Problems to manage startups in absence of Co-founder Agreement, What is Co-Founder Agreement?
problems to manage startups in absence of co-founder agreement- A co-founder Agreement is an essential document that could save anybody’s lot of pain, money and the confusion. It lays down all the important terms and conditions between the co-founders of a start-up regarding how the business will be operated.
Co-founder agreements not only safeguard and protects the interest of both the founders and co-founders but also in case of any disputes and misunderstandings it provides protection to the founders that show what they agreed upon. To prevent long term risks, it is suggested to follow certain legal procedures to process fair business between them.
Why do Start-ups need a Co-founder Agreement?
Starting your own venture is itself a big task for anybody. Start-ups come with huge responsibilities in all aspects, from fund raising to establishing itself in the market there are a lot of risks. If anybody is planning to run business with co-founders then a founders’ agreement is important. This document outlines each owner’s rights and responsibilities, just to avoid conflict among co-founders later. There are very reasons why creating a co-founder agreement is an indispensable part, it clarifies each owner’s roles and responsibilities, provides a structure for resolving the dispute among them, protects minority owners, provide signals to investors that you have a serious business.
Essential elements for Co-founder Agreement
- Name of co-founders and the Business
- Company goals
- Each owner’s Roles and Responsibilities
- Equity breakdown
- Non-Compete clause and confidentiality
- Intellectual property Rights
- Resignation and removal
- Dispute Resolution
- Length of validity
- Salary and compensation
Drawbacks of not having a Co-founder’s Agreement
At the outset of the new venture there’s a lot of excitement and every founder feels committed to the new business. But later situations arise and expectations change causing psychological and financial grief to the co-founders who only plan for the upside ignoring the potential downsides.
Sometimes in the endorphin rush of a new business idea, we hear what we want to hear and forget asking the tough questions of others and ourselves about risks, motive, goals and contingencies.
Ideally, the co-founder must think through many potential problems that they or the business might face. In a way, think of the co- founder agreement as a form of “pre-nuptial agreement”.
Some of the problems usually faced by Co-founders of not having a Co-founder Agreement:
- Who gets what percentage of the Company?
- What would be the Roles and Responsibilities of each Founder?
- How much time commitment is expected from each founder?
- What salaries are the founders entitled to?
- If any founder leaves, does the company or the other founder have the right to get back his shares?
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