Here are some of the things you should put in a co-founder agreement:
- Roles and responsibilities of the co-founders. This is the third time it’s been mentioned in the article. This means it’s important!
- How will the roles and responsibilities of the co-founders be prioritised if there are competing commitments
- If the co-founders have day jobs, how much time will each commit to the start-up?
- How will decisions be made, both big decisions and day-to-day management decisions
- What are the initial contributions of each co-founder?
- What and how will co-founders be paid?
- What is the equity of each co-founder (see more on equity below)
- Who is going to be a director and how are directors appointed or removed and what powers do they have?
- How are shares sold?
- How and when can new shares be issued?
- What is the process for selling the whole company?
- A clause preventing co-founders from competing with the business
- A confidentiality clause
- A clause explaining who owns the intellectual property that is contributed to the company or created by the company
- What happens if one or more of the co-founders want to leave?
- How will disputes be resolved, especially if there is a deadlock?
Equity (i.e. who owns how many, or what percentage, of the shares in the company) is a big area of dispute between co-founders. It is common for co-founders to want to shake hands on an equal split of the equity of the company but it could result in some co-founders getting a terrible deal and others getting a free ride. For example, if one co-founder quits their day-job and gives lots of time and money to the company and another keeps their day-job and only works after-hours, should the equity still be split equally?
To help prevent unfair treatment of co-founders and prevent disputes, you can consider including a vesting clause in the co-founder agreement. This means that co-founders earn equity in the company when they have reached milestones, put in a certain number of hours or simply through the passing of time. It is a good way to ensure everyone is treated fairly and the clause can be tailored to account for the different skills, roles and investments of each co-founder.
Having a map won’t guarantee that you never get lost, but it will drastically reduce the likelihood. Think of a co-founder agreement in the same way, it won’t resolve all issues, but it has the ability to reduce them substantially!