The Most Important Document You'll Sign

A co-founder agreement is a legal document that governs the relationship between the founders of a company. It outlines the ownership, roles, responsibilities, and what happens if a founder leaves the company.

Having this conversation early, while everyone is still friends and excited, is one of the most important things you can do to prevent future conflict. Not having an agreement is a huge red flag for investors and can lead to company-destroying disputes down the line.

Key Clauses in a Co-founder Agreement

While you should always consult a lawyer, your agreement should cover these critical areas:

1. Equity Ownership

• The Split: How is the company's equity divided among the founders? It's common to believe the equity should be split equally, but this should be a deliberate conversation. Consider factors like initial cash investment, intellectual property contributions, and long-term commitment.
• Don't default to 50/50 without a discussion. An unequal but fair split is better than an equal but unfair one.

2. Vesting

• What is it? Vesting means that founders have to earn their equity over time. If a founder leaves the company early, they don't get to keep all their shares.
• The Standard: The most common vesting schedule is 4 years with a 1-year cliff.
  • The 1-year cliff means you get 0% of your equity if you leave before your first anniversary.
  • After the first year, you get 25% of your shares, and the remaining shares vest monthly or quarterly over the next three years.
• Why is it essential? Vesting protects the company and the remaining founders if one person decides to leave. Without it, a founder could leave after a few months and still own a huge chunk of the company they are no longer contributing to.

3. Roles and Responsibilities

• Who does what? Clearly define the titles (CEO, CTO, etc.) and the primary responsibilities of each founder.
• Decision Making: How will major company decisions be made? Is a majority vote required, or do certain founders have final say over specific areas (e.g., the CTO on technology decisions)?

4. Intellectual Property (IP) Assignment

• Company Ownership: The agreement must state that any intellectual property (code, designs, content, etc.) created by the founders related to the business is owned by the company, not the individual who created it.
• This is critical for investors. They need to know that the company legally owns its core assets.

5. Founder Departure (The "What If" Scenarios)

• What happens if a founder quits? Vesting is the primary protection here.
• What happens if a founder is fired? The agreement should define the process for removing a founder for cause (e.g., misconduct) or without cause.
• Buyback Rights: The company often has the right to buy back a departing founder's vested shares, often at fair market value.

Have the Tough Conversation Now

Talking about money, ownership, and what happens if things go wrong can be uncomfortable. However, it is far easier to have these conversations at the beginning than it is to deal with the consequences of not having them later. Use a co-founder agreement as a tool to make sure you and your co-founders are fully aligned on the future of your company.