In this blog post, Rebecca Furtado, an Instructional Analyst and a Lawyer who is currently pursuing her MA from Indira Gandhi National Open University, New Delhi and a Diploma in Entrepreneurship Administration and Business laws from NUJS, Kolkata, discusses the clauses that need to be included in a Co-Founders’ Agreement to minimize the chances of co-founder disputes. 

Today, we see a lot of people entering into partnerships in every spectrum of the business sector. Gradually, with the increasing size of the business, the partnership converts into a corporate company. With the growing trend of technology and the need to ease our lives, a new trend of companies building prototypes have emerged. These companies have a definite goal in mind – profit through innovative thinking.

It’s pertinent to note that these companies are not subsidiaries of the age old traditional companies; rather they are the brainchild of youngsters who believe in making the world rather livable. With the rise of these Startups in India, the chances of risks are higher and the loss of money even higher. It’s important to look at some high-prolific cases to understand the need for a thorough and crystal clear co-founders’ agreement. The Viral Fever’s co-founders battle and the recent ousting or in politer terms the very public resignation of the Housing CEO are some of the very public spats that have grabbed both the media and the public by their eyeballs. Both have one common motive in mind, and that includes the money pumped into the start-ups. While the court judgment stated that Prashant Raj was entitled to compensation but not equity in the Viral’s co-founder, Prahsnat Raj’s battle against Arunabh Kumar, the Housing CEO questioned the integrity of the investors and mismanagement of funds.

These episodes cast a harsh spotlight on the pitfalls of engaging in a startup. Ideas written on scraps of paper or long brainstorming sessions all seem in mortal peril when terms and clauses are not clearly defined. This brings us to an important question relating to the promotion of start-ups. Some of the most commonly listed causes that lead to the breakdown of a start-up include lack of capital funds, poor demand estimation, the spat between co-founders, lack of focus, low scale marketing standards or simply no emphasis on the customers. What takes precedence is that the breakdown of these start-ups ultimately is hardwired due to the lack of funds or showdowns with investors.

To mitigate such losses and protect ones’ financial self, it’s important to have a co-founders’ agreement in place. A co-founders’ agreement in layman terms is an agreement that legalizes the professional relationship between founders of a start-up. The main objective of a co-founders’ agreement is an open dialogue between the founders and airing out of doubts about the management, finance, operations and possibility of dissolution of the company (start-up).

Some of the essentials of a co-founders’ agreement include the following clauses. Let’s take a look at each of these clauses:

• The description of the project – this includes the objectives of the project and the service markets that will come under its working.
• Ownership of the company – this deals with the amount of shares held by the co-founders and their investors. It also includes the equity held by each of the members. It also includes the voting rights vested upon each of the founders.
• Roles and Responsibilities – this includes the roles that each founder has to play in the smooth functioning of the company. It includes specific responsibilities with decision-making responsibilities for the role assigned to the founder. These roles should be listed down in the agreement to avoid vague assumptions and disagreements at a later stage.
• Conflict resolution – this includes the method to be undertaken in case of a conflict. Conflict resolution mechanisms include the inclusion of an arbitration clause, and if possible the arbitrators can be listed in the agreement.
• Non-compete restrictions – to protect the integrity of the company and to protect economic interests it’s pertinent to note that restrictions on non-competition by co-founders should be added to the agreement. This means that non-compete restrictions will prevent a founder from opening another company that coincides with the economic interest of the present company.
• Firing and non-performance clause – this includes the firing procedure to be adopted or disciplinary measures to be adopted by the management in case of non-performance of duties by the co-founder. This may also include legal liability of a co-founder in the case of non-performance of duties by the co-founder.
• Compensation provisions – this includes reimbursement of costs incurred by the members or co-founders in the initial stages of the start-up. This may also include monthly provisions or provisions in case of fallout.
• Winding off or shut down – Incase of winding off the business, there needs to be a clear model to indicate the provisions that have to be included in cases of winding or closure of the company.

To ensure free accessibility and economic growth of a start-up as well as protecting individual co-founders interests, it’s important to include a co-founders agreement before beginning the business together.