How many of you are thinking of running a company together with a friend?

In my field, I've seen most people start an idea together with a friend or stranger without a formal agreement in place.

But the agreement in question is important.

It's called Co-Founders Agreement or Founders Agreement, whatever works for you.

The agreement basically determines the rights and duties of the co-founders.

Now this is important because you need to be clear on who's doing what.

And also, what each person is getting out of their joint efforts.

And before you even register a business, consider getting this Agreement.

Because it will protect you from a lot of headaches in the future.

In this specific case, we were approached by two co-founders.

Now these co-founders were running a company together.

They didn't have any formal agreement in place that determined their respective rights.

That's why they reached out to us to set everything in stone and draft a Co-Founders Agreement.

Problems:

(1) Newbies in Business:

They were running a business for the first time.

And because of that, they were not very aware of how things work.

They wanted us to provide them with different options available to safeguard their business.

(2) Keeping It Simple:

They were not very aware of the legal side of running a business.

But their request was simple - they wanted to ensure each of them would stick around for the business and not leave the company mid-way.

(3) Planning Ahead:

They were aware that there might come a situation where one person wants to leave the company in the future.

They wanted to make proper arrangements in such cases for the exit by co-founders.

Solutions:

(1) Tackling Future Issues:

• Drafted a co-founders agreement dealing with the most common problems that may arise in the future.

• Specified their respective equity along with a vesting provision, so they wouldn't leave the company just after a funding round.

• Retained the majority of power with the major shareholder but reserved certain decisions, like future financing, for both co-founders, which could have a major impact on the company.

(2) Dealing with Departures:

• Accounted for contingencies when a founder does want to leave the company.

• Made sure that the exiting founder only gets the right to shares for which they have worked.

• Made provision for “reverse-vesting,” so the exiting founder would be bound to transfer back the remaining shares to the company at a fair price.

(3) Putting the Business First:

• Prioritized the interests of the business.

• Made sure that the company isn’t adversely affected if one co-founder wants to leave.

• Added an option for the remaining co-founders to buy back shares, preventing outsiders from interfering.

• Implemented strict clauses to prevent the misuse of company secrets or the starting of competing ventures.

Results?

We were able to draft a fair agreement.

The focus was on ensuring the founders could work together to build their dreams.

And also made sure the company does not face any problems in future fundraising as investors often look for formal arrangements between co-founders.

I hope you learned something from this week's case study!

I have changed the timings a bit because this is when most of you are active.

See you on Wednesday!

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