Starting a company with a friend or colleague is exciting. But things can go wrong – and it’s in your best interest to try and prepare for the unexpected. No relationship is perfect, and the Co-Founder relationship is particularly volatile because you’re dealing with money, livelihood, relationships, etc..
This is why it is valuable, and almost essential, to have a Founder Agreement signed and in place between everyone involved, outlining specifics of the company form the get-go. This post will give you a high level overview of what goes into a Co-Founder agreement.
This section will include information such as:
- Names of the Founders,
- When the company started,
- Name of the company,
- Type of entity of company and state of registration,
- What the company mission is,
- What the (initial) product is,
- Any other piece of information that is common knowledge, and agreed upon.
Roles and Responsibilities
This section should clearly lay out the roles of each Founder – including who is the Chief Executive Officer, who is the Chief Technology Officer, and any other role you’ll have at inception.
You should also lay out who is responsible for making specific decisions in the company- including finances, product, and the like.
Equity Split, Vesting Schedule, and Equity Acceleration
This section should clearly lay out the equity split between each Co-Founders. More often than not, the equity split is not an even 50/50 – and can involve one Founder owning a larger piece than the other. The conversation around this can be uncomfortable, but it is essential to have.
This should also lay out the vesting schedule of each Co-Founder, whether it is 4 years or 10 years. For more information on the glossary of startup equity, read my article here.
Finally, your agreement should lay out what happens for “acceleration”; For example, if there is an acceleration event such as an acquisition or IPO before the vesting period is complete, does your Co-Founders equity accelerate? What happens to the equity if the Co-Founder is let go by the Board of Directors? What happens if the Co-Founder leaves the company on their own accord?
Intellectual Property Transfer
This section should clearly indicate that the Intellectual Property being developed by each Co-Founder is transferred to the company. This should also be memorialized in a separate agreement, often called the Intellectual Property and Invention Assignment Agreement, or Intellectual Property Transfer Agreement.
The details of the company, the intellectual property, and how the company runs should all be proprietary information that belongs to the company itself – and as such, should remain confidential. Your Co-Founders agreement should have a confidentiality clause clearly laying out what should remain confidential, and how long that information should remain confidential.
This section should lay out how disputes should be resolved. Your options are court, or arbitration. Arbitration is generally a good alternative to going to court, and involves a third party arbitrator to help make the decision based on the facts.
Let us Help
This post is just a high level overview of what should be addressed in a Founder Agreement. There are plenty of templates out there you can use, and nuances to these agreements.
Kader Law can help you understand a Founder Agreement placed in front of you. If you need assistance, feel free to contact us.
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.