What is a Co-Founder Agreement?

A co-founder agreement is a legal document that outlines the roles, responsibilities, rights, and obligations of each co-founder in a startup. It is used as a benchmark in resolving disputes and ensuring unity among the founders about the vision of the business and its operations.

Importance of Co-Founder Agreement?

• Provides Clarity:  A well-crafted co-founder agreement clearly defines the roles, responsibilities, equity ownership, decision-making processes, and other key issues.

• Protects Founder Interests: It includes provisions like vesting schedules, exit terms, non-compete clauses etc, to protect the rights and interests of founders.

• Prevents Future Disputes: An efficient co-founder agreement can prevent future disputes as it states all the potential issues such as equity distribution and decision-making processes upfront.

• Exit Strategy: Determines equity splits and terms for major liquidation events.

Key Components of a Co-Founder Agreement

A co-founder agreement usually contains information regarding the below headings:

Equity Split:

• How much equity does each co-founder have?
• Is there a vesting schedule?

Roles and Responsibilities:

• Who handles what aspect of the business (e.g., CEO, CTO, CMO)?
• What are the expectations for time commitment and contribution?

Decision-Making Process:

• How will decisions be made?
• What types of decisions require a higher level of agreement?

Intellectual Property (IP) Ownership:

• Who owns the IP generated by the founders?
• How will IP be managed if a founder leaves?

Compensation and Salary:

• What is the initial salary for each co-founder?
• How will future compensation be determined?

Exit Strategy:

• What happens if a co-founder leaves the company?
• How will their equity be handled?

Conflict Resolution:

• How will conflicts be resolved?
• Under what jurisdiction’s law will the document be governed?

Confidentiality and Non-Compete Clauses:

• Protecting sensitive information regarding the company.
• Restrictions on starting or joining competing businesses.

Conclusion

Even though it takes some effort to create a decent cofounder agreement, it can act like a company rulebook, protecting the founder’s interest in the business. As every element is sorted out from the start, founders can focus on developing their business and achieving success.