Important Clauses of Co-founders agreement

Overview of co-funders agreement

A co-founders agreement is an agreement which is entered into between the founders of a company. This agreement would also govern the manner in which the co-founders are bound to work within the organization and stipulates the relationship between the co-founders of a company.

Starting a company involves numerous challenges and may incur certain liabilities. When two or more people come together for the purpose of starting a company, it is advisable that the co-founders of the company enter into a co-founders agreement for smooth functioning and also, to avoid any disagreements or disputes in future. Such agreement will establish a legal and binding relationship between the founders.

You have conceived a million dollar idea for your start up or you may have nascent inkling to start a new business with your buddies.

Sooner or later there will come up a need to draft a co-founders agreement.

Why?

Your co-founders may be your best friends; you may kick-off really well but as the business expands and grows there needs to be some agreement governing the professional relationship between the co-founders.

To have clarity of certain issues like who is going to take care of what (allocation of responsibilities), who is going to shell out how much from their pocket (Contribution of each co-founder), how much time is going to be devoted by each of them, deciding what is it exactly that has to be the end product (defining the purpose), what is the profit sharing ratio going to be (in case there is profit) and many other such details depending upon the structure and the nature of the business-in the initial phase of the business makes the road smoother.

Important Clauses that must be present in a Co-Founders Agreement

The name and the description of the company

The first essential clause is the name and description of the company. It is important to specify the name of the company in the agreement and also to describe the nature of the business for which the parties are entering into the agreement.

Equity Ownership

It is important to determine the equity ownership of each co-founder in the agreement. It typically depends on factors such as the quantum of investment/monetary contribution in the company, network in the company’s field of business etc.

Roles and Responsibilities

The Agreement must stipulate the role and responsibilities of each co- founder. This may include the roles and responsibilities with regards to business development, marketing, administration, finance etc.

Representation and Warranties

The Agreement must include the representations and warranties clause. The agreement must consist of a representation stating that a co-founder is not a party to any other agreement that would restrict such founder to perform its obligations stipulated in the agreement.

Restriction on transfer of shares

The Agreement must have a clause wherein the co-founders are restricted to transfer their part of the shares in the Company before the expiry of certain number of years.

For protecting the equity from going in the hands of an outsider, one may also include the right of first refusal to shareholders in this clause. This means that the founder can transfer their part of the shares to an outsider only when the shareholder(s) of the Company refuse to take up those shares.

Vesting

The Agreement must include this clause as this will enable a co-founder of the Company to deal with the shares of other co-founder in the event he decides to exit the company or is removed from it.

Assignment of Intellectual Property

The Agreement must specify that all the intellectual property developed by any of the co-founder(s) during the course of this Agreement shall be the property of the Company and not of the co-founder(s) who actually developed it.

Confidentiality

This clause is essential as it will restrict all the co-founders of the company from disclosing the company’s confidential information to any third party.

Designation and Employment

The Agreement must stipulate the designation of all the co-founders along with the details of their employment such as salary, bonus, etc.

Removal or exit of Co-founder

The Agreement must include the provisions relating to the removal and exit of a co-founder of the Company. This clause must specify the event and the procedure in which a co-founder may be removed or may exit from the company.

Non-Compete Clause

This clause is important as it will prevent a founder from starting a similar company/ business after leaving the company. However, such restriction on the co-founder must be put for a reasonable period of time and should not be arbitrary.

Non-Solicitation Clause

This clause is important to prevent the co-founder from soliciting the employees, clients licensees of the company.

Future Financing

The agreement must include a provision for future financing in the company by the co-founders. Such clause must stipulate the ways in which the co-founders can invest in the company for its growth.

Termination

The Agreement must stipulate the events in which the agreement can be terminated by the co- founders and the subsequent consequence/effect of such termination.

Dispute Resolution

The Agreement must also provide the mechanism for dispute resolution between the co-founders and also, between the company and the co-founders in an event of breach of any of the provisions/clauses of the agreement.