Last updated on Mar 18, 2024

What are the steps to a fair co-founder agreement?

Co-founding a startup can be an exciting and rewarding journey, but it also involves some important decisions that can affect the future of the business and the relationship between the partners. One of these decisions is how to create a fair co-founder agreement that defines the roles, responsibilities, equity, and exit options of each co-founder. A co-founder agreement is a legal document that can help prevent conflicts, misunderstandings, and disputes down the road, as well as protect the interests and rights of each party. In this article, we will guide you through the steps to a fair co-founder agreement, from choosing the right co-founders to drafting and signing the document.

1 Choose wisely

The first step to a fair co-founder agreement is to choose your co-founders wisely. You want to work with people who share your vision, values, and goals, as well as complement your skills and expertise. You also want to make sure that you have a good rapport, trust, and communication with your co-founders, and that you can handle constructive feedback and criticism. Ideally, you should have worked with your co-founders on a previous project or have known them for a long time, so that you have a sense of their work ethic, personality, and reliability.

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Ravi Handa

Early Retiree | Financial Freedom Advocate | Creator of Desi FIRE Podcast
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Sometimes we pick co-founders based on our previous personal relationships. While friends and spouses can turn out to be great founders but a prior personal relationship is no guarantee for professional success. You need to look for a complimentary skill set so that it is clear about what everyone brings to the table.

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CS Uttsav Singh

⭐ !!150k IMPRESSIONS!! ⭐SINGH US & ASSOCIATES, PEER REVIEWED FIRM BY ICSI |COMPANY SECRETARY | STARTUP ADVISORY | BCOM | LLB ASPIRANT | CORPORATE CONSULTANT | MANAGING PARTNER AT CORPORATE WIZARD PROFESSIONALS LLP
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Open Communication: Discuss each founder's roles, responsibilities, expectations, and contributions openly. Equity Distribution: Determine each founder's ownership stake in the company. Consider factors like initial investment, time commitment, skills, and future contributions. Vesting Schedule: Establish a vesting schedule to ensure that each founder earns their equity over time, typically over a period of four years with a one-year cliff. Decision Making: Outline how major decisions will be made within the company, including voting rights and procedures for resolving disputes.

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Anupam Dasgupta

Growth Partner for Digital SMEs & Startups | Founder & CEO, StratAnalyze | Founder, The Curated Circle | Most Admired Marketing Leader, World Marketing Congress | IIM Grad | Author | Speaker | Ex - PwC | Ex - Infosys
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Choosing a co-founder is a make-or-break decision. The pressures of running a business can push you to choose a co-founder in haste, complicating matters. While trust is a basic necessity for this association, its important to be able to agree and disagree with each other, in a constructive manner.

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Aarthy Annamalai

Health Care EDI Leader, CMMS, Facilities Management Software Specialist
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> Upbringing new ideas on how to do things to raise up. > Encourage and invite positive vibrations. > Learning any new needed skills that saves time for your co-founder. > Contribute and be dedicated as you are responsible. > Time Management, Even a minute time is worth doing a bigger task.

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2 Discuss expectations

The next step is to discuss your expectations and assumptions with your co-founders. During this conversation, it's important to be open and honest about what you expect from each other, what you are willing to contribute, and what you hope to achieve. You should cover topics such as the vision and mission of the startup, the roles and responsibilities of each co-founder, the time commitment and availability of each co-founder, the financial contribution and compensation of each co-founder, the decision-making process and authority of each co-founder, and the risk tolerance and exit strategy of each co-founder. Taking time to discuss these topics will help ensure that everyone is on the same page.

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Anupam Dasgupta

Growth Partner for Digital SMEs & Startups | Founder & CEO, StratAnalyze | Founder, The Curated Circle | Most Admired Marketing Leader, World Marketing Congress | IIM Grad | Author | Speaker | Ex - PwC | Ex - Infosys
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It is important to understand the motivational drivers of your co-founder. Is s(he) interested in the venture for intellectual or professional fulfillment? Or is it long-term wealth that s(he) aspires for? Or maybe the experience of guiding a business? Once you know the driving forces, it is easier to assess whether there is a fitment, and if yes, how should the roles & and responsibilities, KPIs, and rewards (tangible and intangible) be allocated.

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3 Allocate equity

Equity allocation among co-founders is one of the most important and delicate aspects of a co-founder agreement. Equity is the percentage of ownership and control that each co-founder has in the startup, and although there is no universal formula for equity allocation, some factors to consider are the value and contribution of each co-founder's skills, experience, and network; the opportunity cost and sacrifice of each co-founder's alternative career options; the level and duration of involvement and commitment of each co-founder; and the market rate and benchmark for similar startups and roles. It is also essential to agree on how to handle equity dilution, vesting, and transfer in case of future fundraising, hiring, or exit events.

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4 Draft the document

When reaching a consensus on the key terms of your co-founder agreement, it's important to draft the document with the help of a lawyer or a legal template. This document should be comprehensive and cover all relevant aspects of your co-founder relationship. It should include sections such as the name and purpose of the startup, names and addresses of co-founders, equity allocation and valuation, vesting schedule and cliff period of equity, roles and responsibilities of co-founders, decision-making and dispute resolution process, confidentiality and intellectual property rights of the startup, as well as termination and exit clauses. All these sections should be expressed in clear and concise language.

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Daniel Ahmadizadeh

Start With One | 2x YC CEO | Teach at Columbia Stanford
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One thing I have found helpful is to draft the document early. Look for templates via the Y Combinator resources. It is good to over communicate early and have it all in writing.

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5 Review and sign

The final step is to review and sign the co-founder agreement with your co-founders. You should read the document carefully and make sure that you understand and agree with all the terms and conditions. You should also consult a lawyer or an expert if you have any questions or doubts. You should sign the document in the presence of a witness or a notary, and keep a copy for your records. You should also revisit and update the document periodically, as your startup evolves and grows.

A co-founder agreement is a vital tool for any startup that wants to avoid potential pitfalls and ensure a smooth and successful collaboration. By following these steps, you can create a fair co-founder agreement that reflects your vision, values, and goals, and that protects your interests and rights as a co-founder.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the steps to a fair co-founder agreement?

1

2

3

4

5

6

1 Choose wisely

2 Discuss expectations

3 Allocate equity

4 Draft the document

5 Review and sign

6 Here’s what else to consider

Startup Development

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What are the steps to a fair co-founder agreement?

1

2

3

4

5

6

1 Choose wisely

2 Discuss expectations

3 Allocate equity

4 Draft the document

5 Review and sign

6 Here’s what else to consider

Startup Development

Rate this article

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