A start-up is an idea turned into reality. Being a brainchild of different individuals come together to create something new, it is a homogenous product of different ideologies. Diverse idiosyncrasies of each co-founder create cocktail of a successful business! However, disparate calibres often turn a sweet fruit bitter!
Nonetheless, prevention prevails over cure and for start-ups the cure ensues in silhouette of Co-founder’s Agreement. Designating the stipulations of how the business must be operated, the agreement provides indemnity against unanticipated discord among the co-founders.
Fashioned as per sine qua non of a start-up’s genre, a well-drafted co-founder’s agreement can be the cannon against disarray and enmity. Nevertheless, there are certain provisions every co-founder’s agreement must encompass. Following imperative aspects must be a part of every agreement between co-founders of a start-up:
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Ownership Clause:
Each co-founder in one way or another, is the owner of the start-up! However, the degree of ownership varies for each co-founder, thereby making it cardinal to define ownerships pertaining to:
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The percentage or number of shares or equity held by each founder on the basis of involvement or capital investment put in.
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Voting rights on company matters.
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Veto power.
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Scheme of ownership, if one or more of the founders leave.
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Division of profits.
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Role of each co-founder:
Two people don’t have the same capabilities and skills, making it paramount to demarcate the roles and responsibilities of each co-founder. The co-founder’s agreement must clearly define the roles of each co-founder to avoid any hassle.
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Decision making powers and Conflict Resolution:
A mechanism for decision making needs to be devised and specified in the co-founder’s agreement. There is always a possibility of conflict arising between the founders. In such a situation, it is prudent to opt for alternative methods of dispute resolution such as arbitration or mediation, rather than wasting time and monetary resources in courts. An arbitration clause can be included within the co-founders’ agreement.
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Removal of a Founder:
A scenario where co-functioning becomes impossible may arise and removal of one or more co-founders may be the sole measure in interest of the business. A removal clause pertaining to removal and its aftermath must be included.
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Winding Up:
The rights and obligations of each co-founder needs to be pre-established for a situation when the company may require to be wound-up! A scheme devised for an equitable distribution of assets and liabilities of the business must be a part of the co-founder’s agreement.
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Financial Aspects:
Financial aspects that need to be considered while drafting the agreement concerns with:
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Salaries drawn by each co-founder.
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The manner in which company expenses are managed.
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The mode of debt repayment.
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The authority to sign cheques on behalf of the company.
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The authority to enter into legally binding agreements on behalf of the company, including matters related to finances.
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Non-Compete and Confidentiality clause:
In case a founder leaves, he should not solicit either clients or employees of the company to any other company. This clause is paramount to warrant that business idea is not facsimiled by them by restricting the founder from divulging confidential information as the owner as well as when they leave the business.
Given that start-ups operate across various miscellaneous industries, the clauses in an agreement vary corresponding to a start-up’s disposition. A co-founder’s agreement, drafted on footings of these caveats dispenses an unabridged preventive measure against any dissention!
