In the series of blogs we write, this is our first blog on co-founders’ agreement. We will attempt to decode all the myths around the founder and the founder’s agreement. In this blog, we attempt to answer 3 basic queries.
Founder vis-a-vis a co-founder, what is a co-founders agreement, and the legal validity of a co-founders agreement. This will help readers and especially entrepreneurs to understand the basics of a co-founders agreement before moving on to understand the clauses that form part of a co-founders agreement.
Who is a founder?
The founder is the mastermind or the one with an idea or vision and wishes to implement such an idea which can provide for something innovative or improvise any area or solve any existing problem. As just an idea is not enough, so for the implementation of his concept or idea which can be by starting a new business or startup, he tries to accumulate resources which can be monetary or intellectual. Further, all of these efforts can be for-profit or non-profit.
Who is a Co-founder?
A founder for the implementation or materialization of his idea and when he is independently incapable of doing so by himself may require additional persons either for finance or for specific skill sets. Such a co-founder can be on the same track as his founder i.e. he can also have his share in the founder’s idea and is willing to put equal efforts into the implementation of the idea. He is someone who is involved with others assisting in the practical materialization of the founder’s idea for the creation of a startup or business.
What is a Co- Founder’s Agreement?
A co-founders agreement is basically a formal written agreement between the co-founders of a new business or a startup. It provides clarity with respect to the ownership and terms of business or startup, nature or functioning of a startup or company, initial investments, profit sharing ratio, etc. It also throws light on the professional relationship amongst the co-founders, obligations of co-founders, allocations of responsibilities between co-founders, and future goals or vision of the co-founders of a startup or company. Further, the most important role that a co-founders agreement plays with respect to a business or startup is that it provides for safeguards and protection in case of disputes between the co-founders by providing details with respect to what the co-founders have agreed at the beginning of their company or startup. It provides for open dialogue or discussion by way of mediation or arbitration between the co-founders thus safeguarding the interests of the co-founders and also saving the company or startup.
Legal Validity of a Co-founders Agreement:
A co-founders agreement is generally signed before the incorporation of a company or startup i.e. before the existence of a company or startup. So it raises doubts as to the legality of a company or startup entering into a contract prior to its existence or registration. In such a situation, the ‘Specific Relief Act 1963’ has provided the remedy. Section 15(h) provides that ‘The specific performance of a contract may be obtained by any party thereto when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation, the company: Provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract. A similar remedy has been provided in ‘Section 19(e)’ of the ‘Specific Relief Act 1963’.
While this blog provides basic conceptual clarity with respect to co-founders’ agreement, in the next blog, we will discuss the important clauses that form part of the co-founder’s agreement.