Create a co-founders contract for your startup
With all the things that come with launching a startup, it can be tempting to forget to draft your co-founders contract. You'll be fine, right? You are all buddies. You trust each other. You do this together!
And while all of that is certainly true, you still need to draft a co-founders contract. A co-founders contract, like all contracts, is there to not only help you navigate your day-to-day activities but also to come to your aid when things don't go as planned. Don't skip this step, founders!
Would you like to receive a co-founders contract template, with all the points that we will discuss below?
What is a co-founders contract?
A co-founders contract is a legal agreement that the founders of a startup enter into with each other. It can include everything from who is involved to how much they contributed to what happens when someone leaves. It's a legally binding contract and should be drafted at the beginning of the company's life cycle to get everything on the table before a group of co-founders jumps together.
Founders and Company Names
This is virtually non-negotiable. First, put the names of everyone involved on paper. Also make sure to include the name of your startup, even if it can change later. It's hard to overstate the importance of a startup name - that's why naming a company can feel so poignant. A great name can take your business to the next level, but a terrible name can sink you before you even got started. So how do you find a great company name?
Here you determine what percentage of the company each member - that is, you and your co-founders - own. This number can change as people join and leave the company. If your company is an LLC, you also need to figure out what percentage of the management stake each member owns. That means determining whether each person is an owner only in an economic sense or whether he or she also plays an active role in management.
The project is just another way of saying "your startup". In this section, you want to include one or two sentences that describe what you are doing. It should include a broad overview of what you are doing as well as some details specific to your startup. Think of the broad section as your elevator pitch and the details as what you would say to a "fellow geek" asking for more details about what you are creating.
Start-up capital and additional contributions
Each founder of your startup has contributed something to become a founder. That contribution could be cash, property, services rendered, a promissory note or a combination of the above, or even a pledge of any of the above.
If one of your co-founders is contributing something other than cash, you all have to find out the monetary value of that thing and write it down here. You also need to find out if members will continue to contribute capital throughout the life of the business or just against that initial investment.
Expenses and Budget
In this section, you are not so much writing down your expenses and budget - you may not even know them at this point - as much as how you will approach budget and expenses in the future. For example, is one person in charge of the budget, or can it be approved by a designated person? What about reimbursement of expenses that founders pay out of pocket? How should founders apply for compensation? All of that should be described here.
Tax matters are tricky - and we recommend hiring a tax professional to help you draft this part of your co-founders contract. What you write here will be so specific to your business and corporate structure, so please don't just try to expand it or copy it from a template. This is one of those times when it is a good move to invest some of your starting capital.
Roles and Responsibilities
This is another point that you think you've handled with a verbal agreement - or even an unspoken understanding of what everyone is good at - but don't fall for that trap.
“I started a company with four founders and we have not defined any roles,” writes Jason Lengstrof, an expert in the field of remote working. “What eventually happened is that one person did nothing that was of no interest to them, one person started some tasks and half-finished them for someone else to do, and one person was only able to handle the process. -based work, where the fourth person (me) handled everything else (and wrote down the processes). It aroused resentment and made it very difficult to adjust the roles in the future as it was established that I could do anything and so I became the last point of responsibility even if we defined new roles later on. Our only way out was to sell the company. "
Instead of letting it get that far, you should make it clear in your co-founders contract who is responsible for what. By writing down the roles and responsibilities of each founder, you ensure that not only for the money stops with whom it should stop, but you and your co-founders do each other's work again. Because that kind of inefficiency can lead to the downfall of a startup.
Management and legal decision-making, business and approval rights
Who can vote on company decisions? Who cannot? What areas can they vote on? Some startups give voting rights based on a member's percentage stake, but others choose to give limited voting rights to certain groups. Also, give veto rights, but no voting rights, supermajority votes, or even management rights but no voting rights
Equity and shares
When you earn kept in figuring out equity compensation for startups, you will be smitten from all sides with a ton of words you may have heard in the past. But let's be honest: you have absolutely no active, working knowledge of them. One paragraph in an explanatory blog post and your eyes are already crossing, your fingers itching at the Facebook tab in your browser because all you want is to clear your brain with a mindless scroll through the news feed.
Salary and compensation
How do you know how to fairly compensate yourself and your co-founders? This is a very tricky question and, like many other things related to money, can be disruptive. Some founders choose not to take a salary at all in the beginning, while others cannot make that step and still live.
Every startup is different, and every founder has a different relationship with every investor, so there is no true one-size-fits-all approach. There is a good compensation policy for start-up founders, but also bad policy, and several policies that kill a start-up downright.
Intellectual Property (IP) assignment
Intellectual Property (IP) is all it takes to make your startup unique. So the very first thing to do is determine what your intellectual property is.
What distinguishes you from the competition? What does your startup produce in-house? The IP address of your startup can be blog posts, designs, app ideas, ideas in general or something very specific to what you do. In general, anything created during working hours is considered corporate IP. Some companies choose to make anything that is made with work ownership - such as a work phone or laptop - corporate IP as well. It's up to you to decide if you want to go for that more tough approach.
You should also indicate when and how you and your co-founders would be okay with selling intellectual property. Who makes that decision? Is it a majority vote? Up to the CEO? A unanimous vote? And if that IP is sold, who will get the money? Make sure you describe all of these factors in this section.
The last thing to think about isn't much fun, but it's important. And that is a non-competition clause or confidentiality clause. These documents ensure that you and your co-founders cannot go out to consult your competitors - or even become a competitor. It's probably not something you want to think about in the early days of a startup, but it's worth making a plan just in case.
Removal or departure of founders
If a member of your company dies, becomes incapacitated for work, goes bankrupt, or is fired - what will you do? This section allows the other members to buy out that member's interests. If you decide to include buy-out rights, make sure you describe how a buy-out would take place, the buy-out price, and the payment terms.
If you're stuck with the buyout price because your business is still young, consider setting a price or writing a provision now; the price will be based on the fair market value at the time of redemption. Then have that number determined by an impartial external appraiser.
Dissolution and Notice Clauses
Nobody likes to think in the beginning at the end, but it's best for everyone involved if you do. Indicate which circumstances or events would lead to the dissolution of your company. You must also describe the settlement procedures and waterfall distributions of your company's assets if your company is dissolved.
What will you do if a dispute arises about anything in this agreement? This section describes that procedure. Many startup founders choose to require that any dispute with the co-founders contract be resolved through binding arbitration, but it's up to you and your co-founders to decide what you want to do.
Would you like to receive a co-founders contract template, with all the points we have discussed above?