Search

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?

235 views0 comments

Recent Posts

See All

The Intellectual Property (IP) of your startup may be more valuable than its physical assets and is most vulnerable to leaks, theft, and other threats. You need to use a combination of legal strategie

The pandemic has seen a steep rise in people turning to online gaming in India. According to a Deloitte India study, from $1.1 billion in 2019, the sector has been expanding at a compounded annual gro