In this blogpost, Janaki Sincro, Company Secretary in Practice and a student of the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about who is a founder, who is a co-founder and steps to be taken for inducting new co-founder.
A startup is a commonly used term in today’s times. It’s never too late to start-up. Also it’s never too late to induct a new co-founder in the Company, if it is thought over at an initial stage, and if there is a proper strategy in place to manage different and complex situations. Of course, it is not possible to foresee every contingency, but one must draw a few conclusions through experience- one’s own or that of others.
A lot depends on the business plan and how deeply the founders have thought over what they want to build, how they want to build it and with whom and what kind of people they want to build it. In order to understand anything, it is pertinent to start with the definitions.
Who is a founder
A founder is the one who has an idea, which he wants to implement in order to start something new. It can be for profit, or for non-profit. He might come up with some idea which is filling in some gap or improving something which was already created or finding an alternate solution to the same problems. But an idea itself does not make a person a founder, in order to be a founder- a person must execute the ideas into a reality.
Who is a co-founder?
A founder may like to progress alone, or find another person who is on the same page as him, who believes in his idea and wants to put in equal or slightly more/less efforts in transforming the idea into a reality. That person is a co-founder. Dictionary defines a co-founder as A person who is involved, along with one or more others, with helping in the creation of business, organization, union, or entity.
- The idea might be born through discussions between two or more people, and both of them become co-founders.
- One person has an idea, which he proposes to the other who has some different skill sets that can help in business growth and they both feel excited about the possibilities and start building the product, they become Co-founders.
- An idea has two co-founders, and they incorporate a private company, and while exploring possibilities they meet another person who seems to have the skills to take the company 5 steps ahead, in comparison to the two co-founders whose strategy could only get them from step 1 to step 3, so they induct a new co-founder who has equal rights, or rights in some other percentage which can be decided through an agreement, which is called the Co-founder’s agreement.
- A new co-founder might also be inducted because an older co-founder wants to quit or leave or retire prematurely or other members want him to leave, and that responsibility remains vacant and needs to be filled.
Issues about co-founders are extremely sensitive. Most start-up’s and businesses fail because of co-founder disputes. That is why this issue needs to be handled very strategically.
Solutions to induct a new co-founder
- Co-founder induction clause in Original Co-founder agreement: The original co-founder’s agreement may be a detailed document specifying all rights and duties and covering all situations as far as possible, and one of the situations is how the founders want to handle inducting a new co-founder. The new Co-founder might be a friend of one of the founding members; he might not know everyone in the business if there are many founding members and this can lead to animosity and dispute since the new co-founder will have equity in the business.
- A Panel may be pre-decided consisting of the senior co-founders or on some other criteria and their names be mentioned in the co-founder’s agreement or a third party opinion can be taken , somebody who serves as a mentor and can give an independent opinion on the matter. In this way, the co-founders may decide whether to induct a new person or not. If all are agreeing on the new co-founder, there may not be any need for an external opinion.
- There may also be a procedure and criteria in place as to what kind of a person is expected or allowed to be a co-founder. That could be mentioned in the Agreement.
Although I feel that the stricter the co-founder’s agreement and the clauses under it and the more detailed the whole document, less chances for disputes but also lesser growth options. So it is extremely important to give space and have faith and trust in the members and their abilities in order to grow in a positive direction. Insecure co-founders may have a great idea but might not reach the intended goal. In today’s world, the focus is on domain knowledge and the idea, and very less importance is given to interpersonal skills and the relationship and personal side of business. It should never be forgotten that finally, business is made up of people, by the people and for the people and therefore, people management should be given a priority and at least one member/co-founder should be such who can handle people extremely well in order to avoid unnecessary issues into the future. Maturity and experience come to play at this stage.