A new business venture may be exciting for an entrepreneur, for partnerships, LLPs, companies, or societies but if you’re working with other partners, it is essential that you establish and enter a written legal contract as a start-up founder to protect yourself.
A co-founder agreement will govern your business relationships and determine your duties, liabilities, obligations and responsibilities. An existing company or business cannot enter into a co-founder agreement unless it uses the document for minor modifications but an existing business can enter a non-disclosure agreement retrospectively.
What is a Co-Founder Agreement?
A co-founder agreement is an official contract, or a legally binding agreement containing each co-founders’ interest that is executed between co-founders before incorporating a company and sets out the essential protection clauses, strategies, the company’s ownership (not every co-owner is 50/50 owner), responsibilities and duties of every co-founder, the initial capital contribution/investment proportion of each co-founder, which usually varies and Intellectual Property ownership. It can also protect you in case of a dispute arising in the future regarding the business between co-founders.
The co-founder agreement (which is similar in a sense to a pre-nuptial agreement) can cover everything from the following but not limited to:
– How key decisions of the business will be made?
– What salaries, if any, are the co-founders entitled to? How can that be modified?
– What happens when someone exits the business? Is there a pre-emption clause in the co-founder agreement? Are the other co-founder entitled to buy back the exiting co-founder’s shares?
– Clear objectives of the company? What the company proposes to do and how?
– The number of equity shares of each co-founder entering the legally binding document?
– The overall percentage of shares provided to each co-founder?
– Can the co-founders launch other start-ups whilst working on this project?
– Acknowledging and accepting all the terms and conditions before the co-founder agreement is duly signed by all the co-founders.
Parties can also add agreed terms and clauses to the co-founder agreement as an addendum to protect their rights and address their liabilities.
It may be sensible to get a dispute resolution clause in the co-founder agreement at the outset, that is triggered before you go to court and that is in your favour in the event a dispute or conflict arises in the future.
What are the objectives of the Co-Founder Agreement?
The co-founder agreement is essential for newly incorporated company. Think of it as an agreement among the co-founders serving as an insurance to prevent disputes among them.
Questions you may consider before entering a Co-Founders Agreement
There is no formal way to create a co-founder agreement, but you might have some questions in mind before creating and entering one with regards to the details that should be in the co-founder agreement, such as:
– Purpose of the business? Is this a new area?
– Goals of all the parties to the start-up.
– Respective timelines for achieving those goals.
– indicate the name of the company and all founders involved, the ownership structure, a description of your business plan, initial capital, additional contributions, budget, expenses, roles and responsibilities, and taxes.
– Consider including the management, legal decision-making, approval and operating rights, salary and compensation, equity and vesting, removal or departure of founders, dispute resolution, dissolution and termination clauses, and intellectual property assignment.
Do you share the same values as your Co-Founders?
It is important that you have long-term compatibility with your co-founders. Consider their outlook on life, tolerance for risk, personal aspirations, and whether or not your values align. You must also explore the personal and professional motivations of all co-founders and get everything evidenced in writing before the co-founders come together.
AJames Solicitors comprise a team of experienced Solicitors. If you need to enter a co-founder agreement, or if a potential dispute has arisen as a result of an existing co-founder agreement, contact our solicitors by visiting AJames Solicitors website for more information, or contact them on: 0161 791 6666/07729461166 for any legal queries, or send a message with your enquiry using the link below and a member of the team will contact you: https://www.ajamessolicitors.com/contact
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