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Co-Founders Agreement In India For A Startup | Founders Agreement Simplified

Co-founder’s Agreement for Start-Ups








Looking at the scenario of the COVID era, the mantra of ‘Vocal for Local’ is being preached by the Prime Minister of India, Narendra Modi. With the vision of becoming ‘Aatmnirbhar’, acquiring the self-reliant position needs opening up a start-up/business. If you are planning to open a business and accept the entrepreneurial role with your friends/family as your partners in the start-up, it is important to have a co-founder’s agreement. Co-founders Agreement, though not compulsory is an essential element for every start-up. It is a document made between two or more persons who want to set up a business. Every start-up is planned only when several people come together who have certain skillsets, networks, or qualities that combine to form a common vision of the start-up. These people are the co-founders of the start-up and to maintain the common vision, they need to be in the harmony.

Because as much as you trust each other in every role and responsibility you accept, it is equally possible that there could be confusion which could lead to miscommunication and mistrust affecting both the personal as well as professional relations.

So, what is a co-founder's agreement?

A co-founders' agreement is defined as the contract between the members of the start-up. The Agreement sets forth the roles and responsibilities, dispute resolution mechanism, and other terms to be executed between the co-founders and the company which can help in navigating their paths in a defined manner.Elements required for the co-founder's agreement are-

1.      Allocating duties and decision-making process:

Nobody is guaranteed about what will befall the business later on. It is critical to assign the obligations of every one of the co-founders so the business can be run proficiently consistently. The co-founder’s agreement should express the function of every single member. For instance, it can state one co-founder to be in charge of the tasks while the other one in charge of the significant dynamic change. There are circumstances where both the co-founders will differ with one another assessments in the dynamic cycle, in such case, the co-founder’s agreement should direct to the co-founder who will have the final call. To avoid such conflicts co-founder’s meetings should be scheduled every 1 month. It is significant for the co-founders to dodge the heightening of conflicts in the business which can arrive at levels where the start-up will chance disintegration.

 

2.      Allocating ownership equally and vesting powers:

The co-founders of the start-up will direct modified measures of cash and time in the business. The co-founder’s agreement ought to obviously express the ownership procedure of the business and how it can progress in the long run. The best arrangement ought to align the business accomplishment with the money-related achievement of the association. It is significant for the co-founders to stay away from cases where the business will be fruitful, and co-founders will wind up in clashes on how much will every last one of them get. The best arrangement should share the benefits from the business start-up concerning the measures of capital every member has contributed towards the start-up.

 

3.      What if any of the co-co-founders wishes to leave?

You ought to consider the dynamic value split and vesting period. Utilizing a dynamic-split model, business visionaries can decide precisely how much value every individual in the start-up deserves, which is not possible in a fixed-split model. In a fixed-split model, the co-founders choose ahead of time what the co-founders are worth dependent on the future commitments they'll make yet in a dynamic-split model, value choices depend on what co-founders' present commitments which are more effective and realistic.

Also, be smart and have a far-sighted vision that there could be a possibility of split, thereby thinking before vesting powers to each member of the start-up. The powers should be vested depending on the roles and the value they bring to the company.

 

4.      Intellectual Property Rights Ownership:-

 

Like every property of yours which is protected, the intellectual property also needs to be protected. APPLE which was founded in 1976 has seen multiple CEOs, then also stands strong today in 2020 because it protects its brand name, logo and now it also protects its retail store design to avoid anyone from copying or using the years of hard work that has gone into making the brand value. So, the brand value remains if the IPR is owned by the company and not by an individual.

On the off chance that you are working in a cutting-edge area, it's conceivable that one of the co-founders had a significant part in building up that item. He/she has all the right to be attached to their innovation, yet any IPR ought to be possessed by the organization and not by a person. The innovator can be compensated with a higher value of equity and more vested powers whenever required yet once you structure a start-up, everything is possessed by the organization and not by a person. This encourages you to ensure the association when an individual chooses to split away. He/she becomes free of the burden of not having the option of leaving and also after leaving cannot claim the right over the product.

What is the vesting clause?

Anyone who has a shareholding in the company should be vested. Vesting means that the shareholder becomes entitled to the shares, including the rights in those shares.

Where the Vesting Agreement comes in is that instead of getting your full shareholding upfront, you get it regularly in portions over a set period. The Vesting Agreement regulates various aspects of that vesting, such as how long that period will be, how many shares will vest in each month or year during that period, and any performance targets that you might be expected to achieve for the company (if you are an employee, for example).

What is Cliff Period?

Vesting can result in lots of people owning little pieces of the company, which makes future legal work difficult. Cliffs let you try out a partner in the form of a co-shareholder or incentivize a new employee with shareholding without parting with any shareholding upfront. If the vested person leaves during the cliff or perhaps fails to achieve certainly performance targets that may be part of the deal, then they get no shareholding. The vested person gets everything that they would have accrued during the cliff period when the cliff ends.

Sample Vesting clause in a Co-founder agreement

Upon the formation of the Company, the entire issued share ownership of the Company shall reflect the following:

Person

Shares

Percentage

[FOUNDER1 NAME]

[FOUNDER1 SHARES AMOUNT]

[FOUNDER1 SHARES PERCENTAGE]

[FOUNDER2 NAME]

[FOUNDER2 SHARES AMOUNT]

[FOUNDER2 SHARES PERCENTAGE]

 

 

 

Should the Founders wish to reserve any portion of the shares for future employees or an option share pool, any such portion of shares reserved will dilute all Founders equally.

[FOUNDER1 NAME] interest in the Company shall vest according to a four (4) year vesting schedule beginning [FOUNDER1 VESTING STARTING DATE], which shall vest 1/48th per month in exchange for consecutive service to the Business Concept and Technology.  Additionally, [FOUNDER1 NAME] vesting schedule shall be subject to a one (1) year cliff. Founders shall all reasonably agree to the definition of “consecutive service” for purposes of this vesting schedule.

[FOUNDER2 NAME] interest in the Company shall vest under a four (4) year vesting schedule beginning [FOUNDER2 VESTING STARTING DATE], which shall vest 1/48th per month in exchange for consecutive service to the Business Concept and Technology.  Additionally, [FOUNDER2 NAME] vesting schedule shall be subject to a one (1) year cliff. Founders shall all reasonably agree to the definition of “consecutive service” for purposes of this vesting schedule.

If a Founder is subject to a vesting schedule departs the Company before full vesting of his or her shares, the remaining portion of any unvested shares shall be returned to the Company in accordance with that vesting schedule.



  Conclusion


                                                                                                                                   

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