What Should You Discuss With Your Co-Founder Today?

Last Updated at: Oct 09, 2020
Founder Agreement

People tend to postpone uncomfortable situations. And last we checked, entrepreneurs are people, too. So the difficult questions that start-up founders should have answers to early on are always postponed, even though they’ve no doubt already found a way to change the world. This is not how it should be because there are numerous times in your start-up journey where the problem may have been solved by a simple founders’ agreement. Think of it as a sort of pre-nuptial agreement for business partners. Now, what must such an agreement contain? Let’s consider:

What is the vision?

Too basic, yes, but often unanswered with the precision you want. Unless you’ve started a venture while in college, you’re forfeiting some salary or income for this start-up. It’s likely that you’ve even put some of your or your family’s money into it. As an investor in the business, you need to know what exactly it is you’re giving up this money for. There might be a few things you expect from the project six months or two years from now. If these expectations don’t match those of your partner. It may be that you want to immediately start earning revenue, while he/she wants to raise investment soon. You may think you’re building something pro-consumer, but your co-founder may envision your product as more beneficial to businesses in the long-run. Or perhaps neither of you have anything figured out. You need to discuss all of this and ensure you find common ground. Once you do, it goes into the agreement.

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What do you do here?

Ideas are good, but execution is more important. Perhaps your co-founder believes that since your start-up is based on his idea, he deserves more equity. It’s possible that, if you’re the tech co-founder, you disagree as you will be doing much of the work. So if he still believes he deserves more than half the equity, ask him to commit to a list of responsibilities. If it’s just being the ideas person, it’s not going to work out. The role must have definition, such as CEO or Head of Marketing. Based on the importance of this role, remuneration and equity split can be decided.

Do you think you can just leave?

So you started your business and decided to split equity down the middle. A year later, your co-founder decides to bail. What happens? Does this mean that you need to keep going and making the whole thing work for just half the equity? If you haven’t got an agreement stating that you cannot retain your equity if you don’t complete a certain duration working toward the goals of the business, it does. You should also address what happens in case a co-founder dies. Does the spouse or father/mother get the equity? Have a lawyer think of all the scenarios and enter what you and your co-founder have agreed to in the agreement.

Who owns the IP?

A very important, but often ignored, question. This includes the trademark, copyright and patent. By definition, all three are owned by their creator. So if you code a software project into existence, you own the copyright. If it’s your co-founder’s idea, he could apply for the patent. The trademark belongs to whoever first used it in business within a certain area. All three may be assiged to a person or an entity. As co-founders tend to collaborate on the idea, code and business in some way or other, it’s perhaps best not to have the IP rest with one person (unless, of course, some co-founders had nothing to do with certain aspects of the business). In any case, there are no real best practices here. You and your co-founders need to decide what your answer is.

The conversations that a founders’ agreement can bring up may turn ugly, but also have a profoundly positive effect on your business. It may end up that the two of you disagree about every single detail and, therefore, decide to split ways (better sooner than later) or find the best possible solutions and know exactly what each other’s roles and expectations are. Either way, it will be a good thing.

A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.