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Non-compete restrictions

A co-founder’s agreement should include an obligation prohibiting co-founders from starting work on the same idea in case they leave, retire or are expelled from the business. However, strategic disagreements on the product can make co-founders visualize different products that pertain to the same space. For example, co-founders who started to build a video hosting site together could end up with strategic disagreements and part ways subsequently – one may want to start a site like YouTube while the other may want to start the equivalent of Vimeo. In such situations, it can be tricky to determine whether a particular business competes with the initial business.

Similarly, imagine a Facebook co-founder leaving to start a website like Twitter. Are these competing businesses? They are in the same space, that is, social media, but probably each one has its own niche and does not really eat into another’s market share or has a different type of customer, because each of these tools is used for different purposes. However, Orkut and Facebook are much closer substitutes.

To prevent future disagreements, there should be clarity on what businesses a leaving founder cannot engage in and for how long. Extremely long prohibitions which may be considered unreasonable restraints on the ability to carry out one’s profession and hence invalid under Indian contract law.  

There can also be terms to prevent founders from working with suppliers and vendors of the initial company. These restrictions can be imposed in the contracts between co-founders and the contracts which the business enters into with its key suppliers. For example, Apple used to impose specific terms prohibiting its designers from dealing with former Apple employees or co- founders – it had invoked this term to prevent a designer from dealing with Steve Wozniak’s startup (Steve Wozniak and Steve Jobs had together founded Apple) after he left Apple. 

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