Founders of a small startup are responsible for laying it down and creating it up from scratch. However, while doing this, the founders often ignore having an important document that describes the terms and conditions of their relationship. This small yet important piece of paper is known as the co-founder’s agreement and defines the relationship between the co-founder of the startup.
What Is A Cofounders Agreement?
The legal document that describes the manner in which the co-founders are needed to act within the organization and with each other is known as the founder’s agreement or co-founders agreement. The co-founder’s agreement contains the terms and conditions regarding the manner in which the business will function between the founders of a Startup.
The agreement is a written document that operates as a constitution for the co-founders in case there is a dispute between them in the future gives the legal remedies and law applicable in case of violation by any of the founders of the startup
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Important Clauses Of A Co-founders Agreement
The following clauses provide protection to both the co-founders as well as the company.
The most important clause of a co-founder agreement is in accordance with the proportion of equity ownership of each co-founder of the startup. This clause defines the consideration invested by a founder in the form of monetary investment, experience, network, and IPRs. The ownership clause tells the number of shares owned by each founder, the division of profits between them, and the total amount of capital invested by a co-founder.
The founders’ agreement in India must specify the mechanism to deal with a situation where a co-founder exits or is removed from the company. For such a case, a vesting structure must be included in the agreement to describe how the shares will be taken up by other founders.
The founders’ agreement with the vesting of the shares can do vesting of shares in the following ways:
- Time-Based Vesting, i.e. the shares will be vested in the portion of the time spent by the founder.
- Milestone Vesting, i.e. the vesting will take place when the company accomplishes a milestone.
Roles And Responsibilities
The founders’ agreement must describe the roles and responsibilities of each of the co-founder of the startup. This ensures that each co-founder knows their duties in the business whether it is the functions of marketing, business development, or any other role.
Transfer Of Shares
The Agreement must also specify restrictions on co-founders related to the transfer of their shares to any third party. This means that the agreement must describe the lock-in period for which the founder is not allowed to transfer the shares owned by them in the company. The clause also contains the legal remedy that can be used in case the co-founder of clause also includes the legal recourse that can be used in case the co-founder violates this clause.
This clause is included to make sure that the intellectual property developed by a founder is given to the startup and not individually owned by the founder. This prevents the IPR and trade secrets of the business in case the founder wants to leave the organization in the future. This clause has an essential role in startup valuation as any Intellectual Property owned by the business enhances its value.
The confidentiality clause restricts any co-founder from using, selling, for distributing any business information of the startup’s clients to any third party after leaving the organization. This clause protects any form of data theft by a co-founder and gives the remedy in case an exiting co-founder steals sensitive company information or client data.
Finances Of The Startup
The founders’ agreement must also have the clause relating to the management of its finances of each cofounder, and the manner in which the loans of the business can be taken and repaid.
Removal Or Exit Of Cofounder
The agreement must specify how a co-founder may leave the organization. This also tells the provisions related to the removal of a co-founder i.e. the situations in which a co-founder may be removed and the procedure needed to be followed during and after the removal.
The above-mentioned list of important clauses of a co-founders agreement is not exhaustive, and the founders may include other important provisions as per the nature of the business and the relationship between them.