If you are an entrepreneur and have incorporated a company with other co-founders, it is imperative that you design a Co-Founders’ Agreement. If you ignore this step, you might potentially end up in a state of despair and confusion with your co-founders, which may ultimately hamper the business. When looking forward to start a new bootstrapped business, young entrepreneurs generally turn towards their friends, family members, close relatives or colleagues. Such engagements are commonly agreed verbally among the co-founders without any formal documentation, and it can turn out to be the biggest mistake before commencing business operations. We all have heard the most famous and recent satire of Zukerberg and Winklevoss Facebook litigation.

By our experience, we have listed out the issues that co-founders generally face in the absence of a well-defined co-founders’ contract.  

• Lack of clarity in decision making. How key decisions and even day-to-day general business are to be made? (majority vote, unanimous vote or certain decision solely in the hand of the CEO?). We often find founders’ in loggerheads amongst themselves for silliest of business calls and that is not what your clients, partners or even investors should become aware of.
• Lack of clarity on a cofounder’s role and responsibilities. What will be the roles and responsibilities of each founders’? Without a clarity on what your friend-cum-cofounder is bringing to the table, your business may suffer. A CEO doing a job of the CTO or COO may lead the CEO in a state of absolute burn out and frustration. Well-defined performance matrix goes a long way in setting the right behavioural expectations and milestones for each founder.
• Confusion over ownership rights. Is your business entity actually the owner of the patent that you are commercialising? Check again. The patent may be owned by a founder who registered it with the patents office. A co-founders’ contract will clearly outline the ownership rights over the intellectual properties created in the entire process and there will be no quarrels around who owns what. If you are a startup looking for some seed or early stage investment, you should be vary of this. An investor may raise this as a red flag while conducting a due diligence and if you fail to assign ownership rights to the entity, the deal may be off.
• Transfer of shares. What if your co-founder suddenly decides to exit from the company without your consent? A cofounders’ contract typically captures the due process to be followed when a cofounder decides to step down by putting restrictions such as lock-in, ROFR and more. This allows the cofounders to part ways amicably without compromising the business operations. Lock-in also ensures the minimum time commitment expected of each founder.
• Misuse of confidential information and business plans. Is your ex-cofounder selling the same meat filled sandwiches opposite to the street now and also inviting your clients to his shop? A co-founders’ contract would have ensured that the secret recipe for those delicious sandwiches could not be leaked and used by anyone else, other than the company. Such contracts can also create specific non-compete and non-solicitation restrictions on each founders and ensure that the confidential information of the company and the clientele remains with the company, atleast for few years.

Long story short, it is most important to realize that even if your co-founder is your best friend, differences will ensue in due course of time and if nothing is done to prevent it in the first hand, it may lead to inevitable failure of your start-up.

The foremost solution to avoid such issues is to have a co-founder agreement which sets forth the ownership rights, roles, responsibilities, restriction on transfer of shares, dispute resolution and more. A co-founder agreement is an essential document that can save you a lot of time, money, hardship and confusion. It can be a guide for you to run your business and settle any differences with your co-founders amicably.