October 25, 2019
5 min read
The co-founders agreement in India lays down the terms and conditions between the cofounders of a startup. Read about the important clauses of a founders' agreement in India.
Founders of a small startup that may one day become a multi-national conglomerate are responsible for laying it down and building it up from scratch. However, while doing this, the founders often ignore having a legal document that defines the terms and conditions of their relationship. This small yet crucial piece of paper is known as co-founders agreement and establishes the relationship between the co-founder of startup.
The legal document that defines the manner in which the co-founders are required to act within the organisation and with each other is known as the founder’s agreement or co-founders agreement. The co-founders agreement lays down the terms and conditions regarding the manner in which the business will be operated between the founders of a Startup.
The agreement is a written document that acts as a constitution for the co-founders in case there is a dispute between them in the future provides the legal remedies and law applicable in case of breach by any of the founders of the startup
Careful documentation is the key to have a secure relationship between the co-founders of a startup as the agreement defines the individual roles, responsibilities, rights, and liabilities of each co-founder. Consulting a good startup consultant in India can help the co-founders gain the right knowledge and skills for drafting a robust and watertight co-founders agreement.
Drafting and vetting of the contract require knowledge of the laws applicable and key legal terms, which can only be understood by talking to an experienced startup consultant who holds the knowledge of the startup document. While drafting a co-founders agreement, it is essential to include certain essential elements in addition to the general information of the business. The following clauses, when added to the co-founder’s agreement, provide umbrella protection to both the co-founders as well as the company.
The most critical clause of a co-founder agreement is regarding the proportion of equity ownership of each co-founder of the startup. This clause mentions the consideration invested by a founder in the form of monetary investment, experience, network and IPRs. The ownership clause specifies the number of shares owned by each of founder, the total amount of capital invested by a co-founder, and division of profits between them.
The founders' agreement in India must lay down the mechanism to deal with a situation where a co-founder exits or is removed from the company. For such a case, a vesting structure must be included in the agreement to define how the shares that will be taken up by other founders.
The founders' agreement with vesting of the shares can include vesting of shares in the following ways:
Time-Based Vesting, i.e. the shares will be vested in the proportion of the time spent by the founder.
Milestone Vesting, i.e. the vesting will take place when the company achieves a milestone.
The founders' agreement must specify the roles and responsibilities of each of the co-founder of the startup. This makes sure that each co-founder knows the duties they have to perform in the business whether it is the functions of marketing, business development, administration, finance, technology, operation, or any other role.
Transfer Of Shares
The Agreement must also state restrictions on co-founders regarding the transfer of their shares to any third party. This means that the agreement must state the lock-in period for which the founder is not permitted to transfer the shares owned by them in the company. The clause also includes the legal remedy that can be availed in case the co-founder of clause also consists of the legal recourse that can be availed in case the co-founder breaches this clause.
Another important detail that can be included in this clause is regarding the right of first refusal to shareholders of the startup, whereby the founder is not allowed to transfer the shares to outsiders until and unless the shareholders of the company refuse to take them up.
This clause is included to ensure that the intellectual property developed by a founder is assigned to the startup and not individually owned by the founder. This protects the IPR and trade secrets of the business in case the founder wishes to leave the organisation in future.
The provision ensures that any Trademark, Copyright or Patent obtained by a founder during the course of their association with the startup are the property of the startup for all purposes. This clause plays an essential role in startup valuation as any Intellectual Property owned by the business increases its value.
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The confidentiality clause prohibits any co-founder from using, selling, for distributing any business information or sensitive information of the startup’s clients to any third party after leaving the organisation. This clause prevents any form of data theft by a co-founder and provides the remedy in case an exiting co-founder steals sensitive company information or client data.
The non-compete clause prevents a co-founder who is leaving the startup from soliciting any of the startup’s clients or starting any similar competitive business after leaving the organisation. The clause states the number of years for which the co-founder cannot join or start any business which can be a direct competitor of the startup.
Designation And Employment
The co-founders' agreement must mention the designation assigned to each of the co-founder and the details about their employment, such as salary, reimbursement provisions, bonus, etc. The provision must also include the founders’ right to attest the legal documents of the startup, such as commercial agreements, cheques, etc.
Finances Of The Startup
The founders’ agreement must also include the clause relating to the management of its finances, the rights and responsibilities of each cofounder, and the manner in which the loans of the business can be taken and repaid.
Removal Or Exit Of Cofounder
The agreement must define how a co-founder may leave the organisation. This also includes the provisions relating to the removal of a co-founder i.e. the situations in which a co-founder may be removed and the procedure to be followed during and after the removal.
This clause mentions the manner in which any disputes between the co-founders shall be resolved. The provision also includes the remedy that can be availed in case of violation of the co-founders’ agreement by any of the cofounder. The provision must mention the laws applicable over such disputes as well as the jurisdiction of the court to take up the matters legally.
The above-mentioned list of essential clauses of a co-founders agreement is not exhaustive, and the founders may include other essential provisions as per the nature of the business and the relationship between them.
Using a pre-drawn co-founders agreement template available online can do more harm than the money it may save. Consulting a startup documentation expert can provide critical insights on how to proceed with the drafting and vetting of the agreement and draw up an all-inclusive agreement for the founders.
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