Term of the Agreement
1. Ownership of the company
A key part of the Agreement is to determine the percentage of equity ownership of the co-founders of the company. The equity ownership of company co-founders is determined by considering several factors such as monetary investment, experience, existing intellectual property, expertise, and industry network. As well, equity ownership must be considered to determine the voting rights that a co-founder may exercise.
A consideration to be made while drafting the Agreement would be a mechanism to deal with situations where one or more of the co-founders were to exit or be ousted. To achieve this, an Agreement shall include a vesting structure outlining the process by which shares will be taken up by the founders.
3. Delimitation of roles and responsibilities
An agreement should define clearly what each co-founder is expected to do. Generally speaking, the roles and responsibilities of the co-founders are divided into four categories: operations, marketing, administration, and finance.
4. Transfer restrictions
As part of the Agreement, it is important to determine the founders’ rights and restrictions when it comes to selling their shares. Co-founders may be prohibited from transferring their shares in the company for a set amount of time before the agreement’s termination. If a co-founder wishes to exit the company before the lock-in period is completed, the Agreement must provide a mechanism for doing so. It is important to verify the valuation method used for the shares and the anti-dilution rights attached to the shares.
5. Assignment of intellectual property
Ideas, inventions, and other intellectual property developed by a person remain the property of the person who developed them. In drafting the Agreement, it must be ensured that the intellectual property rights of the co-founders are assigned to the company and do not remain with the co-founders individually. Many firms acquire trademarks, such as Google, Facebook, and Apple. Initially, patents and domain names will be registered in the names of one or more co-founders, but later may be transferred to the company. IP contributions impact company value. In addition to this, the Agreement will state that any intellectual property developed by the co-founders during their association with the company shall always be owned exclusively by the company. The company founder can share intellectual property jointly with the company in specialized high technology sectors. However, this must be well-considered and documented.
6. Contributions by the founders
Value additions made by the co-founders of a company can include intellectual property rights, technical know-how, marketing rights, or other such additions. Having an understanding between the co-founders regarding the nature of such value additions, the value of such value additions, the time period during which such value additions would be made, as well as the compensation to be paid to the co-founders for bringing in these value additions is essential.
Company co-founders must maintain strict confidentiality of business activities of the company and refrain from engaging in any activities inconsistent with the company’s activities. A clear agreement should be reached between the co-founders prohibiting each from engaging in activities that are in conflict with the company’s goals during their association, as well as for a certain number of years after the termination of the agreement.
Founders, by the very nature of their association with the company, often possess a great deal of confidential information about the company, some of which may constitute trade secrets. Co-founders should be contractually prohibited from disclosing any confidential information they acquire during their association with the company, since the disclosure of such information may cause irreparable harm to the business of the company.
Typically, all co-founders need to be full-time employees of the company. A clear understanding must exist between co-founders regarding employment terms, designations, compensation, and benefits to be provided to each. A separate employment contract shall be drafted for the co-founders with detailed terms of employment that will include the benefits that would be provided to them. An Agreement may contain general understandings between the co-founders regarding the same, but a separate employment contract shall be drafted outlining the detailed terms of employment, including the benefits to each co-founder. After the co-founder has left the company, his employment contract must include a non-compete clause that prohibits him from soliciting clients or employees of other companies.
10. Finances in the future
If the company is financed through equity or debt, the agreement should clearly specify whether the founders will contribute additional finances for its growth, including how the additional finances will be contributed by the founders. If the company finances with equity, the method of valuation of equity should be specified, and if the financing is through debt, the interest rate should be specified.
11. How to make a decision
The company may have to take complex decisions in order to function day-to-day. A clearly defined method of exercising simple and substantial decisions must be stipulated in the Agreement. It should be determined what structure the board of directors will take. Day-to-day decision-making is assigned to the chief executive, who is appointed by the board of directors. Additionally, a deadlock in decision-making must be prescribed in the agreement if the company has difficulty making a decision.
12. Arbitration and termination
An agreement will stipulate that the company, as well as the co-founders, can terminate the agreement. Any party may terminate the Agreement at any time upon the occurrence of a particular event, i.e., without cause or with cause, either voluntarily or by mutual consent. Accordingly, the Agreement shall specify a clear mechanism for resolving disputes between the company and the co-founders with respect to any matter stated therein, i.e., mediation, conciliation, and arbitration. Both parties shall agree upon the governing law of the Agreement and the courts to which disputes under the Agreement will be submitted.