In this article we shall discuss some key clauses that must be incorporated in a robust co-founders’ agreement.
There was a time when companies were founded and run by people with sound business and financial knowledge and people with technical skills would be hired as employees or advisers.
However, with the arrival of the internet and the boom in the IT industry, the roles have been reversed. In a world where innovation and disruption is the key to gaining market advantage, it is the people with technical skills are now leading the way in terms of envisioning and growing a company.
People with financial and business astuteness are now either employees or investors who come into the picture only when it comes to making decisions pertaining to their area of expertise.
The startup is the new-age reality which is gaining pace with the passage of time. Often it is supported by the ideologies and investments of young enthusiasts. It is only natural then that there are instances where the ideologies clash.
Thus one must be extremely careful while deciding upon the clauses of the agreement between the co-founders right at the inception.
It does not only help in clearing the air surrounding the business or start-up but also helps in the meeting of minds of the founders and bringing them on the same page.
Ownership And Other Rights Arising
Each founder jointly stands in the position of an owner of the business. However, it is not always necessary that their interests and rights in the functioning of the business are always at par with one another.
Therefore, an agreement pertaining to the ownership and other rights is always a must-have. Ownership clause mainly extends over the percentage of shares held by the co-founders and the entire scheme of ownership as divided amongst them.
However, on a more expansive basis, it shall include the voting rights clause, veto power clause, equity split-up and a clause pertaining to the division of profits. Moreover, clauses should also cover the financial aspects like salaries drawn, expenses, debt repayment, etc.
Duties: Both Jointly as Well as Severally
As with the rights over the business, there also arises a string of duties which is attributed to the co-founders. Some duties are of such nature that it is attributed to all the owners equally while some are peculiar to the owner as against his rights over the business, as defined earlier.
Therefore, in order to avoid a clash of interests and to clearly divide tasks, it is impertinent that duties be divided amongst them in a clear and unambiguous manner.
Dispute Resolution Clause
Despite the clarity upon the rights, duties and interests of the co-founders in a given business startup, it is not feasible to imagine a situation where no conflict arises per se.
In order to swiftly get through the disputes, it is always advisable to bind all the co-founders on a mutually agreed upon method of resolving a dispute that might be arising between them anytime during the continuance of the business.
This results in swift as well as an efficient manner of resolution of the dispute, avoiding any further complications therein.
Termination of a Co-founder or Winding up of the Business
Starting up a business is not all roses, there might arise situations where it becomes difficult to co-function or any of the partners have to take the exit door.
It is always prudent to foresee such situations and plan for a way out. Clauses pertaining to the termination or removal of the co-founders is an absolute must.
Moreover, if the business is hit by any unfortunate circumstances that it has to be wound-up then, the clause of winding up clearly lays down the share of liabilities, division of profit and matters arising thereafter.
Confidentiality Clause
Business idea and information forms the very base of successful functioning and continuance, therefore it is prudent to bind all current and even former partners by the clause of confidentiality.
Confidentiality should mean in respect of the business idea as well as the information obtained during its operation, giving it an edge of competition. For that matter, the former founders must also be bound by the clause of non-competence, to keep free from unhealthy competition. Else there is ample possibility that the business idea will be out in the open giving rise to cut-throat competition.
A carefully drafted Co-founder’s agreement is always seen to be handy when it comes to avoiding potential conflicts in the future. In this article, we will discuss some of the clauses which are an absolute must-have when it comes to a co-founder’s agreement.
Conclusion
Of course it goes without saying that every co-founders agreement has to be tailored according to the circumstances and the vision of the co-founders.
The clauses have to be discussed by all stakeholders and understood prior to finalizing the agreement. Not allowing for ample thought and time for this is a recipe for disaster in the long term as a loose co-founder’s agreement is left open to interpretation and loopholes making it difficult to enforce legally.
However, ensuring the presence of all these clauses will give you a hassle-free experience at a startup business at least at the basic level.
While there are so many things to be taken care of, make sure there are no conflicts between the co-founders at any stage of the business, a clear and unambiguous and legal agreement is the foundation.
If you have any other queries or require any assistance with regard to legal agreements and contracts, get in touch with our team of experts at Vakilsearch and we will ensure that you receive the right kind of guidance for your requirements.
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