If you want to enter into a co-founder agreement with your co-founder then that is good news. It means you are both/all committed to having a professionally regulated relationship, even if you are close friends or family, and it is a good sign for your business moving forwards.
If you run it professionally from the inside, it is more likely to feel professional and trustworthy from the outside.
Here are the 11 key points which you need to cover in your Co-Founder Shareholder Agreement - you can create it with Legal Sidekick today:
Operational Roles and Responsibilities
Bottom line - you need to establish the principle that each co-founder is equally responsible for everything and that everyone will pitch in wherever needed in the spirit that it is a team effort.
However, it may well be that you come to the table with different skillsets, and so the co-founder agreement is a good opportunity to at least outline what those are. And that there is a minimum expectation that each co-founder will lead up certain workstreams.
An ex-banker might be tasked with heading up all financial aspects and investment documents, whereas a web developer might be appointed to run the technology aspect of the business, etc.
2. The Board of Directors
A director is responsible for day-to-day management of a business, and our recommendation is that it would be better if all co-founders of a business would also be directors of it. Even if one co-founder is not planning on having any real operational role, then they should still be a director and act as a non-executive director.
Note that a non-executive director and an ‘executive’ director are still appointed in the same way. They will just have different contracts with the company. An executive director is likely to be employed by the business, and so will have an employment contract. A non-executive director will have a director’s appointment letter or a service agreement confirming responsibilities and obligations, such as non-compete obligations.
The Legal Sidekick Co-Founder Shareholder Agreement presumes all co-founders will be directors.
3. Board of Directors Meetings
Use your Co-founder Shareholder Agreement to determine how often you will conduct formal board meetings in addition to standard meetings you hold together. It is good practice to hold regular, more formal board meetings to check in on strategy, progress and forward-planning.
4. Time Commitments – Full time, part time
The standard position is that equal co-founders will give equal time-commitments, at least in the long term. If your plan is that one co-founder will be full-time, but the other will only ever be part-time, or will be initially part-time and may become full-time in future, then this should be addressed.
To keep it simple, our recommendation is that you commit equally to the project, whilst understanding that different project phases require different skillsets (e.g. the investment phase might be busier for your ex-banker, whereas your development phase might be busier for your technologist).
5. Making Key Management Decisions
When the time comes to make key decisions which affect the future of the company, the simplest and most standard position is that you need the unanimous consent of co-founders to move forward. This is the basis of founding a company together, and if you ultimately can’t agree on things then the arrangement fails.
Even within this principle of unanimity, there are some details to figure out. For example, when it comes to spending money, what is the maximum amount one co-founder can commit to (e.g. your technologist with another developer) without the other’s consent?
Use the co-founder agreement to confirm that you will make decisions together and to confirm details of certain specific decision-making rules.
To make it simpler and more straightforward, the Legal Sidekick version provides for unanimous decision-making between co-Founders, and also covers details for a procedure on what happens if you can’t agree. Create your Co-founder Shareholding Agreement through your account here.
6. Resolving when you can’t agree on a decision
The agreement should cover this procedure that must be followed when the co-founders can’t agree on a decision. Things need to move forward anyway. In some cases, an extra director can be temporarily appointed to help the co-founders make the decision. See your Legal Sidekick version of the agreement for a suggested procedure for this situation.
7. Dealing with shares
A co-founder agreement is just a slightly more bespoke version of a shareholders’ agreement, and as such it also contains provisions you would expect to see in a shareholders’ agreement about what you can and can’t do with shares. However, in a co-founder context rather than in an investment context, this is generally a simpler rule that neither shareholder can transfer, sell or do anything with their shares without unanimous consent of all co-founders.
8. Taking money out of the business
Whether it’s salary or a share of profits, the co-founder agreement is where you determine how decisions on taking money from the business are made.
The Legal Sidekick version presumes this is ultimately decided on a unanimous basis. It does not include very specific figures (e.g. starting salaries), but you can add those later.
10. Dealing with money already put into the business
If you and/or your co-founders have already invested money into the business, then you need to agree on the status of that money – both from an accounting and tax perspective, but also in terms of whether either of you are allowed to take that money back at any point in future.
Ultimately, you are deciding if it is effectively just a grant of cash to the business (non-refundable) or it is a loan. If it is a loan, the standard principle is that you need unanimous approval of all founders to pay it back – but consider if you want more detailed loan terms (e.g. you might want to add in that the loan must be repaid once the company reaches £X of annual revenue).
11. Non-Competition
Your co-founder agreement should contain provisions that any co-founder is not entitled to compete with the business or take its resources (including people) during the time of being a co-founder and for a specified period later. You can decide on the length of that period – e.g. 6 months, 12 months, 18 months, etc.
12. Conditions on Holding Shares – Reverse Vesting
If you start a business with someone, you have a right to assume that they will continue to be involved with the business as long as the business continues to run – and if they don’t want to then they should no longer be considered a co-founder.
However, the question remains at that point over what should happen to a co-founder’s shares if they leave the business.
There are three broad options (which you can vary and adjust for your particular business):
Leave it open-ended with a mutual option that the departing co-founder can sell their shares back to the company at market value at the time.
Fix an agreement that shares must be sold back to the company at the time of leaving, for example at market value.
Use Reverse Vesting. Reverse Vesting is the process by which the right to continue holding Shares is earned in agreed proportions over, for example, an agreed period (e.g. 10% after 1 year, 20% after 2 years, and so on).
Note: Vesting is where shares are earned over time, reverse vesting is where shares are issued up front but may be returned to the company if conditions are not fulfilled.
For more details on Reverse Vesting, see our Reverse Vesting Guide.
Click here to create your Co-founder Shareholding Agreement or your separate Reverse Vesting Agreement.
This article was written by Legal Sidekick. Legal Sidekick is the legla platform for startups. We offer automated contracts and loads of startup legal resources and guides. For queries on co-founder agreements, contact us at hey@legalsidekick.com