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Agreements, Co-Founder agreement

Would just a good idea be sufficient to invest your money and effort into it, all based on “the Trust Factor”? No, people change as time passes by, crucial decisions like entering into a firm as a Co-founder is even more important. I am going to be describing a real-life example of a Cofounder who entered into a business relationship with his friend as a co-founder (let’s name him X and his cofounder Y).  


X and Y were college friends, Y one fine day, proposed his startup idea to X and convinced him to join the business as a Co-founder. X entered into the startup as a founder investing $50K, speaking of the reality that is huge money that anyone could even imagine of investing in a startup that was still in the ideation stage.  


The mistake that X did was believing solely on the “The Trust Factor” did not pay due to attention to drafting a “Co-founders Agreement” not even an exit plan in place. A reach shows, in Indian startup ecosystem, a whopping 53% of startups do the same mistake. If you are someone who could relate to this scenario, go ahead read the available options for you.

  1. Litigation
  2. A Legal notice intimating the co-founders about your interests to exit.
  3. If the startup is registered as a Private Limited Company, call for a board meeting.

The complication of the situation can be eased up based on the entity type you chose to register your startup as.


Greater Goodness if you had a legal Agreement or contract in place: If you did, then these are your options:


  1. Termination of contract Notice: Contract termination is a drastic step and should be done with caution and with proper legal advice. Clauses addressing the situation of exit will determine if the parties can go for exit based on –
  • Breach of contract, or
  • At will

  1. Reformation:

Reformation allows two parties to modify a contract so that it more accurately reflects what the parties intend.  This remedy requires that the contract to be valid.  It may be available when one of the parties had a mistaken understanding of a material term of the contract.

 

When a contract is terminated, it is often said that it “comes to an end” or “ceases to exist”.  However, these statements are somewhat misleading as the contract not only continues to exist but continues to have an operation in some respects.  What is in fact “terminated” is the future performance of the contract – that is, the primary obligations of the parties that have been partially performed at the time of termination and those that would have fallen due for performance had the contract not been terminated.


We at Wazeer think of all these situations and provide a detailed consultation to our clients upfront, all with a motive to provide right information upfront. We would be happy to help you in this matter -> “Get your Wazzeer” 🙂

 

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Agreements, Co-Founder agreement

Importance of asking the right questions to the founding even before creating an entity will protect the organizational culture and safeguard relationships in the long run. Perhaps Co-founders’ agreements is the product of conversations that should take place among a company’s founders at the early stages of formation rather than later in the life of a company. The goal of these conversations is to have an open and honest discussion about the attitudes, fears, and aspirations of individuals involved with the startup. In this blog, we will look at the Top 28 Questions to ask your Co-founders before entering Co-founders Agreement. It is essential to have this conversation – Answering these hard questions now will help you and your co-founders avoid personal conflicts in the future.

 

Strategy

  1. What goals does each of us have for the start-up?
  2. What goals do we have for ourselves?
  3. What are our respective timelines for these goals?

 

Ownership Structure

  1. Who gets what percentage of the company?
  2. What will we each contribute to the company? (e.g., duties, job descriptions, hour commitments, roles, and responsibilities).
  3. How much capital are we each contributing and for what?
  4. Is the percentage of ownership shares subject to vesting based on continued participation in the business?

 

Management

  1. How are key decisions and day-to-day decisions of the business to be made? (e.g., by majority vote, unanimous vote, or certain decisions solely in the hands of the CEO?).
  2. What salaries (if any) are the founders entitled to? How can that be modified?
  3. What happens if one of us wants to leave?
  4. If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price?
  5. What happens if one of us wants to sell the company, raise money, or kill the company?
  6. What happens if one of us becomes disabled or dies?
  7. What happens if it takes us longer than we expected to get our product up and running? Can we each launch other startups while working on this project
  8. Under what circumstances can a founder be removed as an employee of the business?
  9. What happens if one founder is not living up to expectations under the Founders’ Agreement? How would this situation be resolved?
  10. If it turns out the business is not taking off and we decide to end our venture, can one of us take the idea and try it again?
  11. If we need to raise start-up capital, where will it come from and how much of the company are we willing to give in exchange for that start-up capital?

 

Factors that may be considered in an unequal distribution of equity include:

  1. Who came up with the idea that is the key to the Business Concept;
  2. Who has the greatest stake in the IP in the Business Concept;
  3. Who developed the technology necessary to run the Business Concept;
  4. Who owns the patents on which the Business Concept or its products will be based;
  5. Whether any Founder brings existing copyrights or trademarks into the Company;
  6. Which Founders are providing the start-up capital for the Business Concept and in what percentage contribution;
  7. How much time has each Founder invested in the development of the Business Concept;
  8. Whether all Founders are full-time contributors to the development of the Business Concept;
  9. What was the opportunity cost for each Founder to help create the Business Concept? Those who sacrificed more lucrative, high-power positions at established businesses are often compensated more for their risk than those who were not actively employed when the venture began; and
  10. Who has the industry expertise necessary to get the Business Concept going?

 

It is always helpful to have clear clauses in the Co-founders’ agreement for resolving the conflict as that will avoid confusion and uncertainty and save time and money. The conversation that you have with your founding team will decide the meat of Co-founder’s Agreement – The Agreement lays out the rights, responsibilities, liabilities, and obligations of each founder.

 

Remember, Start-up process entails complex procedures and many bureaucratic hurdles, entrepreneurs are better off using professional services. Hiring a virtual lawyer and virtual accountant can save time and help ensure that the process goes smoothly. For any Legal and Accounting support, Happy to help you, let us talk! 🙂

 

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Agreements, Co-Founder agreement
This post will stress the importance of having this conversation (or more likely, conversations) early on, explain why co-founder agreement is a valuable tool to maintain a healthy co-founder relationship, and highlight some of the key topics to cover.

1. Roles and responsibilities. You are going to want to make sure you have a clear understanding around roles and responsibilities up front. Yes, it is critical that a co-founding team collaborate and to create an open and shared culture amongst themselves but that shouldn’t necessarily mean everyone is in charge of everything. I have seen too many startups make the mistake of thinking that every decision has to be made collectively and every founder has control over every decision. That will inevitably create confusion and frustration. I’m not saying you shouldn’t create an environment in which major decisions are discussed and driven be a consensus. What I’m saying that you should strive to establish some clear lines of primary responsibility and enable a functional management system that enables each of the co-founders to have clear responsibilities and reporting obligations. Doing so will go a long way in helping you minimize growing pains. Remember, not every co-founder should be a co-CEO.

2. Equity ownership and vesting:  You’ll need to allocate the ownership of your new enterprise amongst the founding team. While this is a subjective matter and can sometimes be very delicate, it is imperative that you nail down how you will split up the equity between the founding team up front to make sure there are no misunderstandings or hurt feelings once things get off the ground. Remember that you typically will have 90 percent to play with, as you most likely want to set aside at least a 10 percent option pool for future rank and file hires. Also, remember there is no rule that says all of the co-founders will have equal ownership of the new enterprise — and that’s where it gets a little tough. You may have to tell your co-founders they are not your co-equal. But it’s always better to have that conversation on day one and not to move forward with a new enterprise and then get stuck on who owns what.  Also, to stay on the theme of planning ahead, you need to implement market vesting terms for all of the founder’s equity (in case there is a split). ?What that means is that each of the founders must earn their equity by contributing to building value in the enterprise. The most common vesting terms are those that occur monthly or quarterly over three or four years. You do have some room to play with the parameters of the founders vesting schedule, including the amounts that are fully vested up front but you should stay within market parameters. Remember that you’re not doing this just because investors expect it. You are doing it because you will create very significant enterprise risk if one of the members of the founding team picks up and leaves for the beach and you are forced to use dilutive equity to bring on replacement talent, not to mention you don’t want to create any incentives for a free ride. So, be smart. Get the equity ownership conversation nailed early and implement appropriate vesting terms up front.

3. IP assignment: ?When you and your co-founders begin to iterate on an idea and develop a business plan or begin to build a product or a platform, you are creating intellectual property (IP). IP comes in many forms but make sure that whatever IP is being developed for your new enterprise belongs to the entity and not the individuals behind the development of the IP. This concept extends to not only your co-founders but all of your employees, consultants, and contractors. Unfortunately, I have seen too many founders work, iterate and develop an idea or a technology but separate before the IP that has been developed has been assigned from them into the entity, meaning your new enterprise may not have rights to various things that it will need to evolve its business or otherwise raise capital. Getting IP assigned into the entity is simple and there are many forms available online that get this basic assignment accomplished. Do it on day one and don’t wait too long. Co-founding a business isn’t too dissimilar from marriage. You can start with all the right intentions and never imagine separating. But it does happen. Plan ahead. Otherwise, you will jeopardize the viability of your new enterprise.

Wazzeer is vouched by Entrepreneurs as the most reliable Legal and Accounting Partner. We would be super excited to help you. Let’s Connect! 🙂
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