So by now you’ve devised a million zillion dollar business idea. But it seems difficult to outset alone for the project as there’s lots of to deal with. Luckily you met some of great people or person to be the part of your venture and their participant gonna to help your business kick start for its various aspects like startup funding and management of various roles and responsibilities which was almost impossible holding alone.

 

You’re to embark on your excited entrepreneurial journey and all like others you would probably be caught up in the adventure thrill which often times does not produce better result. When you’re startup with other co-founders it’s imperative to have a strong business foundation from the day one being conscious about the critical formalities that result a strong lead to the journey and reduce the drastic consequences likelihood rather than boarding up into thrilling. Its proven that merely startup taken steps determine the organization compound effect on failure or success factors on later time and these actions often irrevocable it means what you had committed in the formative zone of your business absolutely lead the profound result and it’s up to you whether you take the necessary steps for building strong foundation or move away omitting.

What is a contract or agreement and how to form one?

Inception with partners, friends or relatives, for the journey is really pretty exciting in every entrepreneur life. In fact, everyone become so busy in hundreds of works to take the business idea off the ground; in this thrilling time one of the most inevitable things frequently get missed is co-founder agreement or partnership contract; believe me it’s the testament that plays a central role in the success of the organization. What is does actually – The cofounder agreement support the business from all dimensions; where the most remarkable is that it align the vision and clarify the goals of cofounder, make them united and oriented to collectively put their best efforts to hunt down one and only one common goal of the organization. Alternated is that they share their most powerful weapons (e.g., experience, wisdom and expertise area) to prove themselves that they have been on the promise they made on founder sheet.

With cofounder agreement you actually draw out the conclusion from the discussion you had been whole day and night among of you on the various subject matters of your business, all about what we’ll do together; and stipulate the memorandum enforcement for future guide. This sort of agreement deals with the roles and responsibilities of each founder, equity structure and ownership quota, initial capital contribution, decision making powers, various authorities and addendum; that are used for enforcement to the laws and act as a very important safeguard for every founder.

Okay that now you have understood the importance of founder contract now let’s walk through, how to format a co-founder deed and what to include in it?

Employment Agreement (Contract with Employees) — What to put?

 

Founder Team:

At the very hand you must add the founder individuals details in the founder agreement. Something like

[Founder 1] founder X is named “John Doe” parentage of “XYZ (Father’s name) residence of “ABC (Residential address)” want to be the part of the company (Company Name) as a co-founder signifies the consent with the following terms & conditions and hereby agrees to contract.

Company Description:

Describe briefly about the project startup that you all intentionally looking forward.

Roles & Responsibilities

You know you’re inviting any of your friend or someone due to his or her specific expertise and knowledge in particular area which is important for your venture. You also recognized not decades but hundreds of functions and roles in the business management. Well roles and responsibilities is the section that focuses on this area who is gonna to be responsible for what and upto what extend. You might have enough conversation about who has specific knowledge, and skills to perform specific actions and functions and dividend of various roles and responsibilities to the every individual.

In practice you should have cofounder with different skills and knowledge so that one individual can be appointed for one absolute work as you know, in the beginning zone, you’ll be the handful person to hold the broad level jobs; for example founder X will be responsible for marketing management including sales, planning and creating marketing strategies, hiring new employees for the related designated work and guiding and training, and lots of others. As well as founder Y will be responsible for financial management – rolling out the financial statement, approving or withholding the finance issue requests for any project, Paying debts and sometimes seeking the finance resources etc.

Sometimes ground reality makes differences, a founder squeal to claim a specific work of the firm proven fail when specific sort of work imposed on him. Now what to do in that condition, the company imperatively have to change the job affairs later which can be the case of deviation. However, here the solution available, you can add additional clauses in the agreement that the company may change or update the work obligation of any officer or member within 15 days (Any specified). If the respective referrer founder does get the notification not to pursue the opportunity elected by the member of the company, the referred founder has to give up the designation and shift to another work as specified. Please note that the notification can only be issued upon the voting decision of other founder together; a sole founder or president may not have the power to shift a co-founder opportunity.

In the initial phase you may be all contributing each other’s work without focusing specific jobs or task; hence the beginning roles and responsibilities is subject to change, however, as the time pass on company members work figures distinctions and gradually various jobs are replaced the employees that are hired and then every functional line is overlook and monitored by the formative manager of the referred jobs and obligations. Later on the co-founder usually occupy the figurative jobs of CEO (Chief Finance Officer – the foremost officer commanding all the functional line officers managing internal and External Affairs), CFO (Chief Finance Officer – the supreme of Financial Management), CMO (Chief Marketing Officer – Ultimate marketing line manager), COO (Chief Operating Officer – Managing various day to day company internal affairs) etc. Thereby the situation of dispute may arrive about the torn of positions. That’s the reason its always good to have a clauses consensus about the claimants of company positions in the founder agreement.

 

Understanding the Vendor Contract — the key points.

 

Equity Structure

The company founders are putting in the company whatever that’s could contribute and that’s premises the shareholder quota. Breaking down the equity means factoring the ownership of the company (e.g., 33% ownership of Co-Founder X and 40% ownership of Co-Founder Y & 27% ownership of Co-founder Z). Practically equity and ownership is proportional and splitting down the equity relies of various elements.

Virtually, when you’re startup with co-founders, you just can’t say the company is entirely yours, as a fact of matter the company is owned by the all of you in percentile and treated as partnership firm not solely owned. And the percentage of equity ownership also may change overtimes. In The Founder contract you must want to split the company value factorizing into the units called the shares by recognizing the market value and company resources as in terms of capital, equipment and workforce. Then allocate the shares units to the person accordingly – WHO CONTRIBUTE, WHAT CONTRIBUTE AND HOW MUCH CONTIBUTE.

An important and lifeblood contribution definitely rewarded with multiple numbers of shares for example you conceived the great business idea and had it on table which is fundamental of the business must surely get additional creditable shares for example the company share factorized into 1000 unites you should reserve your at least 50 unit shares. And you add up 50% of capital contribution while other two of co-founder sharing rest of the capital you must allocate 50-50 of share units for example if 400 share unites are entitled for capital contribution you deserve to own 200 share unites. And calculation must go on… assume ultimately you got 550 shares owned your equity percentile is 55% means you owns the company with 55%.

Splitting the equity is the serious case and you should take advance precautions determining the equity share; sometimes situation gets complicated and delicate when you commit even a slight mistake distributing the right. Be upfront and straightforward while dealing subjective matter. A person, who would bear the most brunt upon the business failure, should also be entitled the reward on the success. The most importantly is to factorize the contribution of every co-founder then evaluating the elementary value of every contribution thereby to allocate the equity percentage with all written consent.

  • The Idea: Whoever devises that brilliant idea, is one who put everything off. Most of times coming up with an ideas is difficult and the one should indeed titled the entrepreneurship credit.
  • The Bplan: Making a business plan is a hard bitten person. Scripting a business plan really require lot of work, researches and mind consuming work. Bplan is something that develops the business ease by giving the estimates, roadmaps and future prediction. Who make the business plan definitely should be awarded with additional credit of equity.
  • Capital Contribution: A business idea without capital is like singing without music instruments. To bring the business idea to the life capital is most vital factor and one who hand out for this factor; it’s another most importantly treated person in the company group. If a partner secures the financial input he or she deserves more equity.
  • Initial Work Efforts: Whoever put their precious efforts in company startups to shape the company in working model from developing prototype and sample products till making the service chargeable to the customer. The one who works day and night should fairy treated in equity structure. The entrepreneur should stay away from the partner who works part time for the company.
  • Guidance does matter: While you’re quite new in the industry, if you met somebody who is experience and can deal various matter effectively; such co-founder should fairly treated as well when it comes to equity splitting.
  • Fair with Position: Some management positions really imposed lot of work and obligation such as Chief Executive Office, Chief Operating Officer, Managing Director etc. Equity dividend should take place taking the work obligations into account.

But Wait!

You know, you are splitting the equity of the company in the earliest stage, just when every co-founder is promising to do rather than done anything; he or she just promising to do so later on and you’re rewarding them right now! Is this fair with your company? What would happen when one of your founder leave the company after 6 months or could not be on the promise or isn’t in the position to deliver what he had promised? What will you do when you already entitled a part of company to that co-founder? Well, worry not! Here’s the solution come to fight such contingence unfair with the company – you can simply schedule the shares vesting.

I know you may stuck with vesting, what’s this new term means? Actually vesting is popular in issuing incentives stock options to the employees, with this way the employees accrues the non-forfeitable shares of the company with some extend of terms and conditions. The terms and conditions usually include the scheduling to accruement of the shares with regard of timeline. For example is a founder (In our case) allocated to 1000 shares of equity rather than let him issuing the shares stock at stake we will put the condition that founder X will accrue the part of his shares with the passage of time – if we specified 5 years of vesting schedule to the founder X, he’ll get 200 shares every year for the five years rather than 1000 at once; until he don’t accrued his shares quota as detailed in the founder agreement, the shares stock will remain restricted from being misappropriation. Alternatively you can set the scheduling of vesting for certain task to be accomplished in order to reward the shares or to abstain entitling the shares until a specific time or event don’t come.

How does this help protecting the company equity? See if founder X leaves the company after one year he will only be entitled of 200 of shared instead of 1000 shares that were allocated to him and else remainder 800 shares will be buyback by the company; this is how you saves your company shares from being risking. In alternate case if you apply the condition with founder X that he will gain 200 shares only upon submitting the capital contribution as he is promised in the co-founder contract.

Entrepreneur often seen they just use the principle of 1/N to allocate the equity percentile, where N is the number of founder; as a result it leads to the equal footing of all co-founder in the company. That may not be the good choice and unjustified with the co-founder who really work harder as compared to other which makes such co-founder discouraged and less oriented to work with full enthusiast, fairly, every member ought to get satisfied for its hard work.

What are the Statutory Business Compliances, Rules & Regulation to adhere ?

 

Decision Making Powers:

This section of co-founder agreement contrast on the decision making powers for very common that occur frequent and delicate decision about the company. The powers distributed can be with regard or regardless to the equity ownership – for example the co-founder may have equal valued voting power for some case or value may treated with regard the equity percentile. While you’re scripting decision making clauses you should consider the following points:-

  • Decision that can be grant by Individual: A corporate has lots of decisions to take on daily basis that very common and frequent but as your system is quit new possibly those tiny looking decision may matter a lot just because you’re beginner to decide with solely mind. This key point highlights the various decisions that can be decided by an individual co-founder. In this case the concerned decisions can be independently taken by a referred individual without consulting to the other member. For example if founder X is delegated to manage the financial affairs he may laid independent to make various financial decisions such as he allow the money expenses and approve the budgeting with his own take. An experienced founder often add up some additional terms and conditions while allocating the decision powers to an individual is that there are some condition of limitation for example founder X can’t approve the budget above than $5000; such out of limitation decision is to be decide by the unanimous of all members.
  • Decision by Board: In the co-founder contract, this is the section that you must script down about some critical decision to be determined by the board – with the consensus of all co-founders voting and discussion. Some of most crucial decision which details is compulsory to be added on the document is hiring/firing the employees or firing any of the founder, Appointment on chief positions like CEO, CTO, CFO and managerial core, Approving the substantial budgeting, entering into contract, etc.
    Firing a co-founder determination is a important process that should mandatory detailed in the agreement. You must define unanimously what are those circumstances may be when a co-founder may be discharged from the position – like not be in the position to deliver the promises, caught in the corruption or misappropriation of fund or powers, unable to meet the criteria etc. Next you should define the process founder removal from the position which could be being united to vote against the respective co-founder to eliminate from the board.
    Mention all other decision making condition by having enough cover conversation among you all and draw out the conclusion on the agreement paper with all of your consent.
  • The Casting Vote: Is a high valued vote entitled to a specific founder that ultimately cast the decision determination. For example if you’re four founders with equal footing (all have same level of vote power) and split your vote 50-50 on a decision means 2 founder have approved rest declined; in such case who would have the casting vote power or whose vote has the most weight to ultimately either approve or decline the decision.

Company Legal Structure:

However, a company with multiple founders is legally oversees as general partnership firm. However choices are there to remain the company as general partnership (GP) or to form limited partnership (LP) or limited liability partnership (LLP), which each has its own pros and cons. By default you company is treated as GP which does not form a separate legal entity and as a critical drawback it has unlimited liabilities to the members, however, you may settle the matter what sort of liabilities is concerned to whom with regard or regardless to the roles and responsibilities. Check more information about the company various legal structure in our previous article.

IP Assignment:

Intellectual property is the actual value lives in a company. When you all outset to take the company to next level, the intellectual property play a indispensable role – A founder may work alone or with other for the innovation in the company products, improvement, conceive new ideas, makes strategies, discovers something new or create something unique – the question is this who owns the rights of Intellectual property? Is the person entitles itself who innovated or the company?

99% startups choose that anything devised, innovated, discovered, conceived or anything related to the intellectual property; the IP is exclusively owned by the company rather than giving legal rights to the respective co-founder or employee which, practically grows the value of the company rather than valuing the particular individual. Its also important when you seek the investment from Angels or VC’s that put their eyes exclusively on the IP assignments provisions.

You all should have a proper discussion on this topic and have the clause written on the founders’ agreement.

 

Confidentiality Agreement:

While formatting a founder agreement, be sure to have unanimous conclusion made about the confidentiality of the company. I mean when your company will be moving ahead there would be much secret information about the various aspect of the system that should be remain confidential. As founders are the peak powers of the company and, of course, they would have access to the secret information. Have a non disclosure agreement in order to make every founder restricted to sharing the information with any third party.

 

Allowing Third Party for Investment:

Capital is always good at every stage of the company and must always welcome to turn the company toward the opportunities. Angel investors or Venture Capitalist all they have their own term sheet that they need some part of equity securities and rights dilutions means you’ll have to grant some extent of ownership. Hereby with the founder agreement you must written consent about whether or not the third party investment would be allowed or if allowed than how? In the condition you should describe the ways if an investor proposes the capital investment how that particular should be treated – you may all have the participation to negotiate in term sheet and power have conversation with the investor.

 

The Final Words:

Whenever you set out with partnership be it co-founder it compulsory to have unanimous about various future conditions and their roadmaps hereto. Please understand as I already said that company never governed by the trust and belief rather compliances and statutory and founder agreement is a elementary fundamental of compliances procedure. Another remarkable thing is that you always consult with attorney who can help you with legal matters and keep you safe.

 

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