How to Create The Perfect Co-founder Agreement

To create the perfect co-founder agreement, consider the following steps:

1. Clearly define roles, responsibilities, and expectations: All co-founders should have a clear understanding of what each of them will be responsible for and what is expected of them.
2. Determine ownership and equity split: This should be based on each founder’s contributions, such as capital invested, time and effort, and level of experience.
3. Address future decision-making: This includes how major business decisions will be made, who has the final say, and how disputes will be resolved.
4. Outline exit scenarios: Consider what will happen if a founder leaves the company, whether voluntarily or involuntarily. This could include buyout provisions or restrictions on competition.
5. Include confidentiality and non-compete clauses: These clauses protect the company’s confidential information and prevent founders from competing with the company after their departure.
6. Get professional legal advice: It’s important to have a lawyer review the agreement to ensure that it is legally binding and covers all relevant aspects.
7. Review and update regularly: The co-founder agreement should be reviewed regularly to ensure that it remains relevant and up-to date-as the company evolves.

A co-founder agreement is a legally binding document that expressly stipulates the rights, liabilities, roles, responsibilities, and obligations of co-founders. Technically, it is the bedrock of any business formation. To make the co-founder agreement more effective, co-founders are encouraged to execute it before the commencement of business. The agreement not only helps forestall possible conflict but also serves as a vital document for investors to judge the management of the company before investing in it.

Importance of a Co-founder Agreement

• The co-founder agreement creates clarity as it outlines the roles and responsibilities of each founder before the commencement of business. Hence, it tells co-founders how to deal with each other professionally. Additionally, co-founders are clear on what to expect from each other in the cause of running the business.
• The document enhances quick decision-making as it forestalls possible future scenarios and how to deal with them. It also prepares co-founders to take action when a co-founder exits due to death, loss due to underperformance, or accident.
• Co-founder agreement safeguards intellectual properties in the name of the business.
• The co-founder agreement offers legal protection to co-founders and minority shareholders.
• It informs investors about the corporate governance structure that is in place. Hence, the presence of a good co-founder agreement would encourage investors to invest in the company.

Tips for creating a Co-Founder Agreement

There are no clear-cut tips for creating the perfect co-founder agreement.  However, the following tips will help you have the perfect co-founder agreement that suits your company. 

• Determine the type of company you want to establish. Here, you consider whether or not a co-founder relationship is the best fit for your company. You also consider your goals, objectives, values, and your measure of success. 
• Ensure that your goals align with that of the other co-founders to avoid conflicting interests.
• Establish specific roles and responsibilities for your startup. Roles & responsibilities depend largely on the type of company and the number of founders. Also, ensure that you consider possible future recruitment. Some of the roles include chief executive officer, chief operating officer, chief marketing officer, and chief technology officer.
• Employ the service of a startup lawyer to assist with critical legal decisions and documentation.
• Decide on equity compensation to avoid the assumption that co-founders will share equity equally. 
• Draft the initial co-founder agreement with the help of your startup lawyer.
• Review your co-founder agreement draft. 
• Execute the agreement. Execution includes signature and date. 

Essentials of the Co-founder Agreement

There is no formal structure as to how a co-founder agreement should be. However, irrespective of the type of startup and industry, the issues addressed in the co-founder agreement are almost the same. Consequently, the following are the essentials of a co-founder agreement;

Business definition: This gives a clear overview of what the company does. Hence, the clause should clearly define the goals, vision, and mission of the company. 

Equity Ownership: Equity ownership deals with the proportion of equity that is held by the co-founders of the company. The voting right exercisable by co-founders is determined by this clause. It is noteworthy that equity ownership depends on many factors like monetary investment, experience, intellectual property rights, and networks in the industry. 

Roles and responsibilities: It is pertinent to include well-defined roles and responsibilities of the co-founders in the agreement. This establishes clarity and reduces possible disputes to the barest minimum. 

Intellectual property: The co-founder agreement is a place to protect intellectual property. Hence, ownership of intellectual property rights is an essential part of a co-founder agreement. It is usual for companies to register their trademarks, patents, and domain names. Irrespective of who develops intellectual property in their interaction with the company, a co-founder agreement should state that ownership remains that of the company. Sometimes, founders may consider sharing intellectual property jointly with the company. However, it is advised that a separate Intellectual Property Assignment Agreement be executed by the co-founders and the company, independent of the co-founder agreement.

Capital Contribution: The presence of a capital contribution clause in a co-founder agreement helps to ensure that contribution is fair in all respects. The capital contribution could be in cash or kind. Some co-founders would contribute sweat equity, while others could contribute cash. Whichever contribution, the agreement should clearly state whether or not cash contribution would be regarded as paid capital or loan capital to avoid future disagreement.

Confidentiality: Co-founders are bound to have confidential information about the company by their relationship with it. Hence, it becomes necessary for the co-founder agreement to contain a clause to restrict co-founders from disclosing delicate information about the company. The purpose of this clause is to prevent co-founders from duplicating business ideas or causing irreparable damage to the company.

Dissolution: A co-founder agreement should contain provisions relating to the rights, obligations of the co-founders,  and that of the company in the case of dissolution. Additionally, it should outline what circumstances or events would lead to the dissolution of your company.

Dispute Resolution: The purpose of this clause is to provide a clear framework for resolving disputes between co-founders or between the company and the co-founders. It should also contain the applicable laws that would govern the process of resolving disputes.

Amendments: A co-founder agreement should include procedures for making necessary changes and updates for future purposes.

This is not an exhaustive provision of what a co-founder agreement should contain. However, it is a guide for co-founders to use when preparing their agreement. Parties to the co-founder agreement are at liberty to include other clauses that best suit their needs. Thus, executing a co-founder agreement is highly recommended and encouraged to help the co-founders have a clear understanding of how to run the day-to-day affairs of the company. It will also serve as a guide for measuring the performance of all co-founders to ensure all parties are delivering on their roles and contributing to the growth of the business.