THIS AGREEMENT (the “Agreement”) is made and entered on __________ [Insert date] between __...
Beginning a new business involves a lot of risks. Often two or more people come together to apportion a startup. There are a lot of formalities that needs to be completed while launching a startup and a co-founders’ agreement is one of them. Founders of startups need not skip this step as this agreement will come to their aid if things do not go the way as planned. A co-founders’ agreement, like all other contracts, helps in navigating the founders day to day operations and also helps in clearing the differences in case of any issue. The co-founders’ agreement as a document can be made legally enforceable by just printing it on a non- judicial Stamp paper, which must be duly signed by the concerned parties with the appropriate stamp duty varying in different states.
The essentials to be found in any founders’ agreement are as follows:
All the founders of startups own a part of the business even though the ownership may be divided based on their investment. Each co-founder agreement must mention the following details:
The roles and responsibilities of every co-founder are different based on their skills and capabilities. The co-founders must declare their roles and duties in the agreement and also lay down the activities of the business for which they will be individually responsible.
The agreement must name the founders and the company. The name of the business and owners must be clearly specified in the agreement.
Finally, it must be clarified as to how long the co-founders’ agreement will remain valid. It is not legally binding to continue working for the business forever, so it is suggested to decide the validity period of the agreement.
This clause can change the way business changes and grows, but it is better to mention in the clause regarding the goals of the company. What products to offer? Or how the business will look to a consumer, a competitor, or an employee?
To predict how a company will operate is not legally binding, but it is just a business model to be planned before.
A provision which prohibits explicitly any founder from soliciting any business information or sensitive information of any client or employee in case he leaves must be revealed in the co-founders’ agreement. This clause prevents any co-founder who leaves the business in the future from duplicating the business idea.
The co-founders’ agreement must lay down the rights and liabilities of the founders in case of winding up of business. The provision also includes, how the assets and liabilities of the business will be distributed.
Generally, one or more co-founders put in some capital in the early stages of the company. The agreement shall specify each founder’s contribution and the basis of contribution for example, debt, equity loan etc.
Founders must decide if and when they will take a salary or they will take other forms of compensation other than shares. In this part reimbursement of expenses incurred by the individual founders must be decided.
Founders must ensure that in case a founder decides to leave and sell their shares than the other founders have an option to purchase those shares. These are important as the departing founder can sell their shares to an unknown third party.
As disputes regularly arise in co-founder situation, it is vital to set out the process of how the differences will be resolved. This may engage a series of steps such as having an informal meeting if no agreement can be reached then to have mediation or another alternative dispute resolution process.
Finally, a founders’ agreement must mention the circumstances of exit, i.e., what happens when a co-founder has been consistently underperforming he can be asked to leave the company, or the person can be terminated.
A co-founders’ agreement is a brief idea of how the co-founder relationships will work in the future or how the company is structured and what is the contribution of the owners in business. It is the key to any type of business structure.
In many cases, this document is optional, but it is not recommended to start a business without one. Co-founders’ agreement is an insurance against the unexpected.
Some of the reasons why having a founders’ agreement are essential is mentioned below:
Co-founders’ agreement is a legal document, and it becomes difficult for individuals to draft one. Here, a step by step procedure has been mentioned as to how it should be drafted:
At Enterslice, we have a team of efficient lawyers who will help you in getting through this agreement in a hassle-free manner. Our professionals will help you in drafting the agreement accordingly within a short period.
Lawyers and entrepreneurs recognize that a Co-founders’ agreement is an initial assessment of how things stand when the business is new. You can comprise procedures in this document for making crucial changes and updates. Founders’ agreement is optional, yet it can end up being extremely useful if driven because it can be fundamental in producing better understanding between co-founders.
Read, Also: Why is Founders Agreement Required?.