A Co-founder Agreement is a legally binding document entered into by the Co-founders of a company, which governs their business relationship and arrangements. A Co-founder Agreement also sets out the rights, responsibilities, liabilities and obligations of each shareholder. In general, a Co-founder Agreement regulates matters that are not considered in the company constitution.

A Co-founder Agreement is one of the most important documents you, as a co-founder, will enter into at the outset of your company setup. Getting the right legal advice upon entering into a Co-founder Agreement is extremely important to avoid common legal pitfalls. This article will explain some of the important provisions for which you should keep an eye out.

Business Operations

A Co-founder Agreement, especially ones that are entered into by startup founders, will typically establish the business’ operations. If you’ve got a small number of shareholders who also have active roles in the business, it’s common to set out those roles in the agreement. Larger organisations will not always set out the roles of the management team, although may include an overarching objective of the company.

Directors

A company structure has two key groups of stakeholders, which are the directors and shareholders. The shareholders own the company and typically appoint a board of directors who oversee the management of the company. The board of directors is a powerful organisation, and the Co-founder Agreement needs to establish how each director is appointed, explain whatever powers they have, and clearly establish their duties and obligations.

Shares in Co-founder Agreement

Some of the most important provisions of a Co-founder Agreement are the clauses and schedules that set out the individual shareholdings of the co-founders. In general, the individual shareholdings will be set out in a schedule to the agreement; allowing the agreement to be easily amended if the co-founders change over time (for example, you may bring on a Technology co-founder at a later stage).

Sale or Transfer Clauses

It is not uncommon for disputes amongst shareholders to arise when one or more chooses to sell or transfer their shares in a company. To prevent this from occurring, Co-founder Agreements often include the following clauses: “right of first refusal”, “tag along” and “drag along”.

A “right of first refusal” suggests that if one co-founder elects to sell his or her shares to a third party, the other co-founders are entitled to buy them at an agreed rate with the third party. If the third party is willing to pay a higher price than the current co-founders, then generally the sale will be acceptable.

A “tag along” provision aims to protect the interests of a minority co-founder. If a majority co-founder opts to sell out, the “tag along” clause will ensure that the minority co-founder has the right to be bought out on a pro-rata basis.

Finally, a “drag along” clause stops a minority co-founder from unreasonably postponing a sale. When a majority co-founder chooses to sell out, he or she may force the minority shareholders to sell at the same time.

DOn’t forget that these clauses are usually negotiated for each company on an individual basis, and that no one-size-fits-all solution exists.

Conclusion

If you want to know more about drafting a Co-founder Agreement, get in touch with LegalVision on 1300 544 755. Our business structure specialists can certainly help by providing you with a free legal health check and a fixed-fee quote for further assistance.

Lachlan McKnight

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