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Founders and Co-founders Agreements

Introduction, Objectives and Drafting.
Beginning a new business involves a lot of risks. Often two or more people come together to apportion a startup. There are a lot of formalities that needs to be completed while launching a startup and a co-founders agreement is one of them. Founders of startups need not skip this step as this agreement will come to their aid if things do not go the way as planned. A co-founders agreement, like all other contracts, helps in navigating the founders day to day operations and also helps in clearing the differences in case of any issue.

The co-founders agreement as a document can be made legally enforceable by just printing it on a non- judicial Stamp paper, which must be duly signed by the concerned parties with the appropriate stamp duty varying in different states.

A co-founders agreement is a legal document which specifies the terms and conditions between the co-founders of a startup, regarding as to how the business will be operated between them.

This agreement provides insurance in case of disagreement between the co-founders.
The drafting of a co-founders agreement must be on based on the lines of business. It must mention all the provisions relating to the factors for which the co-founders will be liable.

This agreement must be accurate, and hence it is better to consult a lawyer or a firm to help in drafting it accordingly.

This document can save the founders from getting into any type of confusion in case if there is any change in situations, whether it is psychological or financial.

Basically, a founders agreement is an official contract signed between all the co-founders of a firm or business. This document specifies all the responsibilities, ownership, and also the initial investments made by each of th

Reasons to Have a Founders' Agreement.
Founders agreements serve as the bedrock of a new business formation. They set the tone and lay the groundwork for how you interact and manage the business as a team. While it's unnecessary to utilize a founders agreement, drafting one ensures everyone is in a lockstep position on every critical legal and financial issue associated with the business.

Reasons to have a founders' agreement includes:
  1. Establishes ownership roles and responsibilities
  2. Offers guidelines for dispute resolution
  3. Provides rules surrounding the contract's termination
  4. Gives direction for handling a dissolution
  5. Protects minority shareholders
  6. Solidifies the seriousness of your business formation

Legal mistakes are another common downfall of new startups. While you do not have to go to law school to run a company, you should familiarize yourself with critical legal issues and decide how your company will handle them.

Issues that you will want to address may include:
  1. Safeguarding your intellectual property or IP assignments
  2. Creating co-founders vesting schedule on share issuance
  3. Determining how to handle the departure of crucial founders
  4. Establishing day-to-day company management
  5. Learning the definitions of basic legal terms
  6. Deciding on the particulars of corporate bylaws
     
Roles and responsibilities.
The co-founders agreement should clearly stipulate the role, duty and responsibility of all the co-founders. Ensuring that the co-founders know what they need to be doing would lead to less wasteful and more efficient. You should be really specific while deciding on roles and responsibilities, so that there is clarity among the founders and there is no confusion. Also, this creates a system of accountability and you would know who is responsible when something is not done.

Investments and contribution.
The co-founder's agreement must categorically state who and all will invest in the business and their contribution percentage in the total capital. The agreement should also mention in which form is the contribution made by the parties. There should be no ambiguity and later after the contribution is made it must specifically state, what is contributed by whom and when as well as during which phase ( after or before inception of the company).

Liabilities of co-founders.
This is another crucial clause in a co-founders agreement. As per this, the co-founders are severally liable for any such wrongful acts. Like negligence, cheating, fraud. If the company suffers loss due to an intentional act of one of the co-founders then he must be responsible for such loss caused intentionally.

Non-compete.
A non-compete is essential clause to ensure that the founders do not abandon the partnership and start their own business and compete with original business. 3- 5 year is common.

Vesting clause
If the co-founder leaves the company at an initial age, then all the burden comes on the other co-founders. Due to this vesting clause, the co-founder will have to stay with company to get back all the shares he owns in the company. This clause helps the company to retain the co-founder for a particular period.

Amendment clause
You must state that the agreement should not be amended without the prior consent of all the co-founders and such a consent must be in writing and henceforth signed by each and and every co-founder. Prior consent should also be taken for waiving of any clause.

Appointment and removal of CEO.
The agreement shall state as to how a CEO will be appointed and removed. Generally, Board of directors and each founder will have single vote over this issue.

Treatment of Loan from founders. It should be clarified that how will the loan received from the founders should be treated. Weather the loan will be rapid or without interest. The founders can also be compensate by issuing shares of the company.

Termination clause. The agreement should also spell out if the founders decide to terminate their relationship and how will it take place. Termination clause is a stressful clause but the agreement should stipulate what will happen if your co-founder flunked on you and what would happen if the co-founder was under performing or letting the business down or what will happen if one of the co-founders want to leave for whatsoever reason.

Drafting.
By And Between
  1. [●] [Insert the name of Co-Founder], residing at [●] [Insert address of Co-Founder], which expression shall unless it is repugnant to the subject or context thereof, include their legal heirs, successors, nominees and permitted assignees, of the First Part; AND
     
  2. [●] [Insert the name of Co-Founder], residing at [●] [Insert address of Co-Founder], which expression shall, unless it is repugnant to the subject or context thereof, include their legal heirs, successors, nominees and permitted assignees of the Second Part. AND
     
  3. [●] [Insert the name of Co-Founder], residing at [●] [Insert address of Co-Founder], which expression shall, unless it is repugnant to the subject or context thereof, include their legal heirs, successors, nominees and permitted assignees of the Third Part. Each of the parties shall be individually referred to as a Co-Founder and collectively as the Co-Founders.
WHEREAS the Co-Founders are [●] [insert background about how the co-founders know each other]

WHEREAS the Co-Founders [have started/contemplate starting] work on [●] [insert description of the business] commenced activities into the field of [●] and allied areas ("Business") in [●] [insert approximate time e.g. month and year of commencing activities], carried out or proposed to be carried out under the name of [●] [specify the brand name which is used for the business];

WHEREAS the Co-Founders have decided to enter into this agreement to crystallize the terms of their relationship with one another.


It Is Hereby Agreed By And Between The Parties Hereto As Follows:

  1. Purpose

    1. The Co-Founders have identified a prospective business opportunity in the area in which the Business is planned and have agreed to work together [until/for a period of] [●] [mention a milestone, e.g. completion of the first phase of the product or launch of the website, or a timeline in months or years] (Initial Objective or Initial Timeline) from the effective date of [●].
       
    2. Any costs incurred by any of the Co-Founders, personal loans of the Co-Founders or their friends, family, relatives or any angel investor to the Business will be reimbursed from the revenues if any. Profits of the Business shall be shared in the following ratio:
      [Insert name of Co-Founder]: [●] [Profit ratio]
      [Insert name of Co-Founder]: [●] [Profit ratio]
      [Insert name of Co-Founder]: [●] [Profit ratio]
       
    3. The Co-Founders shall jointly participate in the management and operational decision-making processes of the Business, and in the execution of the business strategy, as explained in this agreement.
       
  2. Term And Validity Of This Agreement

    1. This Agreement shall govern the relationship between the Business and the Co-Founders. If the Co-Founders agree to carry on the Business in the long term, they shall, [as soon as it is feasible] organize themselves into a formalized business entity such as a partnership, LLP, company or a registered non-profit by entering into appropriate documentation and performing necessary statutory filings. The actions under this clause shall be taken latest by [the realization or completion of the Initial Objective or the Initial Timeline].
       
    2. Unless a Co-Founder is dismissed or retired as explained later in this agreement or has stopped working for the Business, the Co-Founders shall ensure that the commercial understanding in this agreement (particularly the provisions with respect to the economic interest and capital contribution) is factored into the documentation executed for any formal business structure that is subsequently adopted.
       
    3. Until the actions described above are completed, this agreement shall continue to remain valid and govern the relationship between the Co-Founders.
       
    4. Any amendments to this document or admission of new Co-Founders shall only be made in writing.
       
  3. Responsibilities Of The Co-Founders

    1. The Co-Founders will share a general responsibility for the reputation and the economic growth of the business. Currently, the specific responsibilities of the Co-Founders are as follows:
      [Insert name of Co-Founder]
      [●] [Mention responsibilities]
      [Insert name of Co-Founder]
      [●] [Mention responsibilities]
      [Insert name of Co-Founder]
      [●] [Mention responsibilities]
       
    2. The above allocation is not strict and responsibilities on some of the above areas may be shared with other Co-Founders. Wherever necessary, each Co-Founder shall co-operate with each other and provide necessary help to other Co-Founders towards discharging their specific responsibility, for the overall benefit of the Business.
       
    3. The roles mentioned above may be modified from time to time depending on the needs of the Business and based on mutual understanding. The modification may even be recorded or evidenced by electronic communication.
       
    4. The Co-Founders may identify and create appropriate processes for decision-making in a meeting where all Co-Founders are invited, and at least the majority are present. They may be voting to appoint one of them as a Chief Executive Officer (CEO) to bear responsibility for day-to-day decision-making and assume other responsibilities of a CEO.
       
  4. Mutual Rights And Obligations Of The Co-Founders
    In capacity as a co-founder of the business, the New Co-Founder shall be expected to participate in team discussions and development of plans.
    Co-Founder will have the following rights:
    • The right to be represented as a co-founder of the Business in all communications and publicity materials
    • Right to participate in discussions pertaining to the company.
    • Right to be involved in developing future expansion plans and strategies.
    • Right to inspect the books of accounts.
    • Right to be treated fairly.
    • Right to have the terms of this agreement incorporated into a subsequent business structure.
      [specify any other general responsibility you contemplate.]
       
  5. Capital Contribution And Profit-Sharing

    1.  The Co-Founders shall contribute the following amounts as their share of capital in the business:
      ● [Insert the name of Co-Founder]: [●] [Mention capital contribution]
      [Insert the name of Co-Founder]: [●] [Mention capital contribution]
      ● [Insert the name of Co-Founder]: [●] [Mention capital contribution]
       
    2. Any excess amounts of capital beyond the limits above shall be expressly acknowledged by the other Co-Founders in writing. However, the capital contribution shall not alter the economic interest of the Co-Founder in the Business.
       
    3. Vesting Schedule: While any income that is earned may be shared in the manner specified above, economic interest or share in the ownership of the business shall vest periodically in the Co-Founders as per the following schedule:
      • TIME PERIOD (IN MONTHS) / Percentage of ownership interest that will vest.
        6/ 25% of total economic interest.
        12/ 50% of total economic interest.
        18/ 75% of total economic interest.
        24/ 100% of total economic interest.
      • Impact of Vesting: Economic interest in the business that has not vested in the Co-Founders may be held by a separate entity;
        Or; Vesting: The Co-Founders agree that if they exit or are fired or dismissed from the business within the terms of this agreement before their economic interest has completely vested, the unvested portion shall be relinquished back to the business. All Co-Founders shall co-operate and perform all actions necessary to respect this understanding.
         
      • Upon incorporation of the Business into an LLP or company, a minimum amount of capital contribution may be necessary under the law. The Co-Founders agree to contribute necessary amounts as their capital contribution towards the Business.
         
  6. Restraint On Competing Business

    1. The Co-Founders shall be expected to involve herself full-time in the carrying out of their responsibilities towards the Business and [will not carry out any other activity for remuneration or charity (irrespective of whether it competes with the Business)]
      OR
      [will not carry out any competing activity that conflicts with their duties, but may carry out part-time occupations or jobs so as to earn upto [●] [specify amount earned at the current job or a minimum salary that is acceptable]] without consent from the other Co-Founders.
       

  7. Profit-Sharing, Salary And Drawings

    1. Unless all the Co-Founders decide by consensus to share the profits equally, profits will be ordinarily shared in the ratio of their economic interest in the Business.
    2. Loans provided to the business from any of the Co-Founders shall attract interest at [12% per annum].
    3. [The Co-Founders may mutually agree to draw reasonable salaries to meet their personal costs and expenses if the financial position of the Business permits.]
       

  8. Minimum Commitment Of Partners

    The Co-Founders agree to be committed to the Business until the realization/ completion of the Initial Objective or Initial Timeline subject to Clause 6 above.
     

  9. Performance Goals And Consequences Of Non-Performance

    1. Performance goals between the Co-Founders shall be clearly communicated amongst them on a periodic basis. Any differences or opinions pertaining to underperformance will be escalated and discussed on a prompt basis between the Co-Founders. Defaulting Co-Founders shall be given sufficient opportunity to make up for any shortfall in
      performance.
       
    2. Continuous non-performance, non-availability or inability to perform duties without satisfactory justification, despite necessary intimations, shall render the Co-Founders liable to expulsion. Further, dishonest or unethical conduct damaging to the business or reputation of other Co-Founders, a serious breach of discipline in course of performance of duties at the workplace or otherwise, including sexual harassment, as well as a commission of a crime involving moral turpitude can lead to the expulsion of any Co-Founder if other Co-Founders unanimously so desire.
       

  10. Voluntary Retirement

    1. If any Co-Founder voluntarily wishes to leave the Business before realization/ completion of the Initial Objective or Initial Timeline or is unwilling or unable to stay committed to the Business on a full-time basis or is expelled before the realization/completion of the Initial Objective or Initial Timeline, they will be divested of their economic interest in the business and their stake will be distributed equally to the remaining Co-Founders.

      However, the outgoing Co-Founder will be entitled to profits (represented under the financial statements) that correspond to their economic stake for each month/year which they have worked as Co-Founders, which will be calculated based on the actual finances of the Business at the time of leaving.
       
    2. Expulsion or voluntary retirement before the Initial Objective or Initial Timeline iscompleted pursuant to Clause 9 or this Clause 10 will deprive the outgoing Co- Founder of his �co-founder�status in the business.
       

  11. Consequences Of Death

    In the event of the death of a Co-Founder, the economic stake shall be subject to a fair valuation conducted by the Chartered Accountant, using the book value for reference, and may be purchased in the following manner:
    • The surviving Co-Founders proportionately, or
    • A ratio that is mutually decided depending on the financial ability of the surviving Co-Founders, or
    • If the Co-Founders are unable or unwilling to buy, the economic interest shall devolve to the successors of the deceased Co-Founder, without conferring any managerial or operational rights in the conduct of the Business.
       

  12. Dispute Resolution And Jurisdiction

    1. All disputes between the Partners inter-se or between any of the Co-Founders with respect to the Business, and which cannot be resolved amicably must be referred to arbitration as per the provisions of the Arbitration and Conciliation Act, 1996, in [●], or such other cities as the disputing parties may unanimously agree upon.
       
    2. The arbitration shall be conducted in English by a sole arbitrator appointed jointly by the parties, as far as possible. If the parties are unable to agree upon an arbitrator, an arbitration panel consisting of 3 arbitrators will resolve the dispute, where each of the parties appoints one arbitrator. The arbitrators must be independent and must have had prior experience of running a startup for at least 5 years or of having invested at least [INR 100,000] in a startup.
       
    3. Arbitrator�s fees will be capped at [INR 15,000], where there is a single arbitrator, or a total of [INR 30,000] when there is a panel. The arbitrator or the panel must issue a final decision within 1 month from the date a claim invoking the arbitration clause is filed.
       
    4. The courts of [●] shall have exclusive jurisdiction over all matters pertaining to this agreement.
       

  13. Intellectual Property, Non-Disclosure Obligations

    1. Intellectual property in all work that is done by any of the Co-Founders for the Business shall be exclusively used for the purposes of the Businesses. In case of retirement or expulsion pursuant to Clause 9 or Clause 10 the outgoing Co-Founder.
       
    2. An outgoing Co-Founder shall be under an obligation not to disclose information specific to the business to third parties, without the express written permission of the remaining Co-Founders.
       
    3. During the period of their association with the Business, disclosure to third parties shall only be made on a need-to-know basis and by subjecting the third party to a similar obligation of non-disclosure, or on any other basis as agreed by the Co-Founders.
       
  • IN WITNESS WHEREOF the parties have put their respective hands the day and year first

    hereinabove written.

    Signed and delivered by
    [Name of the first party]
    [Address]
    [Email Address]
    [Signature]
    [Name of the second party]
    [Address]
    [Email Address]
    [Signature]


    [Name of the third party]
    [Address]
    [Email Address]
    [Signature]
    Witnesses for the Co-Founders:
    Name of witness: [●]
    Address: [●]
    Signature: [●]
    Name of witness: [●]
    Address: [●]
    Signature: [●]
    Name of witness: [●]
    Address: [●]
    Signature: [●]
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