Key Takeaways from Founders’​ agreement session by Vivek Sadhale

If you look at the empirical data visible to you on Google, what are the reasons businesses falter? Although, of course, there’s money, timing and ideas, one of the top reasons that come is because of the co-founders’ issue. You’ll often see that either friends or relatives or people you know come together to start a venture. Think about it; you must have started it with someone else. Now think about some situation six months down the line, the business may or may not be good, but your relationship starts to go southward, that someone you trust the most now cannot see eye to eye with you. That’s precisely what this agreement begins to help you out to preserve the relationship. We don’t live in a contract because we like how contracts are written; we do it because we want to co-exist and do more work with people. And even though it’s hard, we try to stay within the contract with our employees, vendors, and customers because we have to co-exist with the same people in this ecosystem. With co-founders too, you know each other intimately, and you’re trying to do business with them; with an agreement, you’re ensuring that it doesn’t get strained.

Following are the pointers a Co-founder Agreement helps you with:

• Equity Ownership: Instead of hiding the complex issues under the carpet, you decide equity objectively by putting in weights. If you’re doing more, it should reflect in your shareholding pattern. Consider factors like Monetary investment; Experience; Existing intellectual property; Know-how; Network in the industry.

• Roles and Responsibilities: There is no clear line when you are in the startup phase, and everyone has to do everything. But once you move past that phase into the growth curve, who will do what, howsoever broad it may be because, in a business, you have to be realistic. And remember, as things change, your roles will change too, so make sure to change it accordingly in your understanding so that it’s reflected clearly. 

• Transferability of Shares: When someone joins as a co-founder, you should have a lock-in clause, i.e., the person cannot transfer their shares to anyone for a certain period of time, for a minimum of three years simply because the first years go in trying to figure out what things are, the second year is all about being better in what you have learned in the first year and third year is the first year where you are relatively stable and on the growth path. Make sure to define everything correctly in the clause.

• IP Assignment: IP ownership is critical. Considering I am an investor, I’ll not invest if the patent is in the personal name, howsoever good the business model and growth may be. I’ll only invest if you agree to transfer the IP rights to the company. IP rights to be assigned to the company and should not be the property of the Co-founder.

• Value addition by co-founders: The value added by every co-founder needs to reflect in the shareholding pattern, or they should be compensated separately. The agreement should lay down the monetary value of any additions like patents brought in by a co-founder.

• Non-compete: All founders must necessarily write a non-compete clause while they are a part of the company and for a certain number of years post-exit. It is vital and has to be a strictly enforced clause post-exit. In addition, the founders mustn’t engage in activities that conflict with the objectives of the company. Make sure to define the “Conflicting Activities” clearly, too.

• Employment and Benefits: Regardless of your business and its cash flow, an employment agreement with terms, designation, compensation, and benefits is a must-have.

• Further Financing:  It is essential to embed this further financing clause so that if a co-founder is unwilling to or unable to contribute, they will dilute in favor of the person contributing. The agreement can be crystal clear about the rules of the game.

• Deadlock: A successful business enterprise should not be destroyed solely because two partners are unable to agree. Since differences and disputes between the co-founders may lead to a deadlock in the operation and management, they need to have a pre-determined mechanism to resolve. Find a fair way to allow one party to bow out with fair recompense or give up their share in the venture.

To summarise:

• Understand what’s in agreement and do not rush to sign it.  

• Do it early, at the time you start a venture or when you hire a co-founder.

• Google is not the right place to clear your doubts regarding this agreement. Join a forum or talk to a professional. Don’t get confused and caught up with the information available on google.

• Don’t get bogged down by legalese. The form itself is not important; substance it. Creating that framework is essential and not the form.

• Don’t assume that everyone will agree. Try bringing a consensus, do not force it on anyone. 

• This is like writing your will- Do Not Procrastinate. 

• When you need, involve lawyers early so that last-minute you are only trying to solve the situation and not salvage it. Get the professionals early.