Saturday 28 January 2023

The importance of a Cofounder Agreement.

The importance of a Cofounder Agreement.

I started my startup in April 2017 with a friend of mine from college. We both were good friends and knew each other for about 4 years. We started on a positive note. Incorporated a company and had an equal 50/50 stake in the business.

Later, we got incubated at SINE, the IIT Bombay Startup incubator. SINE invests a small amount of money against a small amount of stake and helps startups get off the ground by providing them guidance, mentorship and access to investors. We got incubated at SINE in June 2017.

As a process, SINE asked us to mandatorily sign a Cofounder Agreement. My co-founder and I were less than a few months out of college and so, we didn't really realize the value of that agreement. But we had to do that as a process of SINE incubation.

We quickly did a Google Search for the Cofounder Agreement format, went through it and started customizing it to our requirements. One of the clauses talked about a Lock-in period. Both of us were naive and so, we didn't really go through it in detail. Here is the clause:

"The Founders hereby agree that the shares held by them in the Company shall be locked in for a period of [*] years (“Lock-in Period”) from the Execution Date. The Founders and the Company hereby agree to take such steps as may be required to give effect to the provisions of this Clause."

Here, the [*] was to be filled by both of us. We both decided that 2 years is a good enough timeframe and so, we made it 2 years and filled in the rest of the details in the agreement and signed it and submitted it to our incubator.

This agreement was signed on the 29th of July 2017, 3 months after we incorporated our startup. Fast forward to the 6th of August 2018, slightly more than a year after signing the Cofounder Agreement, my cofounder decided to quit. He owned ~50% of the shares of the company when he quit.

Only and only because of the above clause, I could save that. Otherwise, I would be forced to lose 50% of the company to a cofounder who quit barely after a year of starting up.

That incident taught me a lot of things:

1. Legal Agreements can be a big saviour when things go wrong.
2. Not everyone thinks long-term.
3. People can quit abruptly without any notice.

After this incident, I have been generally very particular about all legal agreements, especially the termination clauses like the one above. These clauses help ensure that your rights are protected and that the parties don't end up fighting with each other because of prior verbal discussions.

If you are running a startup and do not have a Cofounder Agreement signed yet, please do it now. You will do a big favour not only to yourself but to your customers, team members and investors.

I have shared a lot of my learnings about Business and Entrepreneurship on my YouTube Channel. Please check it here:

No comments:

Post a Comment