Co-Founders Agreement: Protect Your Startup with a Clear Vision

A co-founders agreement is the base agreement which records the inter-se relationship between 2 or more co-founders or co-promoters of any company. With changing times, it has now become a norm for the founders of the start-up companies to enter into Co-Founders agreement as it not only results in clarity on respective rights and obligations but also gives an insight to the prospective investors who intend to invest money in the Company regarding the working arrangements within the Company.

Further, these agreements establish a formal documented relationship between the co-founders, which is quintessential for any professionally managed entity, more when they look up to raise funds from outside sources. To give a broad idea regarding the contents of a Co-Founders agreement, the following clauses may be relevant to be noted:

Equity participation and contribution

The equity that the respective co-founders will hold in the company and the monetary contribution that they intend to make being the most important elements should be clearly stipulated in the Agreement and a clause to this effect should be incorporated.

Defined role and responsibility in the Company

When there are 2 or more promoters in a company, it is always advisable to clearly demarcate the respective roles and responsibilities of the respective founders so that there is not overlap and the energies are channelized for the effective functioning of the Company. Further, it gives an impression to a prospective investor that the company is professionally managed.

Contribution by the respective co-founders

The co-founders may in certain cases agree to specifically contribute through human capital, value additions through knowledge, etc., which ideally should also form a part of the co-founder’s agreement.

Non-compete clause

These clauses generally provide for a bar on the respective promoters from indulging in running business competitive to the business of the company during the course of association with the Company or for a certain period post severance from the Company. This ensures that the promoters continue to work solely and exclusively for the Company in the said area of business.

Membership of the Board of Directors

The Board of Directors being the body taking major decisions in relation to the company, the right of the promoter to have a seat on the Board of Directors is also generally defined in the Agreement.

Share transfers and restrictions in relation thereto

The company being a close-knit entity having been incorporated as a going concern by the co-founders together, the clause provides for restriction on transfer of shares by one co-founder without the consent of the other co-founder, right of first refusal in the case of any prospective share transfer or exit of the promoter etc.

Technology and Intellectual Property Rights

The technology, IPR or even the business model that the company develops during its existence is generally a result of the joint efforts of the co-founders and therefore is required to be duly protected and prohibited from unauthorised disclosure or compromise. These clauses provide for a restrictive covenant on the promoters or co-founders from doing so and therefore act as a safety valve.

Future Investment

This related clause provides for a scope for raising funding for the company and the promoters generally mutually agree to work towards this and agree to dilute their equity proportionally to facilitate the fundraising in case required.

Resolution of differences

This clause in the Agreement provides for the mechanism for resolution of differences between the co-founders amicably and in case the same is not possible through an agreed dispute resolution mechanism.

Miscellaneous provisions

The provisions relating to notices, severability etc. are generally provided for in the miscellaneous provisions of the Agreement.

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