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Co-Founder's Agreement in India
Housing.com was launched in 2012 and took the market for house rentals by storm. In 2 years, it obtained Rs. 138 crores funding, but guess what? 3 of its 12 co-founders had already left by then. Do you know why? How would you handle a situation where your co-founders had to leave? How would you minimize its impact on your startup? How would you protect your interest if you had to exit? 

A Co-Founder agreement (or a founder agreement or a founders’ collaboration agreement) is essentially an agreement governing the professional relationship between founders who have started a new business. In the face of options such as Partnerships, LLPs, Company or a Non-profit entity such as a trust, society or a registered non-profit, why should anyone consider entering into a separate co-founder’s agreement?

Although some of the above business vehicles offer significant flexibility, a major disadvantage of all of them is that they require registration and some filings with statutory authorities. Even a partnership agreement can be quite sophisticated – it can state a lot of details about finances, operation of bank accounts, admission and retirement of new partners, etc. However, at the initial phases, parties usually want to focus on the business and build a pilot or a prototype, so any legal documentation that is entered into must focus more on their immediate needs.

At a time when there is just an idea and a group of people have come together to try and see if they can build a prototype, it makes little sense to enter into a detailed agreement about a ‘future business’. In the initial phases, revenues are often absent - what is needed is an arrangement to pool funds and build a pilot or a prototype that can be tested and generate some initial customers. If revenue generation potential is identified subsequently, a formal business vehicle can be adopted, or more elaborate provisions can be inserted into the co-founder agreement and the business can be registered as a Partnership or incorporated as an LLP or Company.

When should the co-founders agreement be entered into?
What issues need to be determined at the time of entering into the co-founders agreement?

Starting a business requires investment of time and resources from each co-founder. The co-founders may know each other extremely well personally, or they may simply operate professionally – in either case, it is extremely important to determine certain issues when co-founders decide to come together so that there is clarity on what is expected from each other.

Typically, the following issues need to be understood at this stage:
  • Deciding what is to be built
  • Estimating how much time it will take and ensuring that the co-founders are committed for that time
  • Allocation of responsibility amongst the different co-founders
  • Knowing how much money is required to build the product, i.e. how much each co-founder will contribute
  • If there is a feasibility of a business, then, determining an agreed profit or shareholding ratio in advance, which would be used for incorporation or formalization of the business entity.
  • Ensuring that any intellectual property is used only for the purpose of the product
A co-founders agreement typically addresses these issues. Let’s understand some of its clauses. A sample co-founders’ agreement is accessible here.

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