The Basics of a Co-Founders' Agreement
Updated: Aug 28, 2020
What is a co-founders’ agreement?
A co-founders’ agreement is an agreement executed amongst co-founders of the company. It is much like a shareholders’ agreement, but since it is executed at a very early stage when the co-founders are the only shareholders, it is referred to as a co-founders’ agreement.
Before we dive into what the terms of a co-founders’ agreement should be or what needs to be incorporated in a co-founders’ agreement, let us first answer the daunting question - who can be termed as a co-founder? Is a co-founder different from a promoter? Or a founder?
Legally-speaking, the terms are different. The term “promoter” finds mention in any and all statutes, but the terms “founder” and “co-founder” are not to be found in statutes. A “promoter”, as defined under most statutes, is the person who is supposed to be in charge of the day-to-day operations and management of the startup, and has to act in line with the decisions of the Board of the company.
In the VC / startup world, the words “promoter” and “founder” are used interchangeably. The terms refer to a person who has either set up the startup or has joined a startup but in the role of running it as its “owner”. The term “co-founder” is used when there are multiple founders!
Co-founders often undermine the importance of a co-founders’ agreement, majorly on account of being friends. Having worked together previously, they don’t feel the need to pen down their relationship in the form of a contract. Involving lawyers seems unwarranted at that point in time.
While it might be deemed to be a waste of time and resources then, co-founders must nevertheless execute a co-founders’ agreement. A co-founders’ agreement, in addition to helping promoters navigate day-to-day operations, sets out the rights and liabilities of the persons involved and comes to your aid when things don’t turn out as planned.
A co-founders’ agreement must form the foundation document for any entrepreneurial venture and must be drafted considering the interests of all parties involved.
Through our new LexGyaan series on Co-founders’ Agreements, we aim at throwing light on the various facets of a co-founders’ agreement, how to structure co-founders’ agreements, what clauses must be incorporated in such agreements, among others.
Next up in the series: “Any concern if I term my CTO as a co-founder?”