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If you're starting a new business with one or more people, you'll need to create a co-founder agreement. This agreement is an essential document for startups and allows you to set out the roles and responsibilities of all founders.
Keep reading to find out how co-founder agreements work, what information they need to include, and where you can access free co-founder agreement templates online.
What is a co-founder agreement?
When you're in the process of starting a business, it's easy to get swept up in the excitement of what lies ahead. Thoughts of what could potentially happen if something goes wrong can get pushed aside as you focus on building your business from the ground up.
But planning for unexpected problems, disputes and misunderstandings is crucial. For example, what happens if you and your co-founder have completely different ideas about which direction the business should take? What happens if one of you moves overseas or wants to leave the business to start a family? What if you and another co-founder have a falling out?
The result could be a messy, stressful and expensive disaster for you and for the business — and that's where a co-founder agreement comes in.
A co-founder agreement is an important document for startups that helps protect you against whatever the future may hold. It sets out crucial details like the equity ownership, capital contribution and responsibilities of each founder, as well as how business decisions will be made.
Download this template at Lawpath
When should I use a co-founder agreement?
If you're founding a new business with one or more other people, you need a co-founder agreement.
It's also important to create this document as soon as possible. Sitting down to draft a boring legal document might not be something you're excited about doing when you're ready to get out there and start making money, but it should be one of your top priorities. With an effective co-founder agreement in place, you should be able to avoid any costly and stressful legal disputes with the other founders in the future.
Co-founder agreement vs founders' agreement
A founders' agreement is simply another name for a co-founder agreement. So if you come across a free online template for a founders' agreement, this document can perform exactly the same role as a co-founder agreement.
What does a co-founder agreement include?
A properly drafted agreement is a legally binding document that outlines the key details of the business relationship between all founders. It will typically include:
- The names of the founders and the name of the business
- A description of what the business will do
- How much initial capital each founder will contribute
- The equity percentage each founder will receive
- A vesting schedule
- Each co-founder's roles and responsibilities
- How much time each co-founder will contribute to the business
- What process will be followed if a founder wants to leave the business
- How business decisions will be made — which decisions will require a vote and which ones can be made by a single person?
- Ownership of intellectual property
- What happens when a co-founder wants to sell or transfer their shares
- Non-compete and confidentiality clauses
- The dispute resolution process
- How the business can be dissolved.
How effective is a co-founder agreement?
When you think about how many things could potentially go wrong with a business, it quickly becomes clear why a founders' agreement is so important. From simple personality clashes to disputes over who owns what and even what direction the business should take, there are lots of risks you need to protect yourself against.
A co-founder agreement ensures that there is a framework in place to resolve any issues, preventing them from leading to expensive lawsuits and potential disaster for your business. However, for your agreement to be completely effective, you'll need to make sure that it is legally binding.
Do I need to use a lawyer for this type of agreement?
There are several reasons why it's a good idea to seek legal advice when creating a co-founder agreement. As we've already discussed, this agreement is a very important document for any startup, so it's crucial that you get it right.
An experienced lawyer will be able to advise you on what information the agreement should include, how to structure the business, and how to ensure that the document is legally binding. And with an effective agreement in place, you'll be free to focus on your business without having to worry about potential future pitfalls.
Get access to customisable co-founder agreement templates online
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How do I write a co-founder agreement?
Before you can put together an agreement, you'll need to sit down with the other founders and have some important conversations about how you're going to run the business. Some of the topics may be difficult, but it's vital that you nut out the details now.
There are plenty of free online templates available to help give you an idea of what needs to be included in a founders' agreement. You can use these templates to draft the document in collaboration with the other founder(s).
However, this is an essential legal document for the future of your startup, so hiring a business lawyer or online legal service to draft your agreement is the best approach. It will mean extra cost upfront, but the money and stress it can save you in the long run will make it well worth it.
Where to get free legal documents and templates like a co-founder agreement?
There are several websites that specialise in offering a range of legal document templates, including co-founder agreements. Some of the options you might like to consider include:
- LawPath. Choosing a LawPath template allows you to customise a founders' agreement in less than 10 minutes. However, you'll need to sign up for a free account before you can create your document.
- Wonder.Legal. You can customise a template from Wonder.Legal by filling out an online document, with the completed agreement then sent to you in Word and PDF form. However, please note that this agreement is not legally binding.
You'll find a host of other templates on the world wide web. Just make sure that they satisfy all relevant requirements — seek legal advice for more information — before deciding whether they're right for your business.
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