A Co-Founders agreement is a necessary first step when you’re looking to start a business with friends. Completing a Co-Founders Agreement with Lawpath will ensure you are equipped with a contract that formalises the business relationship by establishing the decision-making powers, distribution of equity and the responsibilities of each founder.
Co-Founders should consider the following five issues when creating their Co-Founder agreement:
1.Determine the Roles and Obligations of each Co-Founder
A clear description of the roles and obligations must be broadly outlined, being sufficiently flexible to account for future changes in the business. This allows each Co-Founder to understand where their obligations and decision-making power stands.
2.Outline the Mechanism for Dispute Resolution
It is important that disputes are resolved efficiently as conflict can act as an impediment towards business viability. A process that identifies the appropriate steps taken in the event of conflict between the co-founders is an effective tool in maintaining relationships.
The following represents an example of the steps used to solve conflict between co-founders.
- Hold an informal meeting
- If an agreement has not yet been reached, conduct mediation
- Seek alternative dispute resolution
3.Set out the Equity Participation of the Co-Founders
The ownership of the equity in the business must be allocated amongst the founders. The equity can be apportioned to the amount of up-front investments in the enterprise. It is important to agree upon the equity, as it will prevent any misunderstandings in the future as to ownership.
The amount of capital that each founder contributes into the enterprise should be expressed in the agreement. This has the effect of protecting founders initial contributions and preventing any future disputes regarding the financial input of the founders.
5. Dissolution of Agreement
The Co-Founders agreement should describe what happens in the event of the business ending. Important considerations include non-competing and confidentiality clauses in order to protect the business through a restraint of trade and information.