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Cofounding A Startup? Make Sure Your Partnership Agreement Covers These 12 Key Points

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Summary

When starting a new business with partners or cofounders, it is important to create a formal agreement that covers key issues such as capital contribution, percentage ownership of the business, intellectual property, titles and roles, compensation to founders, decision-making, withdrawal from the business, distributions and dividends, transfers of stock, dissolution or sale of the business, amendments to the agreement, and dispute resolution. A good cofounder agreement can help avoid future problems and ensure that all parties are in alignment about how the business will be operated.

Q&As

What is the recommended business structure for a startup?
The recommended business structure for a startup is a corporation or a Limited Liability Company (LLC).

What are the key issues to address in a cofounder agreement?
The key issues to address in a cofounder agreement include capital contribution, percentage ownership of the business, intellectual property, titles and roles, compensation to the founders, decision-making for key matters, withdrawal from the business, distributions or dividends, transfers of stock, dissolution or sale of the business, amendments to the agreement, and dispute resolution.

Who will own what percentage of the business?
The percentage ownership of the business will depend on the agreement between the founders, but one founder who comes up with the idea for the business or the bulk of the capital will often expect to get 50% or more.

What steps need to be taken to ensure intellectual property is owned solely by the business?
To ensure intellectual property is owned solely by the business, all founders, employees, and independent contractors should sign a Confidentiality and Investment Assignment Agreement for the benefit of the company.

What dispute resolution process should be included in the agreement?
The dispute resolution process that should be included in the agreement is confidential binding arbitration between the parties before one arbitrator.

AI Comments

👍 This article provides a comprehensive and detailed list of things to include in a cofounder agreement. It also provides helpful advice from a startup lawyer to help ensure that all parties are in alignment about how the business will be operated.

👎 This article does not provide any examples of what a cofounder agreement should look like, which can be difficult for entrepreneurs to understand without seeing an example.

AI Discussion

Me: It's about the importance of having a solid cofounder agreement when starting a business. It outlines 12 key points that should be included in the agreement.

Friend: That's really important. What are those key points?

Me: The key points include the capital contribution each founder will make, percentage ownership of the business, intellectual property rights, titles and roles of the founders, compensation, decision-making for key matters, withdrawal from the business, distributions or dividends, transfers of stock, dissolution or sale of the business, amendments to the agreement, and dispute resolution.

Friend: That's a lot of details to consider when starting a business. What are the implications of not having a cofounder agreement in place?

Me: If you don't have a cofounder agreement in place, it can lead to misunderstandings and conflicts between founders. This can result in costly and lengthy litigation, which can put the business at risk. It's important to have a cofounder agreement in place to ensure that all parties are on the same page and that disputes can be handled in a manageable way.

Action items

Research the legal structure of the business and decide if a corporation or LLC is the best fit.
Draft a cofounder agreement that addresses the 12 key points listed in the article.
Consult with a startup lawyer or credible online legal assistance service to ensure the agreement is tailored to the specific situation.

Technical terms

Cofounder Agreement: A formal agreement between the founders of a startup business that outlines the roles, responsibilities, and rights of each founder.
LLC: Limited Liability Company, a type of business structure that limits the personal liability of its owners.
Vesting: A process by which a founder's stock is gradually earned over time, usually based on continued participation in the business.
Intellectual Property: Creative works or inventions that are protected by copyright, patent, or trademark law.
Confidentiality and Investment Assignment Agreement: A legal document that ensures any intellectual property developed by company employees and contractors is owned by the company.
Capital Contribution: Money or property put up by each founder at the start of the business.
Percentage Ownership: The percentage of the business each founder owns at the outset.
Board of Directors: A group of individuals elected by the shareholders of a company to oversee the management of the company.
Employment Agreement: A legal document that sets forth the terms of a founder's employment and how they can be terminated from employment.
Severance Benefits: Benefits provided to a founder upon termination of employment.
Distributions or Dividends: Profits from the business that are distributed to shareholders.
Transfer of Stock: The process of transferring a founder's stock to a third party.
Right of First Refusal: A right that allows a party to have the first opportunity to purchase a founder's stock before it is offered to a third party.
Dissolution or Sale of the Business: The process of legally dissolving or selling the business.
Amendments to the Agreement: Changes to the founder agreement that require a certain percentage of approval from the founders or shareholders.
Dispute Resolution: The process of resolving disputes between the founders.