear about whether you are looking for a long term investor or a venture capitalist who actually enters the scene with the exit scenario in mind in about 5-10 years. Also, decide who is to helm the affairs of the company and make major decisions at the start itself to avoid conflict of interest.
Benefits and Drawbacks of the Co Founder Agreement
Benefits:
- The cofounder agreement would provide security for the funds invested by each of the investors
- It helps in intellectual property assignment
- It gives the rights of pre- exemption for the founders
- It ensures that the start-up functions as always even when a co-founder exits the start-up
- It is a written contract of whatever has been accepted by the co-founders
Disadvantages:
The co founders agreement might not always be in the best interest of the investors. This is because, in the investors’ point of view, founders committed to the venture is what they would prefer.
What Happens in Case of Violation?
The steps for resolving the disputes would be laid in the agreement. However, if the violations are gross and cannot be resolved amicably, it should be taken to the arbitration court for settlement(1).
The co founders agreement is a written contract that clearly sets forth the rights, responsibilities, ownership, and the dispute resolution that is to be executed by the founders of the company. It has to be done with care and after a lot of deliberations, discussions, and agreement. The co founder agreement sample/templates can provide the framework. But the final draft has to be developed after considering all aspects at length to ensure the longevity of the startup.