Decoding a co-founder agreement
A Co-founder Agreement is an agreement between Co-Founders laying down the ownership, initial investments and responsibilities of each Co-Founder. This agreement acts as a safeguard in the event of any dispute, as it can provide protection to show what the co-founder agreed too.
Equity and salaries of each founder
Under this clause, equity ownership, profit or loss sharing and the salary of each founder is to be clearly stipulated. It is advised to include how change in salaries will be addressed as well.
When you are working on building a product/company, business plan, you are creating intellectual property (IP) for the company. This clause states that every IP developed belongs to the company and not the individuals creating it.
The direction of the company
This clause contains information about how the firm is going to run, how are the operations set to happen and in what direction,how things will proceed when you decide to expand the firm and hire new people under you, what happens in case of an acquisition or closure.
Roles and responsibilities
Each founder is in the business for a specific set of roles and responsibilities. Those have to be stated under this section. Ensure that you clearly define the duties of each founder so that there is not duplication of work or any confusion of “who is to handle what” at a later stage. This clause should be so clear that, each founder knows exactly what he has to handle and what jobs do not fall under his umbrella of work.
This section talks about the founders, their family background, education details and work experience. It is mainly used for evaluation purpose by outsiders to check if the founders are actually capable enough of handling the business.
Equity breakdown and initial capital contributions
This section talks about the breakdown of assets – who owns what. It also talks about how much capital has each founder invested in the business. This section is and will always remain as proofs of investment by each founder. It should also cover important aspects like what percent of the equity is vested etc.
Management and approval rights
Under this section, the founders negotiate and agree upon decision making rights and approval rights. Who is going to approve budgets? Who is going to sign the cheques? Who is going to take decisions on everyday decisions? All these questions are answered in this section. Usually it is always better to have all the founders approvals and signs on all big decisions and the active partner can be responsible for all the day to day petty decisions.
Non-compete and confidentiality clauses
This clause includes all the confidentiality statements, which are private only between the founders and need not be disclosed to anyone except them.
Resignation, dissolution and removal of directors
This is the final requirement which talks about how everything is going to be distributed amongst the founders, in case of liquidation or closure of the company. It also talks about on what terms will one founder have the right to terminate another founder. Questions like what happens when one founder leaves need to be addressed. Does the company or the existing founders have the right to buy back that founder’s shares and at what price?