In this blog post, Tapan Patnaik, Senior Manager at Flipkart Internet India Pvt. Ltd. who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses how a co-founders’ agreement could have helped in the Housing.com dispute.
Background of Housing.com
Housing.com is a map based search portal that started into the real estate business of selling and renting real estate properties. Established in June 2012, the company had 12 founders, all of who were IIT, Bombay alumnus. The company was one of the very first in India to marry geographical analytics and transparent property listing. The company changed from housing.co.in to housing.com by buying the domain name from San Francisco based entrepreneur Peter Headington for 1 million dollars and also bought the hotline for 03-333-333-333. The company got a funding of a total of over 750 crore in funding from venture capitalists like Helion Partners, Softbank and Nexus. It started its operations in Mumbai on June 2012 and later on expanded to Pune, Bangalore, Gurgaon and Hyderabad in March 2015 under a new branding and logo. Lauded for its simplistic yet refined UI design and a huge database of house and users, Housing.com was seen as the next poster boy of the booming e-commerce industry in early 2015. However the company ran into trouble with one of the founders, Rahul Yadav had a public spat with the board, thus resigning and then withdrawing his resignation and later on being fired by the board members.
Housing.com is now currently only dealing with sale of properties with CEO Jason Kothari leading it and only 9 of its 12 founders remaining. It is based out of 40 cities with over 6000 brokers on board.
Issues faced during Housing.com dispute
- The co-founders had quite a few scenarios of conflict of interest during the whole episode of power struggle at Housing.com. The major despite flash points are as listed below :-
- Then CEO Rahul Yadav first resigns in April 2015 on account of differences with the board and then goes public with his opinion about investors. Later he rolled back his resignation after an apology was submitted.
- Rahul Yadav, allocated his personal stake of 5% (approximating to 150 – 200 Cr) to the then 2250 employees of the company without any approval of the board or co-founders.
- In Jan, 2016, the restructured board decides to issue phantom stocks to the employees as earlier declared resulting in Rahul Yadav’s share still remaining with the investors, further resulting in discontent among the employees and the founders.
- There was no legal binding on Rahul Yadav to not start a competing startup against Housing.com.
- The company had 12 founders which in itself had all the makings of a complex board and company structuring.
How a Co -Founders Agreement would have helped in the case of Housing.com dispute
A clear and precise co-founders agreement could have gone a long way in protecting the interest of the company as well of the other co-founders and employees and avoided the much maligned public wrangling with the investors. The following are the some of the points that could have been effectively covered in the co-founders agreement:
- Housing.com had 12 founders of the company. However it only had 2 directors of the company. So in an absence of co-founders holding majority of the shares, it was difficult to have any say in the operations of the company.
- The shareholding pattern was to be clearly defined once the business was to adopt a formal structure of business.
- The company could have been started post a legal consultation as an LLC.
- The roles and responsibilities of every co-founder were needed to be clearly defined from the inception of the company.
- Time, commitment and remuneration of each of the founders to be explicitly defined across.
- Decision making pattern in case of key decisions of the company.
- Overall goal and vision of the business.
- Business definitions and milestones for the company overall.
- The way to define the ownership based on equal distribution or on the basis of effort or on the basis of capital invested or on the basis of critical contribution of each of the founding members was sorely missing in the agreement if any. Also vesting of shares was not defined with any timelines.
- Shareholding pattern or restructuring of the equity stake in case of one of the co-founders leaving or firing of one of the co-founders. The option to give up stake in Housing.com should have been first made by Rahul Yadav to the board members and founding members and in case they did not buy, he should have got the option to offer the same to other employees of the company or 3rd party buyer. This was not the case that was observed in here. Precisely, the Right to First Refusal clause was not available on the agreement at all. Also a strong Memorandum of Association was found to be missing in this case.
- Confidentiality clause in the contract to be signed by co-founders was sorely missing in this case. This was a reason why internal discussions with board members and subsequent communications were leaked to the media without any legal consequences for the then CEO of the company.
- Non-solicit clause was also missing which could have had a great bearing on Housing.com. As a result, there was an exodus of critical resources once Rahul Yadav exited the company.
- There was no agreement as to under which condition can a co-founder be fired from a company. Hence as a result, it was seen that the CEO was forced out under undefined scenarios by the investors of Housing.com.
- Non-compete clause was something that could have been included to protect the greater interest of the company which would forbid an existing founder to pursue a competing business or firm as such. (Agreement in restraint of trade as specified in Section 27 of Indian Contract Act would have been an added check).