Updated: Feb 7, 2022
We have just witnessed a highly successful season of Shark Tank India. It is a pleasant experience to see many entrepreneurs show their innovative ideas and aspirations. We had a lot to learn in each episode apart from the hilarious memes (my favourite pastime!).
This series gave us an insight into how an investor sees a business idea. What factors do they consider while deciding whether to invest in a business? Most importantly, what are crucial factors for NOT investing in a startup? I observed one of the reasons to avoid investing in a business is the lack of clear legal structure and documentation. An investor shall feel reservation if your business structure is very complicated and there is no legal documentation to give enough clarity. In that case, you may get the following response from your investor!
Jokes apart, let's understand one of the most crucial documents of any startup. It is a 'Co-Founder Agreement', a contract among the co-founders of a startup. It is applicable for any entrepreneur, including film production startups, technology-based startups, or other businesses. If you have started a business, you must sign a Co-Founder Agreement (even if co-founders are best buddies or family members). It shall help you avoid any future legal complications, make your functioning smooth and enhance the confidence of your investors. So, what all you should decide in your Co-Founder Agreement?
Co-Founder Contract must elaborate overall goal and vision for the business. It should capture the division of equity among the founders. You need to include the roles and responsibilities of the founders. Your contract should have the contingency of buying back the equity by the remaining founders if one founder exits. It would help to clarify the founders' commitments and constraints imposed on their outside engagements. What salaries (if any) are the founders entitled to? How can that be changed? Who shall take the business's critical decisions and day-to-day activities? You need to capture if the decision making is by majority vote, a unanimous vote, or are certain decisions solely in the hands of the CEO? Another important aspect is the removal of the founder. Under what circumstances can a founder be removed as an employee of the business?
Investment in the business is another crucial aspect. Your contract should elaborate on what assets or cash each founder contributes or invests into the business. Do not forget to decide the termination clause. What happens if one founder isn't living up to expectations under the founder agreement? Can other founders terminate the Agreement? What shall be the consequence of such termination? Also, there must be a detailed clause capturing how to sell the equity of the company? Finally, it would be best to capture the dispute resolution clause to resolve any friction among the founders.
It would help if you took due legal consultation and drafting support in the co-founder agreement. So, remember, if you have started a business/startup in partnership, do sign a partnership/co-founder agreement. I have already elaborated on the benefit of this investment. So, next time approach your investors with solid legal documentation. Your investor shall have trust in you and may happily invest in your business!
If you have any queries feel free to reach us at firstname.lastname@example.org
Picture Credit: Sony TV, Shark Tank India