In this blog on the co-founder’s agreement, we will look at some of the important clauses of a co-founders agreement. We attempt to provide the readers with some crucial clauses to have in your co-founder’s agreement.
The following are some of the important clauses in a co-founders agreement:
1. Ownership: It provides for the ownership pattern of each co-founder i.e. the percentage and number of shares held individually, division of profits, etc. This is also crucial in determining the voting rights of each co-founder.
2. Intellectual Property: This is a crucial clause in the determination of the distribution of equity of a startup or company. This clause decides the fate of the intellectual property, brought in by a co-founder or created during his existence when he wishes to quit the startup or company.
3. Description of Business: This clause defines the potential venture of the startup or company, its objectives, and the services it will provide. In this clause, a list of milestones can also be provided which are to be accomplished within a specific period of time.
4. Roles and Responsibilities: This Clause specifies what will a co-founder actually do in a startup or company. It specifies the roles and responsibilities he will play. This clause provides the co-founder with clearly specified pre-decided targets and tasks. Further, it is also necessary to keep room for new roles and responsibilities for the co-founders as the startup or company expands with time.
5. Business Decisions: It provides a mechanism through which business decisions of the startup or company can be taken by the co-founders in a convenient way. Decision-making power is equivalent to the shareholding pattern of the co-founders in the startup or company. It should not only specify the procedure for taking important decisions but should also specify about taking simple decisions i.e. daily decisions.
6. Induction of New Co-Founders: This clause provides for the procedure to be followed while inducting or introducing a new co-founder in the startup or company. It can also provide for his roles and responsibilities.
7. Loan from Founders: This clause provides details with respect to how the loans from the co-founders are to be treated. It also provides details as to how such loans shall be paid back with interest or through any other benefits.
8. Compensation Clause: This clause provides for reimbursement of costs and expenses incurred by the co-founders in the initial stages of the start-up. this may include rewards as well as risks for which provisions should be
9. Exit Clause: This clause provides details about the procedure to be followed when a co-founder decides to exit the startup or company. It lays down the mutually agreed circumstances under which a co-founder can be removed or fired by other co-founders. This can include fraud and lack of performance. It also mentions the rights enjoyed by the co-founders after their exit. This includes ‘Right of first refusal’ giving an option to certain parties to buy the shares that are being sold by the leaving co-founder before offering such shares to third parties, ‘Tag Along with Rights’ gives the other co-founder an option to exit the startup or company on similar negotiated terms and conditions.
10. Non-Compete: This clause is extremely important as it prevents any co-founder, who exits the startup or company, from starting a similar business and thus competing with the original startup or company. These clauses can provide for a specific time period of non-competition like 3 to 5 years.
11. Non-Solicit: This clause requires the leaving co-founder that he does not solicit the clients and the employees of the startup or company he took an exit from.
12. Confidentiality Clause: This clause makes it mandatory for the present co-founders as well as the leaving co-founders to maintain confidentiality and not to disclose any of the sensitive matters of the company or startup.
13. Dispute Resolution Mechanism: This clause provides for a pre-decided dispute resolution mechanism. The issues can be resolved through mediation or arbitration by a pre-fixed mediator or arbitrator. Opting for such ways of dispute resolution can prevent the reputational damage of a startup or company which it risks when it opts for litigation.
14. Termination/Winding Off/Shut down: This clause provides for the circumstances under which a co-founders agreement can be terminated, the future course of actions if the business does not take off and becomes unviable like distribution of assets, liabilities, and any money left in the business or startup.
So the short explanation of all the clauses above will help the readers to know the
basic elements that form a part of the co-founder’s agreement. This will help any entrepreneur or anyone willing to form a startup or company to be more prepared by having a pre-existing knowledge with respect to a co-founders agreement. It also helps him engage more with a lawyer who is well versed in drafting co-founders’ agreements or a startup lawyer who is well versed in drafting, vetting, and negotiating contracts and agreement relating to startups. In the next blog, we will look at the co-founder’s agreement of housing.com to further showcase why a co-founders agreement is necessary for a startup or company.