While it is possible to find just about anything on the Internet, including already-to-sign co-founder agreement, you’d be wise to consult an attorney before deciding on which document you’ll use.
State laws and industry-specific legislation could make these generic agreements inadequate for your purposes. Plus, different business structures will have their own particular restrictions as to what should be included in these documents. Still, there are some components that are common to most co-founder agreements.
Below are some of the most important provisions for an agreement governing a general partnership (but note that an LLC or an S-Corp would require very different documents).
You’ll need to name the parties to the agreement: Include the name of your company and the names of any co-founders. Right off the bat you’ll need to think about how your company might end someday: The document should state for how long the agreement will be valid, and how it might eventually be dissolved.
Once the parties are established, the document will outline the purpose of the company. This statement should be carefully delimited: broad enough not to be too restrictive, but specific enough to be meaningful. You and your partners can change it later, but it’s best to give this verbiage some thorough consideration in the beginning.
The financial contribution of each founder must be documented in detail. How much will each founder contribute? Will all contributions be made at the company’s inception, or will the document contain a provision that allows the company to demand such contributions as needed? The same care should be taken with expenses: You and your lawyer would do well to eliminate any loopholes that would allow your partners to head to Vegas on the company dime every weekend.
If you and your co-founders are equal owners (as tends to be the case in a general partnership), the document should state as much. The agreement should also outline taxation procedures for your company. Our example here, being a general partnership, is a “flow-through” entity, meaning that the company itself will not be taxed; the founders will pay taxes on their individual returns. Still, all of this needs to be said in the agreement. It may also be wise to name one of the co-founders as the primary point of contact for any tax issues or inquiries.
This opens up a whole can of worms: What are the members’ responsibilities to the company? And what will their opportunities be outside of the company? It should all go in the co-founder agreement. Many agreements include non-compete clauses to prevent founders from participating in business ventures that compete with the interests of the startup, or from owning significant amounts of stock in competing companies.
You’ll also need to know how money will flow from the company to the founders: Lay out exactly how cash will be distributed. You should also establish the criteria for approving investments. Typically all partners must agree to accept money from any investor.
On the other side of the coin, taking on debts is obviously a matter of prime importance to all parties as well. The agreement should specify the procedure for approving an action that causes the company to incur debt.
The co-founder agreement should also protect the partners from having their company sold out from under them. The document will establish the terms for selling off the company, or selling any of its physical or intellectual property.
Intellectual property is another important consideration here. An invention that is related to the mission of the company, and created by a founder on company time, should probably be the property of all co-founders equally. But what about something created by an employee? Or created by a co-founder on his or her own time?
If such an issue ever arose, you’d have to resolve it somehow, and the co-founder agreement is a great place to lay out exactly how. Everything looks rosy when you’re starting your company, but you never know: Things could turn contentious someday, and you could even need to remove a partner. Likewise, just as you might not be able to consider giving up your company now, there may come a day when you’ll want to sell it, or sell your stake.
All of these considerations should be addressed in the agreement. It’s always better to take care of such matters early, before emotions start running high, and it’s a smart move to step back and talk to a lawyer who has been through the startup process before, to address any potential problems and start your business off on a solid foundation.
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