Getting together with a friend or two and creating a new business is an exciting time in any entrepreneur’s life. However, co-founders are often so busy building and running their new business that they skip a hugely important step, the Co-founder Agreement. A Co-founder Agreement is a speculative, non-binding agreement between co-founders setting out the ownership, initial investments and responsibilities of each co-founder. This agreement also safeguards you in the case of a dispute, as it can provide protection to show what the co-founder agreed to.

If you are making a Pty Ltd company, you may also want to consider making a Shareholders Agreement.

Use this Co-Founder Agreement if:

• You are a co-founder and would like to clearly set out the equity participation in your new business.

What does the Co-Founder Agreement cover?

• Co-founder details;
• Project description;
• Equity breakdown and initial capital contributions;
• Roles and responsibilities of each co-founder;
• Management and approval rights;
• Non-compete, confidentiality and intellectual property; and
• Resignation, dissolution and removal of directors.

Other names for Co-Founder Agreement include:

• Founders Agreement; and
• Hackathon Collaboration Agreement.

What are the best ways to split equity?

Splitting equity can be a difficult task if you have not done so before. However, it is important to note there is no right or wrong way to divide equity. Some startups would split the equity equally, others would negotiate, and few would decide on launching a successful product. Before coming to a decision, it is essential to fully understand both sides of the agreement to ensure the best outcome.

Key considerations include:

Ideas and contributions of co-founder(s)

It is important to consider what each founder brings to the business. If one of the co-founder’s brought the original concept to the table, they might deserve a higher percentage of shares in the company. Long-term contributions, such as time and quality of work may also be determining factors in the distribution of equity.

Reputation and experience

Being experienced versus a beginner entrepreneur may affect the amount of equity you get. An experienced founder with an extensive network in the field can be of great benefit to the company (i.e. securing more funding) and deserves more equity.

What are their priorities?

Are the founders fully invested in the business or are they using this as a stepping stone for their next project? You would want to make sure your co-founder is focused on your project and not looking elsewhere before determining the division of equity. Transparency between the partners is essential for the success of the business.

Besides equity, what else do I need to discuss with my co-founder?

Division of equity is one of many items included in a Co-Founder Agreement. Other issues you should discuss would your co-founder include:

• Ownership percentage;
• Roles and responsibilities;
• Salary;
• division of work and commitments;
• business vision and goals;
• dispute resolution policies;
• What happens when one founder leaves;
• Sale of the business.

After completing a Co-Founder Agreement, what are the next legal steps?

For a startup to legally operate as a business in Australia, it must be registered as an Australian business (i.e. ABN, TFN, ACN, GST) and follow the legal requirements in its relevant field. It is advised you consult a legal professional to ensure the protection your business and comply with the laws.

Key legal considerations for every startup business include:

Business structure

This is one of the most important decision a new business will make. Choosing between the partnership, sole trader, trust, company or co-operative would have a significant impact on key areas including tax and legal liability. This is a decision you should be making with a business lawyer to obtain expert advice on the legal structure which will best suit your business.

Employer responsibility

If your business intends to hire employees, it is important to familiarise yourself with the legal requirements and standards to ensure compliance and avoiding liability. Key requirements include sick leave, annual leave and superannuation.

Intellectual property

Many startups are created by inventing a product, piece of technology or service. It is important you consider the intellectual property rights your business wishes to protect. Depending the nature of your service, patents, copyrights and trademarks are available to protect your intellectual property.

Business terms and conditions

This would act as the legal contract between your business and your customers. It sets out what your business is providing, how it is provided and how the customers will pay for it. These terms and conditions must comply with Australian Consumer Laws and contain key terms which cover refunds, repairs and returns.

Other documents you may need:

• Shareholders Agreement
• Partnership Agreement
• Website Development Agreement