You have a brilliant idea, found the perfect co-founder or two and you’re all buzzing with enthusiasm to jump in and get started.
But, before you get swept up in the excitement of myriad ways to launch your idea and test its viability, take a breath. It’s important to not build the foundation of your startup with just a verbal trust agreement.
Before market launch, before any money or profit is involved, you need a partnership agreement. At the same time you’re registering for a business name, an ABN, and a domain name, you need to be engaged in discussions to finalise and sign your co-founder terms.
Most startups fall into the common trap of having this conversation much later on when money is at stake. But that is the wrong time as people can take things seriously and discussions can get heated very quickly.
This is one of the lessons that I personally had to learn the hard way.
I started my first IT consultancy straight out of university, then launched my second startup with co-founders when I was 35 years old and didn’t have this conversation at the beginning and things got complicated.
When it came to co-founding Lumi.Media I was 55, and with the benefit of wisdom, I wanted to make sure we had the foundation right at the outset. Even though one of my co-founders is also my sister, it can make all the difference to co-founder happiness and the longevity and growth of the business, to ensure you have a written co-founder agreement.
6 things you might want to include in your co-founder agreement
What percentage of the business does each co-founder own and what do they pay, or bring to the table, to get that? My advice is that each co-founder needs to actually hand over at least $1 to get started as a symbolic gesture. Hand over the $1 and shake hands on the venture.
Next, determine if you will use an employee stock ownership plan (ESOP), and if so, what’s the maximum percentage of the pie? If you implement this option, you will need to include rules of the ESOP, before offering first options.
2. Company structure
Determine the company structure, with designated co-founders in key leadership roles ie Chairman, CEO, COO, CFO and Company Secretary. Don’t give away C Suite positions lightly. Just because you are a co-founder doesn’t necessarily make you the best person for those positions.
3. What if a co-founder leaves: Your exit strategy
If a co-founder, for whatever reason (for example illness) wants or needs out, what happens? Is that co-founder forced to sell shares back to other co-founders? If so, at what price? Or can an exiting co-founder keep their shares, even when they are no longer hands-on operationally?
In the scenario, where a co-founder gets thrown out of the business, perhaps for reasons due to inappropriate conduct, how will that be handled? Will a forced buy back at reduced value be put in place?
What happens to a shareholding should there be a death of a co-founder? This can have major consequences with bequeathed shares and voting rights.
If all co-founders remain in the business for the longer term, what is the final exit plan? Does the business aim for a buyout or an IPO? How will profits be distributed to shareholders, founders and staff?
Will co-founders get a salary?
What will be the co-founder salaries and how will they be set? Will it be commensurate with hours worked in the business?
For instance, if one co-founder is full-time and 100% only working on the growth of the business, but another co-founder holds side interests and achieves additional income from those sources, will they be paid a lesser amount?
Will it be equal across all co-founders or will it be tied to individual performance targets in a financial year?
Taking on investment
When it comes time to take funding injections either from angel investors or VCs etc, will you have any rules in place around who you can take investment from, ie. no money from coal or non-ethical investment funds?
What is the agreed process of how staff will be chosen, for instance do all co-founders need to interview and sign off on every hire?
How will you determine if they’re a cultural, not just technical fit?
Will you offer ESOP and if so, to all staff or just certain key leadership roles?
Having a detailed co-founder agreement at the outset sets the tone for all future success and guides the strategic vision as the business progresses through different stages of growth.
Most co-founders go blindly into the unknown and run on a trust model, but at its worst this can kill the whole viability of the business.
It may seem like a difficult conversation to raise at the outset, but is one of the most important you can ever have.