In this blog post, Abul Kalaam Azad A.S., who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses how a co-founders’ agreement could have helped in the Housing.com dispute.
Introduction
Housing.com dispute is a well known issue and is a lesson to be studied by the entrepreneurs before starting a startup venture. The major question behind the housing.com dispute is what will happen to the startup if one or more co-founders leave the business.[1] If there is an agreement without any ambiguity, then the chance for dispute diminishes.
Little Background about Housing.com
- Housing.com a portal to search houses or residential properties was started by a group of 12 entrepreneurs. They rightly chose to incorporate the startup as a Private Limited Company in the name of “LOCON SOLUTIONS PRIVATE LIMITED”.[2]
- Since the company was incorporated as a private limited company, it gave them a wide range of opportunities to raise funds through various ways. As we all know, venture capitalists and angel investors always prefer to invest in a Limited Company than any other form of company, since it is easy for them to buy, transfer, sell shares, stakes etc.
- Within few years (approximately two calendar years), the company tasted success and grown to a level of Rs.300 crores and the investors were ready to fund more, although the company had received four funds within the span of just two years.
Dispute and Issues
- All of the sudden, there was some article published in Economic Times about the Housing.com. The article said that three of the founders of the startup resigned from the company due to some disputes or differences with other co-founders etc.
- The company had 12 co-founders, but there were only two directors.[3] The directors are always controlling the company. And if there is no unity in between the co-founders, it is very difficult to arrive at a decision.
In any issue or decision making, If one or two co-founders opine a different view, it will not make any difference or have any value as the majority will oppose such. This will definitely reduce the speed of functions and growth of the company.
The reason for leaving the company
There are various reasons for a co-founder to leave a company, even though the company is exponentially growing. There can be disagreement with the decision taken by majority of co-founders. The leaving co-founder may think that he can do better if he starts a business on his own. He can also think that he can get all the profits, if he starts the business on his own. Some co-founders may think that they do more work than other co-founders, but still are sharing the same amount of revenue.
In some cases, one or two co-founders work hard and bring in projects and thus revenue, but the other co-founders simply in sleeping mode, but still get their share of profits. Such things will lead to disputes and issues.
Co-Founders Agreement:
- It is also called as Founders Agreement. People hurry to start or open the start-ups and they always miss several important things like entering into a co-founders’ agreement. As the name clearly says, a co-founders agreement is a contract signed and executed by the co-founders of the startup.
- Such co-founders agreement will clearly convey the decision taken regarding the ownership of the startup, shares, directors, responsibility of directors, working schedules, roles and responsibilities of each of the co-founders to which each and everyone signed will have to abide by.
- It is a legally binding contract and such agreements will safeguard the interest of every co-founder in case if is there any dispute arises while successful functioning of the startup. It is always better to decide everything before starting up the business. The co-founders should sit together, clearly discuss the roles and responsibilities of each of the co-founders etc.
- They should decide who will be the directors and control the company. They should discuss and decide about the share holding, equity etc, and put it in writing with the help of a legal professional so that the agreement will be well drafted without any ambiguity etc.
Clauses: Co-Founders Agreement
About the Project
In this section, the co-founders should clearly describe the business, the concept behind the business and what they are going to do with this business. The vision, mission, and purpose for starting the startup business should also to be written clearly and in lucid terms. The project description, should not be vague and it should specifically convey the concept behind the business and purpose for starting the company.
Investments and Contribution
- The Co-founders agreement must unambiguously and specifically convey who and all will invest/contribute and such contributions percentage in total capital.[4] The Co-founders agreement should clearly have a word about the ownership in the company and the stake of each of the co-founders in the company. Contribution in any form, including the investment in tangible items must be clearly mentioned in the co-founders agreement.
- It should be specific and later when it is reviewed, the agreement must clearly say who contributed, what was contributed, when was contributed, during which phase (before inception or after inception of the company) the company received contribution etc.
- So that there will not be any issue regarding the contribution later on. The Capital Contribution by each of the founders before inception should be described. The co-founders agreement should also describe if the company can receive contribution after inception and how, when and why such contributions will be allowed.
Roles and Responsibilities of Co-Founders
- It is very important aspect of the co-founders agreement as most of the recent disputes in the start-ups in one way or the other arise from issues or disagreement between the co-founders about their roles and responsibilities in the company. It is always difficult to arrive at an amicable solution when there is a conflict between the co-founders while deciding to divide the roles and responsibilities between the co-founders.
- Each and every co-founder should sit together, discuss the roles and responsibilities of each and every one of them and divide those responsibilities between them without any conflict and describe the same in agreement in clear, unambiguous and lucid manner.
- Each of the founders is responsible for being truthful and faithful to the company and to other co-founders. The co-founders should abide by the terms of the agreement and should keep all information about the company confidential and shall not disclose it to any third person.
Liabilities of the Co-Founders
Again this is another important clause in the co-founders agreement. According to this clause, the co-founders are severally liable for any such wrongful acts, like fraud, cheating, negligence or any illegal acts etc. A Co-founder will not be held liable for the wrongful or illegal act of other co-founder or co-founders. If is there any loss to the company intentionally created by a co-founder, the person who intentionally created loss should indemnify the company and make good for the losses caused intentionally.
IP Rights
- If it is a start-up company planning to invent or innovate something new and apply for patent etc, the question arises as to whether such invention or the patent be owned by the Company or the individual founder who invented such new invention. There can be questions like if one co-founder invents a new thing, will it be considered as an invention or creation by other co-founders of the company too?
- If is there any invention, creation or innovation by any employee of the company, what will happen to such? Will the company own such thing or the employee will be allowed to own?
- In such inventions by the employee, will the employee own the Intellectual Property Rights to his invention, or will the company own the Intellectual Property Rights or will the co-founders too have ownership in such Intellectual Property Rights? Such questions must be discussed before the inception of the company and unambiguously specify such things in the co-founders agreement.
Vesting Schedule
- This clause is a defensive one in the side of the company. This clause provides for the co-founder planning to leave the company in the initial stages will only get a small portion of the shares owned by him and that will be given only after some specified period of working for the company.
- If a co-founder leaves the company at an initial stage, it is very difficult for the company to survive and burdens other co-founders. Due to this Vesting Schedule class, the co-founder has to stay with the company to get back all the shares owned by him in the company. Hence this clause is a defensive one to help the company to keep the co-founder stay back with the company.
Amendment
- In this clause, it should clearly say that the co-founders agreement should not be altered/amended without the consent of all the co-founders and such consent must be in writing and signed by each and every one of the co-founders.
- Moreover, this clause should clearly state that without the consent of the co-founders, that too in writing with the signature of all co-founders, none of the clauses in the agreement shall be waived for whatever reason may be. Hence this clause makes it clear that there shall not be any amendment or waiver without the explicit consent by all the co-founders in writing.
Disputes Resolution Mechanism
- In this clause, it should specifically state the remedy if is there any dispute arises. The co-founders agreement should clearly state if is there any dispute then the kind of Dispute Resolution Mechanism should be employed to solve the dispute.
- It should specify the recommended Alternative Dispute Resolution Method if that can be employed to solve the issue. The co-founders agreement should also state further remedies and the court to be approached and the jurisdiction of the same. The co-founders agreement should give provisions for all possible disputes that can arise and the remedy recommended for the same.
Voting
According to this clause, if is there any disagreement between the co-founders regarding any business transaction, such issues shall be decided based on voting and the decision supported by majority voters will prevail over the other opinions. The voting power of a co-founder is based on the ownership of shares by the co-founder in the business.
Non-Compete Clause
It is again an important clause, and in this clause, it specifies that the co-founder leaving the company, should not start a competing business or similar business for a particular number of years. The Non-compete clause protects the interest of the company and other co-founders.
“Chase the vision, not the money; the money will end up following you.” –
Tony Hsieh, Zappos CEO
Issues in Housing.com:
- In housing.com there were several conflicts between the co-founders and there was a struggle for power between them as there were 12 co-founders and each one had their own priorities.
- Initially, in 2014 The Economic Times published an article about the three co-founders leaving the company. In March 2015, the Bennett, Coleman & Co. Ltd, which owns the Times Group, the largest media group in India sent a legal notice to Rahul Yadav, CEO of Housing.com and co-founder of the Locon Solutions Private Limited.[5]
- Then the CEO Rahul Yadav resigned from the company alleging the difference between the co-founders and his conflict with the board, and later submitted an apology and came back to the board. Then all of the sudden, Rahul Yadav transferred his personal ownership of shares which is approximately Rs.200 Crore and gave this to over 2200 employees of the Housing.com without the consent or approval of the other co-founders or directors.
- The company then had a dispute between the investors, board, and employees. Rahul Yadav alleged that Times Group is trying to destroy the Housing.com as the Times Group was trying to compete with Housing.com using their own brand, named MagicBricks.com. He alleged against the Times Group and hence the Times Group sent a legal notice to Rahul Yadav to openly apologize and pay a compensation of Rs.100 crores for damages.
As there were 12 Co-founders and 2 Directors, that led to a complex structure of the company which added more ambiguity in every decision and function of the company.
How a Co-Founder agreement could have helped
- If there was a clear, unambiguous co-founders agreement with specific provisions between the co-founders of the Housing.com, the business could have survived without such several disputes and issues.
If there was a co-founders agreement with clear division of the roles and responsibilities between the co-founders, there should not have been the conflict between the co-founders.
- If the structure of the company was planned well, it should not have been a complex structure with 12 co-founders and 2 directors.
According to Wikipedia, ” In June 2015, Housing.com then-CEO Rahul Yadav accused Sequoia India MD Shailendra Singh of poaching Housing.com staff. Subsequently, he was asked to leave the company altogether, citing objectionable behavior. Rishabh Gupta was temporarily in charge, before being replaced by Jason Kothari in November 2015.”[6]
If there was a co-founders agreement with specific provisions between the co-founders of the Housing.com, then their conflict between the Rahul Yadav and the board had not arisen, as the agreement would have clearly specified the roles, responsibilities, and liabilities of each and every co-founder.
The Non-Compete Clause is another important thing in the co-founders agreement and this will protect the company from competition by the new entity or business started by the co-founder leaving the company. If a co-founder leaves the company, such co-founder shall not start a similar business, competing with the previous company.
- In the issue of housing.com, the CEO had to leave the company without his own willingness as there was no co-founders agreement with specific provisions. In case, if there was a co-founders agreement with specific provisions about the dismissal of a co-founder, Rahul Yadav, the CEO had not be sent out from the company by other investors.
- Confidentiality clause is also important in any co-founders agreement. In the case of housing.com, if there was a confidentiality clause, there could not be leak of emails and communications between the investors, co-founders, and employees, to the media without any legal consequence. Even the CEO Rahul Yadav disclosed publicly the emails and communications between the board, investors, and co-founders. Such scenario could have been avoided if there was a co-founders agreement with specific provisions like Confidentiality clause. [7]
There was no provision for pre-emption while transferring or giving away the shares, and that had led to chaos in the company. CEO Rahul Yadav transferred the shares to employees without the consent or pre-emption to the other co-founders. If was there a co-founders agreement with pre-emption clause and a well written memorandum of association between the co-founders, such issues could have been avoided.
- Decision making provisions, Dispute Resolution Mechanisms, Shareholding patterns, roles and responsibilities of each of the co-founders, liabilities of the co-founders and indemnity clause for creating loss intentionally by a co-founder, working hours, commitment and salary or profit share between the co-founders should have been clearly described in the co-founders agreement. If there was such co-founders agreement specifically and unambiguously describing decision-making provisions, Dispute Resolution Mechanisms, Shareholding patterns, roles and responsibilities of each of the co-founders, liabilities of the co-founders and indemnity clause for creating loss intentionally by a co-founder, working hours, commitment and salary or profit share between the co-founders, the housing.com could have avoided many disputes and even if such disputes arise, that could have been easily solved.
- Non-Soliciting Clause was also not there, and hence the housing.com could not avoid solicitation by the competing business, started by the co-founders who left the company. They solicited and invited employees, clients from this business to their new venture. If there was a co-founder agreement with specific provision for non-soliciting, this issue could have been avoided.
The BCCL notice says:
“From a bare perusal of the defamatory email, it is clear that you (Rahul Yadav and Locon Solutions) have made various offensive, false, disparaging and pejorative remarks against us which are per se defamatory, thereby causing serious damage to our reputation. We state that you are jointly and severally responsible and liable for circulation of the defamatory email.”[8]
Mr.Jason Kothari is the current CEO of Housing.com and now it operates with only 9 of the co-founders out of 12 co-founders of the company, as the other three left the company.
There is no specific definition for co-founders agreement. But the co-founders agreement will define the limits, roles, responsibilities, liabilities, shares, equity, ownership etc between the co-founders and thus will help the businesses solve the disputes amicably and survive for a long term.
Conclusion
The growth of any business depends on the peaceful and successful functioning of the business and its operations. Each one of the co-founders will have their own priorities, but still, if there is a co-founders agreement giving specific provisions for every issue, clauses for roles, responsibilities, clauses for Intellectual Property Rights and ownership of Intellectual Property Rights, Non-compete Clause, non-solicit clause, a clear company structure with pre-emption for co-founders if a co-founder is willing to give away the shares, dispute resolution mechanisms, remedies, jurisdiction of court etc, then the issue or dispute can be easily solved based on the terms as decided earlier while signing the co-founders agreement.
Hence the co-founders agreement is very important piece of document for any start-up to survive for a long term and to become a successful venture.
“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.” – Steve Jobs, Co-Founder, Chairman and CEO, Apple
Works Cited – Bibliography
- https://en.wikipedia.org/wiki/Housing.com
- https://www.quora.com
- http://www.vccircle.com/news/technology/2015/03/17/times-group-sends-legal-notice-housingcom-directors-claims-rs-100cr
- www.forbes.com
- www.LawRato.com
- www.SpicyLaw.com
- www.LawZing.com
- www.VentureBeat.com
- Financial Express
- The Economic Times
[1] https://en.wikipedia.org/wiki/Housing.com
[2] http://www.vccircle.com/news/technology/2015/03/17/times-group-sends-legal-notice-housingcom-directors-claims-rs-100cr
[3] http://www.vccircle.com/news/technology/2015/03/17/times-group-sends-legal-notice-housingcom-directors-claims-rs-100cr
[4] www.VentureBeat.com
[5] http://www.vccircle.com/news/technology/2015/03/17/times-group-sends-legal-notice-housingcom-directors-claims-rs-100cr
[6] https://en.wikipedia.org/wiki/Housing.com
[7] https://en.wikipedia.org/wiki/Housing.com
[8] http://www.vccircle.com/news/technology/2015/03/17/times-group-sends-legal-notice-housingcom-directors-claims-rs-100cr
