Founders and Co-Founder Agreement for Startups – Best Practices in India
- Published On: 08/07/2021 12:00 am
What Is a Co-founders Agreement?
A co-founders agreement is a legal document that establishes the terms and conditions under which co-founders of a company will manage their business. The co-founders agreement is a written contract that provides benefits in the event of a misunderstanding between the co-founders.
The agreement is a written contract that serves as a constitution for the co-founders in the event that they have a problem in the future. It specifies the legal remedies and applicable law in the event that any of the startup’s founders violates the agreement.
Important Clauses of a Co-founders Agreement
In addition to the general information about the firm, several key aspects must be included while establishing a co-founders agreement. When added to the co- founders agreement,The following terms serve as a cover for both the co-founders and the business.
Ownership is Based on Equity:
The percentage of stock ownership of each of the company’s co-founders is one of the most essential provisions of the Agreement. The ownership clause states the number of shares each founder owns, the total amount of capital spent by a co-founder, and the profit distribution between them. The equity ownership is also important in determining the voting rights that the co-founder may have.
In India, the founders’ agreement must provide a procedure for dealing with a circumstance in which a co-founder leaves or is dismissed from the firm. When drafting the agreement, keep in mind that one of the most important things to remember is to include a system for dealing with the situation when one of the co-founders exists or is terminated from the company.
The founders’ agreement on share distribution might contain one or more of the following options:
- Time-Based Vesting, in which the shares are invested in proportion to the owner’s time spent.
- Milestone Vesting refers to the process of investing stock when the firm reaches a certain goal.
Responsibilities and Roles:
Each co-founder of the startup’s tasks and duties must be defined in the founders’ agreement. Because each founder contributes their unique set of talents, experience, and knowledge to the table, it’s critical to define the partners’ overall working status in terms of responsibilities and duties. The co-founders’ duties and responsibilities may be classified into four categories: operations, marketing, administration, and finance.
Transfer of Intellectual Property:
This section is added to ensure that a founder’s intellectual property is transferred to the company instead of being personally owned by the founder. It is important to ensure that the intellectual property rights of the co-founders are given to the firm rather than remaining the property of an individual while drafting the Agreement.
Employment and Finances:
The co-founders agreement must clearly state each co-title creator’s as well as the terms of their salary. Other information, such as how the business’s daily expenditures will be paid, payment for out-of-pocket expenditures, certification of legal papers on behalf of the company, verification of the company’s checks, and so on, must be included in this section.
The non-compete agreement prevents a co-founder who is leaving the company from recruiting any of the company’s clients or forming a similar firm after leaving. During their partnership, the co-founders should have a clear agreement prohibiting them from engaging in activities that are in disagreement with the company’s objectives.
The Significance Of The Founders Agreement
A Founder’s Agreement is a written agreement between the company’s co-founders when the business is formed. It was created at the time of the company’s incorporation. It is created with the intention of clearly stating how things stand while starting a business. A Founders agreement is also created to avoid the unexpected situations that might affect a company’s proper functioning. It also helps in the comprehension of the business’s risk. The following terms are also used to describe a founder’s agreement:
- Agreement between the co-founders
- Co-Founders Agreement for a Startup
What is the procedure to make the founders agreement?
To make the founders’ agreement, follow these basic steps:
- Make a copy of the founders’ agreement by filling in all of the essential areas; after the document is complete, double-check that all of the fields are filled; if not, make any necessary adjustments.
- Allow all of the partners to review the document before completing it.
- Once the agreement has been well-drafted, it must be notarized on non-judicial stamp paper.
- If needed, have all co-founders sign the agreement once it has been notarized.
What are the benefits of the Founder’s Agreement?
The following are the advantages of a Founder’s Agreement
- It is important to describe the company’s vision and mission in order to set goals that can be fulfilled over time.
- It only reflects the general business of the organization among co-founders.
- It provides a bird’s eye view of every aspect of the business, such as capital, management admission/resignation, or the death of any co-founder, among other things.
- It makes the duties and responsibilities of each co-founder clear.
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