Importance of asking the right questions to the founding even before creating an entity will protect the organizational culture and safeguard relationships in the long run. Perhaps Co-founders’ agreements is the product of conversations that should take place among a company’s founders at the early stages of formation rather than later in the life of a company. The goal of these conversations is to have an open and honest discussion about the attitudes, fears, and aspirations of individuals involved with the startup. In this blog, we will look at the Top 28 Questions to ask your Co-founders before entering Co-founders Agreement. It is essential to have this conversation - Answering these hard questions now will help you and your co-founders avoid personal conflicts in the future.
- What goals does each of us have for the start-up?
- What goals do we have for ourselves?
- What are our respective timelines for these goals?
- Who gets what percentage of the company?
- What will we each contribute to the company? (e.g., duties, job descriptions, hour commitments, roles, and responsibilities).
- How much capital are we each contributing and for what?
- Is the percentage of ownership shares subject to vesting based on continued participation in the business?
- How are key decisions and day-to-day decisions of the business to be made? (e.g., by majority vote, unanimous vote, or certain decisions solely in the hands of the CEO?).
- What salaries (if any) are the founders entitled to? How can that be modified?
- What happens if one of us wants to leave?
- If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price?
- What happens if one of us wants to sell the company, raise money, or kill the company?
- What happens if one of us becomes disabled or dies?
- What happens if it takes us longer than we expected to get our product up and running? Can we each launch other startups while working on this project
- Under what circumstances can a founder be removed as an employee of the business?
- What happens if one founder is not living up to expectations under the Founders’ Agreement? How would this situation be resolved?
- If it turns out the business is not taking off and we decide to end our venture, can one of us take the idea and try it again?
- If we need to raise start-up capital, where will it come from and how much of the company are we willing to give in exchange for that start-up capital?
Factors that may be considered in an unequal distribution of equity include:
- Who came up with the idea that is the key to the Business Concept;
- Who has the greatest stake in the IP in the Business Concept;
- Who developed the technology necessary to run the Business Concept;
- Who owns the patents on which the Business Concept or its products will be based;
- Whether any Founder brings existing copyrights or trademarks into the Company;
- Which Founders are providing the start-up capital for the Business Concept and in what percentage contribution;
- How much time has each Founder invested in the development of the Business Concept;
- Whether all Founders are full-time contributors to the development of the Business Concept;
- What was the opportunity cost for each Founder to help create the Business Concept? Those who sacrificed more lucrative, high-power positions at established businesses are often compensated more for their risk than those who were not actively employed when the venture began; and
- Who has the industry expertise necessary to get the Business Concept going?
It is always helpful to have clear clauses in the Co-founders’ agreement for resolving the conflict as that will avoid confusion and uncertainty and save time and money. The conversation that you have with your founding team will decide the meat of Co-founder’s Agreement - The Agreement lays out the rights, responsibilities, liabilities, and obligations of each founder.
Remember, Start-up process entails complex procedures and many bureaucratic hurdles, entrepreneurs are better off using professional services. Hiring a virtual lawyer and virtual accountant can save time and help ensure that the process goes smoothly. For any Legal and Accounting support, Happy to help you, let us talk! 🙂