Key Takeaways from Webinar on Co-Founders’ Agreement
I recently conducted a webinar in collaboration with 91Springboard on “Co-Founders’ Agreement”. I have summarized in this blog the key takeaways from the webinar.
- Execute the agreement as early as possible in your startup journey
- The conversation can be awkward, include a neutral person as intermediary
- Founders, Co-Founders, Promoters — Terms that are used interchangeably
- Key provisions to include:
- Split of shareholding percentage
Who gets what percentage shares in the startup?
The percentage is also a factor of who brings what to the business — both cash and sweat should be considered.
Consider present role/contribution as well as future contribution; Have the ability to clawback shares if future contribution reduces.
- Decision Making
How to take decisions?
Does one of the founders have the final say? Like a veto or a casting vote?
Where there are more than 2 founders, consider 2 buckets of decision-making items — 1st that would require approval of a certain no. of founders (eg: 2/4 or 3/4), and 2nd that would require approval of all founders.
If you have only 2 founders, think of deadlock resolution mechanism, can consider a mentor/advisor who can act as a mediator.
- Lock — in
Starting a business has to be a long term commitment, so founders need to commit to a lock-in. How much time do you think you need to give this idea a shot? 2 years? 3? 4? Agree to the lock in period.
What happens if a founder breaches the lock-in? Introduce concept of (reverse) vesting and have consequences for different scenarios, eg: what happens if the Founder leaves because of a genuine personal issue vs. if the founder just calls it quits.
Consider an escrow to enforce the lock-in and vesting.
Restrict transfer of shares.
- Non-Compete/Non Solicitation
Founders cannot compete both during and after the partnership. A cooling off period is important.
The above are some of the important factors and talking points when considering a Co-Founders’ Agreement, but like any relationship, one cannot have an exhaustive checklist. However, we have endeavoured to summarize some of the key questions that Co-Founders should be asking each other before embarking on this journey. Do write to on support@lexstart.com, to get a copy of the Co-Founders’ Agreement checklist!
