Structuring Co-founder Arrangements

Co-founder agreements should be an essential item on the to-do list of any startup founder. This is an excerpt from a talk by Anirudh Rastogi, Managing Partner, TRA on “10 Legal Mistakes that Hurt Start-ups”. This excerpt focuses on the importance of drafting and negotiating a co-founders’ agreement between co-founders to a startup. Co-founder agreements are most crucial and can mean the difference between life and death for a start-up. If you have an expectations mismatch with your co-founders, the chance of failure in your venture increases exponentially. A good way to avoid such a situation is to have a well-thought out co-founders agreement that lays down the expectations comprehensively and provides for the recourse and ramifications of various eventualities. Many co-founders underestimate the importance of discussing these aspects threadbare at the beginning.

The video also discusses key terms of a typical co-founders agreement, especially vesting of stock, non-compete and confidentiality clauses and assignment of intellectual property. Not vesting stock in the co-founders can be disastrous in the event one of the co-founders quits the company or is terminated prematurely. In such as event, a well-thought of agreement will provide mechanism to determine and restrict how much stock the exiting co-founder should be able to take home with her. Non-compete clauses limit a co-founder’s ability to start or participate in a competing business. Assignment of IP is essential as well. It is important that any IP developed by a co-founder for the business be assigned to the Company and not belong to the co-founder. If the co-founder were to leave the business, she should not be able to claim any ownership over such IP.

The importance of engaging with an experienced attorney for drafting a co-founders agreement cannot be undermined. A good attorney with experience in these matters will be able to make you ask the right questions of each other, but you may also be able to spend some reading about this (as you are right now) to figure out what are the key aspects that a co-founders agreement should address. Once you have discussed these and come to some understanding with each other, you could record the understanding in simple language (even bullet points) on a piece of paper and sign. You could do so on email too. Even a simple document of this nature can go a long way in bringing sanity between co-founders by providing direction in the event of a disagreement.

You can read more on the topic at hand here:

How to avoid co-founder disputes in a startup – Part I

What startups should know before signing a Founders’ Agreement