MasiboLaw

By Opudo Mitchell

Ever wondered what would happen if you and your co-founder could not agree on a life-altering company decision? Perhaps one of you chooses to quit the enterprise, decides to sell their shares, wants more shares than they have or wants more power in the company.

During the honeymoon stage of your co-founder relationship, it can be difficult to imagine such a thing happening. After all, you seem to have perfect chemistry, both of you are excited about your project and your vision for the future is very clear.

A wise man once said that you should expect the unexpected. When there are no explicit rules governing the relationship between yourself and your co-founder, conflicts can turn disastrous. A co-founder agreement is essential in preventing any disagreement or fallouts and protecting not only the interests of the parties involved but also those of the company and its investors.

In comes the Co-Founders’ Agreement/Founders’ Agreement

A co-founder agreement is a legal document that acts as an agreement between co-founders only, describing their rights, responsibilities, compensation and relationship with each other and with the company. The agreement covers company registration, issuance and purchase of shares, intellectual property rights, board of directors, management and their appointments, the company’s bank account, budgetary and revenue utilization, non-competition, representations and warranties of the founders and termination processes.

Other important clauses include vesting clauses that help determine how the co-founders earns their shares, equity ownership clause that stipulates the percentage of shares to be owned by each co-founder.

Even though they are not required when registering a company, co-founder agreements are important for the following reasons:

1. It develops guidelines for dispute resolution, which can reduce or eliminate the possibility of having to go to court which is expensive, time-consuming and can ruin relationships and affect the company’s reputation. The dispute resolution clause allows you to choose how you will solve your disputes if and when they arise.
2. It offers a backup plan for handling unanticipated circumstances such as the death of either of the founders or both, illness or if you decide to close the company.
3. It secures the commitment of the founders through the vesting clause. The clause enables the founders to know the amount of shares that the founders will get and what they will be required to do, in terms of investing time, resources and commitment into the business.
4. It enables each of the founders to know the percentage of ownership and control they have over the company depending on their initial investment, their level of skill and experience, market potential for the company or any other reason.
5. The agreement can facilitate investment into the company by attracting potential investors who are sure that their investments are offered security by the agreement and that the company has a team committed to its success. It also assures the investors that there is order and professional structure within the company.
6. The agreement guarantees that the company assets and intellectual property are safeguarded and not mishandled or even transferred without permission or following of laid out procedure for transfer and that neither of the co-founders will take those assets without following the right process.
7. The agreement guides decision-making. Co-founders need to agree on what decisions need to be made by either of the co-founders or one, and how those decisions need to be made either by majority vote, consensus, or delegation for instance. These are decisions that solely relate to the running of the company for example the hiring and firing of personnel or awarding of board decisions.

A co-founder agreement is a vital document that can improve co-founders communication, collaboration, and prospects for thriving. Create a co-founder agreement today and lay the foundation for a successful partnership with your co-founder.

The writer is a lawyer who specializes in offering legal services to people in technology, in case you need further assistance, don’t hesitate to contact her through  lawyer@masibolaw.co.ke